The name WeWork is now a known brand name for millennials around the world. This is a remarkable feat given that the company is relatively nascent. WeWork has become so popular that it is the fourth highest valued start-up in the world, just behind companies like Uber. This valuation is largely the result of huge funding that WeWork has been able to obtain from Softbank. WeWork now has an overall valuation of $47 billion. However, many critics believe that the company is highly overvalued.

In this article, we will have a closer look at the business model of WeWork and the major criticisms against the same.

How WeWork Makes Money?

While evaluating the performance of WeWork or any other company for that matter, the first question that arises is how does the company make money? In the case of WeWork, the answer is simple. At the moment, the company does not make a profit.

Instead, WeWork is operating despite running in losses. It has been able to do so because of the huge pile of cash that it has obtained from Softbank. The business model of WeWork is really simple. WeWork takes out long term leases on huge properties in prime locations. After taking a lease over thousands of square feet of office space, WeWork leases it by the workstation. This business model, in essence, makes WeWork, an inefficient intermediary in the real estate business! There is no reason why landlords cannot lease properties by the workstation themselves!

However, WeWork has poised itself as a technology company instead of a real estate firm. It is this positioning that is allowing WeWork to raise huge sums of cash. This is because technology companies can grow in volume quite quickly. Once the infrastructure is set, an application could serve thousands of additional users at very little additional cost. However, that is not really the case with WeWork since if it has to sublet more real estate, it must first have a lease on the same.

The business model of WeWork is basically based on the bullish sentiment, which is prevalent in the real estate market. WeWork intends to make money by increasing the sublet rates in the future, whereas it will continue to pay the lower rents which were originally agreed upon. The WeWork model is basically a large bet on the real estate rental market. As long as the rentals continue to grow, WeWork will continue to make money.

Is WeWork Really a Tech Company?

WeWork has positioned itself as a technology company. This is because venture capitalists are keener on giving money to tech companies since such companies tend to have a rapidly scalable business. However, the reality is that the core business model of WeWork is not based on technology. The company uses technology in order to track the usage of office space. Internet of Things (IoT) is used in order to optimize the design and energy consumption in the office space.

For instance, WeWork electronically monitors the usage of facilities such as conference rooms. This helps it to optimize the number of conference rooms built in the facility. By optimizing the use of shared facilities, WeWork is able to release additional space for creating more workstations, which can be let out.

Although it would be reasonable to say that WeWork uses more technology than its counterparts, it would be wrong to say that its core business is completely dependent upon technology. However, positioning itself as a technology company has paid rich dividends for WeWork. This is because it has close to half the real estate space that its competitor Regus has. However, the valuation of WeWork is 12x compared to Regus. Regus is valued at a meagre $24 billion even though the company has stable cash flow and generates profits. On the other hand, Regus has no stable cash flows or profits, but it still valued at $48 billion.

Since WeWork has an overvalued business, it is at high risk for several adverse events that may happen in the market. Some of the possible risks have been listed below.

Real Estate Downturn Risk

As mentioned above, the WeWork business model is a gigantic bet on the fact that the real estate rentals will keep on rising in the future. If the rentals were to decrease in the event of a downturn, WeWork would still have to pay the lease amount that it agreed to pay to the landlord. Hence, the company would buy expensive and sell cheap and lose money in the process! WeWork has tried to mitigate this risk by setting up several different subsidiaries which sign lease agreements with landlords. In this way, even if a few subsidiaries go bankrupt, the business interests of the larger company will continue to be protected.

Freelancers Risk

Also, most of the tenants that WeWork gets are freelancers and start-up firms. A lot of these tenants are not financially stable. Hence, in the event of a recession, they will be the first class of people who will end up facing cash flow problems. Since these types of tenants provide the largest chunk of business to WeWork, it would not be incorrect to say that the company is standing on shaky grounds. This is the reason that many financial analysts argue that WeWork is probably the most overpriced company in the entire world!