At the beginning of this year, Japanese venture capitalist firm Softbank bought a further $2bn of shares in WeWork, ahead of its expected IPO in September.
WeWork is a business whose primary revenue earner is in the rental of shared office space, allowing small businesses to make the use of an office at a lower rate than your usual real-estate business model. In essence what it does is buy unused office space and then rent out smaller units to start-ups or small businesses, for a much lower cost than would traditionally be charged by a normal landlord.
The company offers several pricing options to larger businesses, as well as individual workers, but all the while with a view to providing the benefits of a full office environment while reducing the costs for businesses, where margins tend to be wafer thin.
WeWork to create three separate divisions
It is certainly true that the shared office space business model is a successful one, given that Workspace Group here in the UK has seen significant growth in the last 10 years. The valuation of Workspace Group however, is much more modest and more importantly the company is profitable. WeWork, or the We Company, as it is now known, has more grand ambitions.
As part of the extra $2bn cash injection by Softbank, which valued the business at an eye watering valuation of $47bn, the company would be spilt into three divisions, with WeWork the largest part of the business. The other two divisions would be WeLive, which provides spaces for co-living, and WeGrow, which would be an education provider.
WeWork IPO looks to raise up to $3bn
Today’s S1 filing appears to fire the starting gun on a roadshow that will look to generate between $2bn to $3bn of extra funding, at a time when the IPO flurry that we saw at the beginning of this year appears to have run its course.
As Uber can attest, a lofty valuation and popular business model doesn’t always translate into a realistic valuation, and looking at WeWork’s numbers it is hard to make a case for the type of valuation that we saw at the beginning of the year. In the six months to the end of June, the company generated revenue of $1.54bn, almost double the same period a year ago. So far so good, but unfortunately its operating expenses were $2.9bn, which saw its operating loss rise to $1.37bn.
There is no question that every business requires capital in order to grow, but in the space of the last few years operating expenses have shown no signs of coming down, with the company making a pre-tax loss of $1.93bn last year. This year alone the company is down just under $900m and the company burns through cash as quickly as it generates it. In terms of the growth numbers, workstation capacity has doubled to 604,000, while memberships were up 97% to 527,000.
The S1 doesn’t give any indication as to what level the company is looking to price its IPO at, but given the current mood in the market, there is a risk they won’t get anywhere close to what they are looking for. At $47bn, the valuation looks a little rich and they may find that, just like Uber, they may have to settle for a lot less, especially if markets continue to behave in the erratic way that has characterised the past few weeks.
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