WeWork: a space odyssey
Start-up believes that data it gathers on ways people use space will give it an edge
Is WeWork worth $100bn? Rajeev Misra thinks so, perhaps because the SoftBank Vision Fund raised that sum easily enough itself. The fund boss’s immediate target for the workspace company is $35bn via a fund raising. Even that would make it the fourth most valuable privately held start-up.
WeWork’s sky-high value is driven by the faith of backers that it is more than just a company that leases out office space. The US-based group wants to span the global property sector. It operates in 74 cities. It aims for more than 100. It believes that data it gathers on the ways people use space will give it an edge in design, construction and outsourced services.
For now, however, revenue and costs are driven by the workaday business of office leasing. That means upfront costs are high. WeWork is known for its high-spec designs. The company says its target is for their costs to equal $2,000 per desk added. For 2017 that figure was more than $10,000.
This is why Softbank’s vocal backing matters. The Japanese group’s involvement soothed bond investor concerns about lack of profitability, enabling WeWork to raise $702m this year in spite of negative cash flow. WeWork’s burn rate means that it will need frequent financing.
Opening the taps of capital markets via a bond sale was a good idea. The bond’s price fall in the immediate aftermath suggests a reality check as investors remembered that WeWork generates negative ebitda. Revenue up 110 per cent in the first quarter to $342m will not reverse this. Revenue doubled last year. So did net losses.
WeWork’s bond price has since risen from 93 cents in the dollar to 97 cents. The company’s chance of turning a profit by the time the bond matures in 2025 depends on a rapid slowdown in costs. That looks unlikely while growth is high. But thanks to SoftBank this does not mean principal will go unpaid. While generous capital raising continues, the bond is a good bet.