WeWork is valued at $15 billion with double the liabilities.
Is the WeWork business model in technology?
Is Myrsa the future of commercial renting?
Can WeWork profit from the Myrsa business model?
Last week on September 24th, the C.E.O of WeWork Adam Neuman resigned as the CEO. His resignation followed weeks of pressure from the board following a botched attempt at an Initial Public Offering (IPO) and questions about his integrity. Adam had led the company as its evangelist CEO since its founding in 2010. Over the last few years Adam has transformed WeWork into the largest commercial real estate tenants in New York City with a valuation of $47 billion.
However this ambition is all coming undone. In August WeWork filed the application for an IPO. When investors did their due diligence they became anxious about the condition of the company. Their CEO Adam Nueman was living a wild playboy lifestyle complete with a private jet and luxury homes, but meanwhile the enterprise was bleeding money with over $34 billion in liabilities. Nueman’s erratic behavior like smoking weed aboard his private jet and spontaneously banning meat from employee meals also spooked investors.
In September these mounting risks proved to be too much for their investor Softbank and they decided to reduce the valuation of WeWork to only $15 billion. This devaluation also compelled WeWork to cancel their IPO. Softbank also requested the resignation of Adam Nueman. While Adam held a majority holding of WeWork shares, he ultimately conceded to pressure and resigned.
Is the WeWork business model correct?
Last August when WeWork announced their ambitions for an IPO, their prospectus classified the company as a technology firm; but is this an accurate description?
What is the business model of a conventional technology company?
Low Variable Costs
Google, FB, Yelp, and UBER all integrate the model of cheap scalable virtual networks. The network is implemented using their application interface at a low startup cost. Then when business is growing, the virtual network can be scaled for marginal additional costs. Virtual networks are also dynamic and can be scaled on demand.
Low Capital Investments
All enterprises come with capital investment costs. In the case of technology firms the investments costs are generally limited to software development and networks supported by server farms. While these farms are expensive assets, they are marginal capital investments compared to the complete assets of the company. Facebook (NASDAQ:FB) manages only $25 billion in assets while they maintain a $525 billion valuation. WeWork in contrast owns very few assets and instead rents real estate from other companies. These real estate assets are still considered capital investments. The consequence of this model is that WeWork will always have higher capital costs than other technology companies and without the low scaling costs. This model also restricts WeWork into continuously seeking lenders to fund growth.
Customer Data
Today nearly all technology companies from AMZN to NFLX accumulate, sort, and analyze customer information. These statistics are typically collected over years starting at the very first customer interaction and are the gold of any technology company. It is with these statistics that companies can target advertisements to consumers or customize services specifically to the consumers preferences. At this time it is unclear if WeWork collects customer statistics and the privacy consequences are also unknown.
Network effects
All modern technology companies make use of a network. This network could be built of literal customer connections like with Twitter or it could be customer statistics like with an Amazon (NASDAQ:AMZN) purchase history. The value of the network increases with the addition of each new member. This value increase can be the result of better customer data, customer engagement, network size or a combination. However with the WeWork model it isn’t evident how the value increases with remote customers.
Asset Liability Mismatch
WeWork manages their real estate by leasing properties on long term contracts and then renting the properties through short term revenue producing contracts. In good times this model can be highly profitable but it is also very risky because liabilities are fixed. WeWorks liabilities are currently at $34 billion.
While WeWork may be disingenuous in classifying themselves as a technology company, is there a precedent for their model?
Is WeWork in the storage business?
In 2006, Amazon (NASDAQ:AMZN) entered the computer hardware market with the launch of their web services (AWS) platform. This was a bold move at the time because IBM had recently sold off their PC business in the previous year. Amazon also entered the business with a 30% margin and with the model of only charging customers for usage. In subsequent years other companies including MSFT have replicated this model.
Startups receive instant access to the network with near zero costs because prices are based on usage.
Growing businesses can expand usage without the expensive prospect of acquiring new servers.
Established enterprises can focus on their core skills and outsource the competencies in managing cloud services.
The common thread with this model is that web services are a variable cost for Amazon (NASDAQ:AMZN) customers. Amazon is still responsible for the fixed capital expenditures of building and maintaining the server network. WeWork could consider mirroring this model as the flexible real-estate equivalent.
Is Myrsa the future of commercial rental?
Facebook (NASDAQ:FB) is valued at $525 billion yet they produce no content. Youtube is valued at $160 billion and they also produce no content. Maybe the future of WeWork really is in technology, but as a lease broker instead of a tenant. There is already a model for this business with the Indian startup Myrsa. Myrsa works by empowering property owners to list their space on their site at a price of their choosing. They can also list the amenities, purpose of the estate, features, and where the property is located. Prospective tenants can then send inquiries to the owner for the price, purpose, and duration of a lease. The owners receive an automatic notification with each request. Then when an agreement is reached, the tenant pays a deposit on the property and can utilize it.
Myrsa also conforms to all of the classifications of a classical technology company. They manage a virtual network with a low capital investment cost. Their network can be scaled at low variable costs dynamically and on demand. It is anticipated that they have access to customer statistics and that they can optimize their services with the data. They should also be able to utilize network effects to improve their network.
This model could be the next business model for WeWork or Myrsa could be the next WeWork.
Is there a future for WeWork?