Like Airbnb and Uber, WeWork appeared at a crucial economic moment: After the GFC (or Great Recession). While the link to the “gig economy” may not be as obvious as in the case of many other players, it is there: WeWork hosted freelancers and laid-off workers in cheap space-on-demand offices. These were not the lavish, upscale offices that WeWork is known for now.
They entered long-term leases in the recession-struck commercial real estate space, renovated and divided up the spaces to rent it out to individuals and very small businesses. The customer segments have undergone quite a shift since.
Business Model Canvas
We will start with the business model using the business model canvas template to structure it.
Since its founding in 2010, WeWork has been expanding fast as a flexible workspace provider. As per their latest update in March 2020, they had
- 693k members (=customers / employees of customers)
- 828 locations (typically a number floors in a larger building, sometimes the entire building) with 604,000 workstations (June ‘19)
- In 149 cities
- In 38 countries
WeWork mainly uses a form of subscription business model that they call Space-as-a-Service. Like their peers, they also have other business models which at this stage generate a minor portion of their revenue (“other revenues”).
WeWork does not use the platform business model. That is a very important call out. You may be able to spot some network effects but they are not significant. Their WeWork Labs offer may be able to generate more significant network effects which we will discuss when we cover this offering. With this, it’s clear that:
- WeWork is not the “LinkedIn of the real-world”.
- And WeWork is not the “Airbnb of commercial real estate”.
Their main business model is to lease real estate from the landlord, design it to their philosophies, partition it up into smaller workspaces and rent it out to individuals and firms (demand aggregation). Their leases are typically 15 years but they allow their members to use them for shorter durations (this duration mismatch was one of the key issues that investors didn’t like - we will cover this in more detail in the valuation section).With this, let’s look at the business model canvas elements starting with the value proposition as to clearly understand what their offerings are.
WeWork is a company renting out flexible workspaces. It has different offerings for different types of customers and use cases. Their customers reach from individuals to small/medium-size firms to large enterprises (the latter use WeWork for only a portion of their real estate requirements).
Value propositions for all target groups
WeWork is making sure that there is something “in it” for everyone. They are not just addressing the decision makers, i.e. the business owners, but also make sure there is value and perks for the employees of the respective businesses.
WeWork’s core offerings are different types of workplaces:
- On-demand access to flexible workspaces for individuals and very small teams (<=5 concurrent users)
- On-Demand access to a flexible workspace: The We Membership (monthly fee) provides access to on-demand workspace in their offices. Actual usage incurs an additional (daily) fee.
- On-demand access to conference / meeting rooms priced on hourly usage rates.
- Open coworking spaces come in various forms and can be used by individuals and (small) groups (group size: 1-5, Start-up Lab: 1-10). These are typically on (at least) a monthly basis:
- Hot desks: these are desks that are not dedicated to anyone and may be occupied by different people on different days (basically a first-come, first-serve).
- Dedicated desks: More thought of for (small) businesses and their employees. These desks offer lockable filing cabinets where belonging can be kept overnight, etc.
- WeWork Startup Labs: these are coworking spaces for startups and come with additional value propositions (more in a moment).
- Private workspaces: These have private access and can scale from very small teams to very large ones, including custom build-outs in real-estate sourced for the respective client. These come at quote-based pricing.
- Private offices: These are private enclosed offices for individuals and teams. There are offices for individuals but typically for more than 1 person. These offices have their private (i.e. lockable) access (24/7) but shared amenities with others. Recommended team sizes: 1-30
- Office suites: Private offices for “larger” teams with private meeting rooms, offices for senior/executive staff and other dedicated amenities. Recommended team sizes: 1-30
- Headquarters: A private floor with own entrance, some customisation (e.g. branding), own amenities and a customisable floorplan. Recommended team sizes: 30-250
- Custom buildout: at the most premium end, WeWork builds out real estate sourced for the respective purpose / customer. WeWork advertises this with them taking on the long-term risk.
Specific amenities & services: more premium offerings come with access to exclusive amenities and services for which I will give some examples throughout. There is also a layer of amenities & services that is accessible to all.
3rd party provided value propositions
In addition to the above three layers of included items, there is a fourth layer provided by 3rd-party partners. These differ by location and they are linked to the offerings above (i.e. the more premium 3rd party offerings are only accessible in combination with the more premium workspace offerings).
Value proposition to (small) business owners
From the perspective of a small business owner, all the aforementioned offerings and value propositions then add up to something bigger.
- Get started quickly
- No upfront cost
- No running costs
⇒ These value propositions add up to a reduction of barriers to entry for small businesses.
- Don’t worry about day-to-day activities
- Adapts to growth
⇒ Allows the business owner to focus on what’s important.
- Great locations
- Additional perks
⇒ All of the above is valuable for a business owner. But it is also of value for employees of these firms and what’s more, it can help make a small business more attractive to talented people which can be a make-or-break difference for a very small firm.
It is not my intention to cheerlead WeWork (or any of the companies that I am covering) but I think all of the above are obvious value propositions compared to traditional approaches.
Value propositions to landlords
WeWork aims to provide value to landlords which can help with sourcing (leasing) real estate under favourable terms (and this aspect has become more important since the IPO “revelations”):
- WeWork often rents only a portion of a commercial real estate building. They state (in their IPO prospectus) that the landlord is able to attract higher value tenants in the remainder of the building with WeWork offices. They argue this is due to the economic (shops, food, etc) and cultural (dining, drinking) activity that their members generate (more later).
- “Select WeWork buildings have experienced increased property value, including a 50-120% increase in sale price and up to 29% rent premiums after WeWork moved in.” (landlords page, retrieved 31/08/2020).
- They claim that buildings they occupy appreciate in value faster which may allow owners securing financing. This can be particularly true for developers.
- Start with small(er) spaces and expand over time as more space becomes available in the building. It gives landlords the prospect of being able to re-occupy freeing spaces quickly when other tenants move out.
- Ability to aggregate demand in ways that the landlord can’t (or doesn’t want to) do themselves, thus giving them access to a new tenant market. ]
- Speed-to-occupancy: WeWork points out that they get properties that they lease finished for occupancy in a shorter timeframe than others. Typically, commercial real estate tenants pay from when a property is ready to start revenue generation. If it can save a few months it can make a difference to the landlord. Though they also say that the typical rent-free period is 9 months as it takes time to generate meaningful revenue.
These “benefits” are certainly used in negotiations with landlords to achieve favourable terms. But who has more favourable negotiation positions may differ by market.
Downsides and risks for landlords
But of course, not all is well. Leasing out to a rental aggregator comes with a different risk profile to landlords:
- Landlords, owner, developers typically foot the initial build-out bill to customise their property to WeWork’s standards (differences exist between countries).
- WeWork has created special purpose vehicles for its leases, meaning there is no direct recourse from the landlord to WeWork (or The We Company, the parent company of WeWork).
The share of “other revenue” is small but growing (fast). In the half year report 30/06/19, other revenue made 12% of total revenue.
The growth rates are promising (though fast-tapering and came in at a +275% YOY in 30/06/19). As of June 30, 2019, the revenue split was:
- Membership revenue: 83%
- Services revenue: 5%
- Other revenue: 12%
Given WeWork is a type of subscription business model (as opposed to a platform business model), the key partners are to be found on the supply side, which is typical for most businesses. Key partners consist of typical players of the real estate industry, such as landlords, owners, developers, brokers and referral partners.
One of their key differences to traditional real estate companies are their partners providing 3rd party services. Here they act as a targeted channel to their customer segments and make commission on typically “exclusive” deals (or those that are called “exclusive” but may be available through a number of other channel partners of the provider company).
Thus, we distinguish between commercial partners, 3rd party service partners and - at this stage of the story - investors.
- WeWork sources their spaces from landlords, commercial property owners, developers through leasing agreements.
- WeWork typically leases real estate for an initial term of 15 years. They get a typical “free” period (until the lease is anticipated to generate meaningful revenue, typically 9 months they state) in which the build-out to a WeWork design occurs. These build-outs may be paid upfront by WeWork but are then reimbursed by the landlord (in part or fully - and in some countries none). WeWork also refers to deals they have struck in India where they don’t pay a fixed lease but a rent based on the revenue (or profit) generated (more later).
- WeWork needs to source (favourable) deals and maintain a (collaborative) relationship through the lifetime of the lease.
- WeWork claims a list of benefits that they provide to the landlord but there are also risks as discussed previously.
- Brokers and agents: Brokers are powerful, incentive-driven middlemen facilitating deals between a highly fragmented supply and demand side in the real estate industry. WeWork addresses broker partners with commissions on the transaction value:
- New deals: the higher of 10% of year 1 contract value or 5% of the total contract value.
- Renewals/expansions: 3% of the net new contract value.
- Upfront payment to the broker at client signing up.
- WeWork has a broker partner network of over 970 brokers (i.e. firms). They address the benefits to the broker and their clients of using WeWork (over traditional sourcing options) as:
- Referral partners: WeWork seeks referral partners and offers them to pass on benefits to their clients such as preferred pricing, premium services and real estate advisory among customisable benefits. They offer (presumably for large referral partners) revenue sharing, co-marketing opportunities and other creative solutions. Note that this is different from individual referrals that WeWork rewards as well.
- Architects, layout experts, engineers, designers and decorators help WeWork to transform leased spaces into the vibrant spaces that they want to make out of them. Some are employed by WeWork but others are local partners. I wouldn’t necessarily see these as key partners, as they are more service providers but we can see them as “other partners”. WeWork is well-known for their lavish interiors.
- WeWork partners with third-party service providers who ease the task of running a (small) business. Additionally, there are partners who target the individual members.
- The next large group are Investors/venture capitalists
WeWork has received $1m in their initial seed round in Oct 2011, followed quickly by another $6.8m in Jan 2012. Funding rounds quickly escalated to $150m in their Series C funding round in Oct 2013. The total funding (including debt funding) amounts to $20.6b (including the recent $1.1b injection by - once again - SoftBank in Aug 2020). They have received $6.8b in debt funding since their failed and redrawn IPO. The funding chart does not include the funding ($7.9b) after the redrawn IPO.
They have a batch of bonds (“senior notes”) at a coupon rate of 7.875% (principal of $669m maturing 2025). These were tracking at 0.63c on the dollar as of the writing of this case study (Sept 1, 2020). At their lowest, they were tracking at ~30c. This means that debt funding is difficult at the time but improving.
WeWork distinguishes between location-specific and centralised activities (look at the cost structure to wit). Location-specific activities are distinguished into pre-opening and operational (i.e. after opening).
Location-specific activities are split into five phases. Pre-operational activities are the most significant due to their long-term impact.
- Find: WeWork has a database of potential real estate opportunities. When they expand within existing markets (country/city) or enter new markets, they negotiate and sign leases for suitable properties. They use local teams supported by centralised software / data for the evaluation of a location and the sourcing process. The local teams build and maintain relationships with the landlords and other real estate partner firms.
- Sign: The signature phase is about securing the identified spaces under favourable lease terms. This can include favourable tenant improvement allowances which reduce WeWork’s net capital expenditure which they have been able to halve (more under economics). These are allowances that the landlord reimburses to WeWork for building out the spaces to their (WeWork’s) specifications. The allowances obviously don’t cover furniture/fixtures (WeWork is known for their lavish interiors).
- Build: WeWork builds out the sourced properties to their liking considering local factors in the design. They use their centralised procurement, supply chain, design and construction processes. In this phase, they engage with various experts from engineering, design to decorators to get the location up to speed. Having done so many hundred times has allowed them to build processes to reduce the timeframe significantly to 4-6 months (as opposed to typically 9 months as per their benchmark). They can also draw on internal cross-location benchmarks on costs, design experiences / learnings and other aspects. Sourcing can occur through their internal global catalogue or locally.
- Fill: The sales process commences with taking possession of a location (i.e. singing). Sales channels include their website/App, global sales teams, local community teams, broker partners, referral partners, etc. They state that it takes up to 24 months (after singing, i.e ~18 after opening) for a new location to achieve maturity (and 9 months from signing to generate meaningful revenue). Beyond this point, they show that average occupancy remains at high levels albeit ongoing turnover. They use discounts to attract new tenants and to drive longer-term commitments. Additionally, they aim to leverage their enterprise customers (who tend to sign up to longer lease terms) to fill new locations quicker (and keep the initial turnover lower).
- Run: About 24 months after signing, a location enters into its steady-state. It is characterised by operational focus and providing a good customer experience. Most of it needs to be delivered by the local community team whilst still running the place efficiently. Smaller capital expenses may be incurred for the redevelopment of the spaces (i.e. repartition floorplan from one type of workspace to a different one if demand is different from what was forecasted). In some locations, WeWork also acquires additional floors which they build out and start filling and eventually “run”.
The initial phases will greatly determine the financial trajectory a location will take.
Then there are a host of centralised activities that affect all locations which we are covering in the premium resources.
Key resources / assets
WeWork’s key resources are their office spaces, their actual locations, the lease terms that they have secured, their customer base and their brand. For all the talk about being a technology company, this has not been considered by many investors as a credible claim.
- Leases, their locations and the terms of the lease, workstation capacity:
- >800 locations in
- 149 cities across
- 38 countries
- A total of 331 leases signed (June ‘19) with a committed lease cost $47.2 billion over the lifetime of the leases (this is an asset in terms of the signed T&Cs and access “right of use” to the respective space and a liability in terms of the committed cashflows that will need to be paid no matter occupancy rates).
- Workstations (as of June ‘19, they had):
- 604,000 workstations operating
- 522,000 in the pipeline (either signed or in build)
- And an additional 724k in the sourcing phase
- The combined ecosystem of location, the offices, the common areas, workspaces, services, amenities, perks, etc.
- It also includes their physical assets, such as furniture, fixtures, etc.
- Their design philosophies have become part of their brand and what they stand for. This can be seen in the frequent positive feedback on the communal areas and the facilities in general.
- Their active members:
- Memberships: >600k
- Enterprise memberships: 40% (~240k)
- More importantly, WeWork states that they see an occupancy rate of 89% for their mature locations (18 months after opening which remained at that rate another 6 months later). The caveat with this is that only 30% of their open leases were at that point.
- Brand / reputation:
- Their brand helps them with customer awareness and acquisition. Despite the failed IPO, on the customer side, there is a lot of great feedback (check out the review section in any of their locations).
- On the landlord side, things will look a bit different after the failed IPO. Many landlords will be wary of their exposure to WeWork.
- Their digital assets:
- Website (7,300th on Alexa in term of engagement) and App;
- Proprietary software: supporting the execution of their playbooks;
- Off-the-shelf software: for standard real estate tasks;
- Tech stack;
- Data assets: they are monitoring space utilisation based on user data (here one of their patents on the topic). They want to play a role in the field of workplace analytics.
- Their playbooks from identification of suitable places to filling and operating them at profit will help to be more efficient with each new lease.
- Patents / IP: They are developing IP and patents. But with 35 patents, they are far behind most other tech companies (who have many thousands).
Many of the firms we have covered are platform business models where we are interested in segmenting the different sides (=participant types). As WeWork is a subscription / on-demand business model, we are focussing on the actual customer. We can segment customers by different dimensions. Here we are looking at the types of firms, the actual people in those firms as well as some potential microsegments.
Segmentation by business size
“As we have scaled our business, our membership community has expanded from mostly freelancers, start-ups and small businesses to global enterprises.”
Actual customer segments in terms of traditional macro segments:
- Individuals: can include freelancers, remote workers, micro business owners (sole traders), business travellers and others. WeWork addresses these segments with their:
- Small & mid-sized businesses: WeWork is popular among these types of businesses for its variable cost character and flexibility. This can also include growing startups.
- Early startups: WeWork targets this segment with their WeWork Labs offering which comes at a higher price but includes additional services.
⇒ The majority (estimated 60%) of WeWork’s customers are from these segments: individuals, small / mid-sized businesses (including start-ups).
- Enterprises: 40% of WeWorks members work for enterprises. WeWork has changed the definition for “enterprises” from companies with 1,000 employees to companies with 500 employees (because it implies more resilience during a downturn).
- Large corporations: Even though WeWork does not further segment enterprises, I do think it makes sense to give large corporations their own bucket (that could be firms larger than 5,000 or 10,000 employees).
WeWork fosters several important layers of relationships which include those to (1) the individual members; (2) the member firms; (3) cities / neighborhoods / communities; (4) landlords / developers / etc; and (5) investors.
Some of the important aspects of the customer relationship are addressed directly through the value proposition and how the value is delivered.
(1) Relationships to members
Members should foremost be seen as individuals even if they are employees of companies. Many of the elements of WeWork’s offices and spaces address the individual in many ways:
- A great entry / lobby / communal area giving the feeling of community;
- Places where people can work focussed and places where they can come together and interact;
- The small services, amenities and perks that let member feel cared for;
- Flexibility and freedom;
- Topical events that bring together like-minded;
- Culture and environment of entrepreneurship.
Their member relationships have taken a hit during covid where WeWork was hesitant to cut/reduce rent for their tenants during the NYC lockdown.
Marketing & Sales channels include:
- Broker partners: help to find customers, esp firms from small to large ones. See more under key partners
- Referral partners: are incentivised for acquiring customers. See more under key partners
- Digital ad campaigns through Google Ads. Once on their webpage, prospects can:
- Call a local number (uncommon these days but it makes sense for WeWork due to higher transaction values and lover call volumes);
- Use the live chat / virtual assistant;
- Use contact forms (which are on all offering pages).
- Word-of-mouth is often said to be a strong driver, it may follow the typical innovation adoption curve starting with early adopters.
- Social media: overall a small footprint with low interaction levels across their social media channels:
- Free media coverage based on the novelty factor. Whenever WeWork enters a new country or city, it can be sure of free coverage.
- Campaigns / discounts for sign-up and retention.
- Offices: the actual office spaces are another place to cross / up-sell their core offerings or additional services through their local teams.
- The App: the app is also a channel to sell additional services (meeting room bookings, mail/package handling, additional printing allowances, etc), 3rd-party services, up/cross-sell their core offerings and make bookings (e.g. for on-demand users).
- The Community tab in the App: let’s users interact with others via posts, direct messages, skill sharing functionality, etc.
- WeWork Labs: additional service in the startup ecosystem, etc.
- Events: can also be used to pitch to prospective customers. This includes events held on WeWork event spaces or networking events that WeWork organises for users.
Daily transaction channels:
- Onsite community manager & team.
- Support/help pages.
- App: Most transactions can be managed through the app.
- Resources for their users (or prospective users): Their blog pages which are categorised into Work Life, Growth & Innovation, City Life and more.
- Their newsroom with occasional updates.
The cost structure reveals a lot about how WeWork organises their business model and their processes / teams.
(1) Location operating expenses: (80% of total revenue) are their single biggest expense with lease cost as the biggest item therein. It includes the day-to-day costs of operating an open location. It excludes other location-specific costs shown next. It includes:
- Lease cost as the biggest item which includes:
- Base and contingent rent and their share of common area maintenance and real estate taxes;
- Amortisation of lease incentives (includes cash received for tenant improvement allowances and broker commissions);*
- Non-cash GAAP straight-line lease cost adjustments.*
- Other location operating expenses:
- Direct costs
- Local teams
- Direct corporate overheads
* These are non-cash adjustments required by GAAP. I am explaining this in more detail in the contribution margin discussion.
Location operating expenses are by far the most important cost as they are variable costs. When we cover their contribution margin calculation, you will see that the other costs are not included. This means, they consider them as (fixed) costs that will scale fast as a percentage of revenue as they scale up. Of course, we are also looking in more detail whether there are any signs to that claim.
- (2) Other operating expenses (5% of revenue)
- (3) Pre-opening location expenses (17% of revenue)
- (4) Sales and marketing (21% of revenue)
- (5) General and admin (G&A) (25% of revenue)
- (6) Growth and new market development (24% of revenue)
- (7) Interest and other income / expense