How Does WeWork

Make Money? 2019

WeWork is one of the world’s most valuable startups, though
just how its business works is widely misunderstood. We look at
how WeWork makes money, where it spends it, and how its
flywheel operates.

On one level, the answer to the question “How does WeWork make
money?” is, “It doesn’t — yet.” The 9-year-old co-working company
is notoriously unprofitable, $1.7B in operating losses in 2018, and
$1.4B in the first half of 2019 alone.

But that hasn’t stopped WeWork from becoming one of the most
recognizable — and divisive — startups in the world. More than
500,000 people work out of WeWork buildings in 120+ cities in 35+
countries worldwide. In 2018, the company reportedly became the
largest office tenant in all of Manhattan.

Skeptics refer to WeWork as a trumped-up real estate play, but

the company’s $47B valuation is far more reminiscent of a tech
company in the style of Uber or Airbnb. WeWork itself has always
maintained that it has more in common with its fellow decacorns
than other real estate companies. As far back as 2014, CEO Adam
Neumann was on the record saying the company “happens to
need buildings just like Uber happens to need cars, just like Airbnb
happens to need apartments.” The company’s S-1, filed in August
2019, mentioned the word “tech” 123 times.

How Does WeWork Make Money? 2

IIn recent years, the company has shifted its focus from the
traditional co-working market of freelancers and solopreneurs
toward higher-leverage opportunities, including co-working for
enterprise and a new “WeWork-as-a-service” offering called
Powered by We. And in January 2019, the company officially
announced that it was rebranding as The We Company. In April, it
was announced that the company would join the wave of high-value
unicorns, including the also-unprofitable Uber, that have gone public
in 2019.

So is WeWork’s business model just a “house of cards” fueled by

“Silicon Valley pixie dust,” as critics have claimed? Or do millions
of square feet of office space, hundreds of thousands of members,
and an ever-expanding repository of data add up to more than the
sum of its parts?

Ahead of WeWork’s impending IPO, we dove into the company’s

S-1 filing to look at its overall business model, its revenues from
its startup and enterprise co-working businesses, and its costs in
order to evaluate how WeWork’s business works today — and how
it might work in the future.

How Does WeWork Make Money? 3

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How Does WeWork Make Money? 4

Table of Contents

HOW WEWORK WORKS 6

REVENUE CENTERS 17
Memberships 19
Enterprise 23
Other Projects 26
Competitor Comparison 31

COST CENTERS 34
Rent 36
Construction & Renovation 38
Member Acquisition & Retention 39

THE FUTURE OF WEWORK:

CHALLENGES & THREATS 41

CONCLUSION 45

How Does WeWork Make Money? 5

1 How WeWork Works

On the surface, WeWork’s business looks like a relatively

conventional real estate play. Across its more than 400 locations,
everyone from solo entrepreneurs to large, enterprise companies
can rent out everything from a desk to a private floor. But WeWork
is different from your average real estate company — and is valued
differently from one — because of the unique way it delivers value
to both tenants and landlords.
WeWork gives its tenants something that is ordinarily hard to find: a
flexible space, on-demand, with short-term leases (in some cases,
even on a month-to-month basis). This solves a problem that
plagues fast-growing startups especially: the process of finding a
new office space, moving in, signing a long-term lease, remodeling
the space, and moving out to start it all over again somewhere else.

Hot desks at a WeWork co-working space in Vancouver, Canada. Image Source: GoToVan

How Does WeWork Make Money? 6

When a company outgrows its WeWork membership, it can upgrade
to a more spacious option, a private office, or even a private floor
— reducing friction from transitions. Customers don’t have to think
about all the minutiae of renting office space, and they get access
to plenty of office perks (free coffee, fast internet, and so on).
For landlords, WeWork offers significant value as well, including
higher rents, an expanded tenant pool, and increases in real estate
values. In a blog post published in 2018, the company reported rent
premiums in buildings it occupies in New York and Los Angeles
of between 15-29%. The company estimates that it has generated
$250M in additional revenue for landlords in New York, Chicago,
and Los Angeles alone.
This reciprocation of value is key to WeWork’s flywheel model — the
engine of this billion-dollar company’s sky-high valuation.
The bigger WeWork becomes and the more locations it’s in, the
more able it is to negotiate favorable lease terms with landlords. It
can do that both because of its negotiating power and because of
its aforementioned brand. The better its deals with landlords, the
more money it can make and the more tenants it can fit into their
buildings.
On the flip side, that increased revenue and higher occupancy can
translate into improved service offerings for tenants. The better
WeWork can make its service, the more members it can acquire —
and the more it can re-invest in member experience.

How Does WeWork Make Money? 7

The We Company is positioning itself as a demand aggregator, matching customers with
goods and services that meet their needs --- a move the company says allows it to “choose
strategically where and how fast to grow as it chooses.” Image source: The We Company.

WeWork’s business model is designed — if it works as intended

— to be a flywheel, generating over time better outcomes for
tenants, landlords, and for WeWork itself. Driving the compounding
momentum are three key elements: space optimization, value-
added services, and data.

How Does WeWork Make Money? 8

SPACE
WeWork’s central premise is that dealing with commercial
workspace is a tough problem no matter how big (or small) your
organization — and it’s rarely a core competency:

• Freelancers and startups don’t have the budget to pay for

office space, or staffing to worry about building management
and design, and so wind up working from home or some other
stop-gap solution, which can be isolating and could inhibit
collaboration and productivity.

• Small-to-medium businesses struggle with budget constraints

and limited resources, as well as growth trajectories that can
make space needs a moving target.

• Enterprise organizations face near-constant pressure to cut

costs and increase efficiency — and real estate and operations
expenses can be a stubborn roadblock to profit.

WeWork positions itself as the solution to all of these problems.

By providing turnkey, scalable workspace solutions, the company
promises to eliminate the friction involved in finding, occupying,
and managing a workspace:

• Freelancers and startups get all the benefits and advantages

of having an office space without the costs and responsibilities
that come with it.

• Small-to-medium businesses get flexible, affordable space

options that can be reconfigured according to their needs.

• Enterprise organizations get a space management partner/

consultant that can take on a lot of the operational challenges
at costs that are lower than what the company would
otherwise pay.

How Does WeWork Make Money? 9

A graphic from WeWork’s S-1 materials illustrates the savings the company promises to
enterprise clients vs. other alternatives. Image source: The We Company

Members and corporate clients aren’t the only stakeholders to

whom WeWork promises value. The company also positions itself
as a value-add to the landlords and owners of the buildings it rents,
promising higher occupancy rates and longer-term leases than the
owners would get from individual tenants — plus the convenience
of being able to lease out large swaths of space while dealing with
a single client in place of dozens.

How Does WeWork Make Money? 10

This, in turn, becomes an advantage for WeWork, as it uses these
promises to leverage more favorable prices and lease terms.
The business model underlying this model is straightforward rent
arbitrage:
• WeWork rents a few floors of a building from a property
manager in a high-density urban area.
• It reconfigures the space to include a mix of private offices,
conference rooms, lounges, and open workspaces and adds a
variety of worker-friendly value-added features, such as coffee,
office supplies, and beer on tap.
• WeWork turns around and rents out offices and desks in the
new-and-improved space to a mix of freelancers, solopreneurs,
startups, and, increasingly, medium- and large-scale businesses
and enterprise organizations.
The key to all of this is space efficiency. WeWork simply fits more
bodies into its spaces than a typical corporate office. The average
per-person office space in the United States is just under 200
square feet, according to US General Services Administration.
WeWork members can expect less than 100 square feet. The
claim is that it does this without sacrificing worker productivity or
satisfaction. In fact, a core promise at WeWork is that its spaces
are intentionally designed to foster more productivity and more
innovation.

How Does WeWork Make Money? 11

VALUE-ADDED SERVICES
Another factor contributing to WeWork’s promise of “more
productivity, more innovation” is the value-added services the
company offers to members:

• In 2017, it introduced the WeWork Services Store, a “one-stop

shop for business” that gives users discounts and deals on
everything from office needs to sales and marketing tools to
fitness and food vendors.

• In 2018, it (re)launched WeWork Labs, an incubator-style

program for startups aimed at helping them grow
their business.

• In February 2019, the company announced a revamp of the

WeWork app, complete with new skill-sharing features aimed at
making it easier for users to find, connect, and collaborate with
other members.

The upshot of all of this is that once members enter the WeWork
ecosystem, it’s harder for them to leave. The company’s public
filing documents report a net membership retention rate of 119%.
WeWork’s growing array of value-added services — ranging from
coffee and office supplies to marketing software and a services
marketplace — propel it beyond a simple landlord into a kind of full-
service professional “incubator” where members can network, grow
their business, learn new skills, and have the day-to-day minutiae of
managing a workspace taken care of.

How Does WeWork Make Money? 12

WeWork has a net member retention rate of 119%. Image source: The We Company

If a member moves to another city, there will be another WeWork

location waiting for them. If they need a strategic partner or service
provider, they can find one via the WeWork network. And as their
company grows from a tiny startup to a small team to a full-fledged
company, WeWork’s services scale with them.

How Does WeWork Make Money? 13

DATA
A final, crucial piece in the WeWork puzzle is the company’s use of
data. WeWork has long been using data to inform the build-out of
its locations: where they should be placed, and what the optimal
mix of offices, workspaces, and amenities should be. More recently,
the company has started to productize its data capabilities with the
“space-as-a-service” offering Powered by We.

Introduced in 2017, Powered by We marks a significant transition

for WeWork. Before this, WeWork’s services were restricted to the
spaces that they occupied. Through Powered by We, the company
has begun to expand its reach outside their own leases and into
companies’ existing spaces. This has a double-whammy effect,
enabling the company to command the higher prices that come
with serving enterprise clients, while at the same time shedding one
of its most significant sources of both cost and risk — the leases
themselves.

WeWork has closed a number of acquisitions geared toward

augmenting the company’s data capabilities:

• In 2015, it acquired Case, a building information modeling and

architecture consultancy firm.

• In 2018, it acquired Teem, a software and analytics provider

aimed at helping enterprises optimize their spaces.

• In 2019, it acquired Euclid, a “spacial analytics platform” that

tracks and analyzes how people move around physical spaces.

All of these acquisitions are geared toward building WeWork into

what chief product officer Shiva Rajaraman has referred to as
the “Google Analytics for space.” The goal appears to be to grow
WeWork into a central repository of information about how we
occupy and utilize space and then leverage that information to
refine and improve WeWork’s core offering, as well as pave the way
for new initiatives like the shift to enterprise.

How Does WeWork Make Money? 14

The more WeWork learns about its tenants, the more efficient it can (theoretically) become
at organizing spaces around them. Image source: GoToVan

Again, all of this is happening at a massive scale. The company

adds an estimated 500,000-1M square feet of space each year.
In May 2017, there were approximately 180 WeWork locations
worldwide. Today, there are more than 550.

As all of these elements converge at a global scale — members,

value-added services, enterprise clients, real estate partners, data,
and the WeWork brand — a virtuous cycle starts to take shape. New
features and amenities bring in more members, more members
unlock better deals with real estate partners, deals with real estate
partners bring in more members, more members generate more
data, more data unlocks more features.

How Does WeWork Make Money? 15

This is the flywheel differentiator that WeWork is building toward:
a combination of network effects, unique data capabilities,
economies of scale, and old-fashioned brand ubiquity that yields
compounding returns the bigger the company gets.
If there’s proof that this model works, the place to start looking for
it is in WeWork’s revenue numbers.

Image source: The We Company

How Does WeWork Make Money? 16

2 Revenue Centers

WEWORK
WeWork co-working memberships are the core revenue generator of the
WeWork business model. The company earned $1.8B in revenue in 2018,
with 88% of that revenue tied to memberships. That 88% number includes
enterprise clients, which now comprise 32% of WeWork’s total membership.
It does not include revenue from WeWork’s ancillary offerings:

• In-space services and add-ons like printing, phone service, WiFi, coffee

• Daily, i.e non-recurring space rentals

• Perks and subscriptions sold through the WeWork services store

In 2017, the company reported that 93% of revenue was membership-

related. The decrease in this figure over time is evidence of the
company’s recent efforts to diversify its income streams with new
products and services.

The company has also successfully moved up market with enterprise

clients (defined as companies with 500+ employees) up to 40% of WeWork’s
membership revenues as of June 2019, up from just 20% in March 2017.

As WeWork’s percentage of enterprise customers increases, so does its committed revenue backlog.
Image source: The We Company

How Does WeWork Make Money? 17

Despite ongoing efforts to diversify its revenue streams, members
are still a crucial component of the WeWork ecosystem — and not
just as customers. Members are also sources for the company’s
expanding library of data. The more members WeWork has, the
more data it gathers on how people work and how they occupy
the spaces they work in. That data, in turn, allows WeWork to
build better, more optimized workspaces — and new products and
services for WeWork to offer to members.

Average membership and service revenue per physical member has declined over time.
(Source: Financial Times)

Broadly, WeWork’s offerings can be divided into two

main categories:
• Memberships, which target individual freelancers and
solopreneurs as well as startups and small teams
• Enterprise offerings, which adapt the WeWork model to the
needs of large organizations

How Does WeWork Make Money? 18

MEMBERSHIPS
The WeWork website divides membership options into four main
buckets: Shared Workspace, Private Office, Office Suites, and
headquarters by WeWork. The incubator program WeWork Labs
can also be included in the memberships category, since it’s
designed to fit the needs of startup organizations.

Shared Workspace

The shared workspace tier is the lowest-value offering that WeWork

has — not the company’s most profitable sector, but an important
foundation for what’s built above it.

These memberships are what most people picture when they hear
the words “co-working space.” Members come in each morning and
either grab any available desk space in the common area if they
have what WeWork refers to as a “hot desk” membership; or, for
$100 or so extra a month, settle in at their own dedicated desk in
the shared workspace.

Amenities are a core part of WeWork’s “managed-for-you” value proposition to members.

Image source: WeWork

How Does WeWork Make Money? 19

According to the WeWork website, these shared workspaces are
meant for startups and small companies as well as freelancers,
consultants, and remote workers. Hot desk memberships start at
$190 a month and can reach upwards of $600 in expensive cities
like San Francisco. Dedicated desks range from $300 to $700+.

In addition to the question of whether you come back to the same

desk each day, there are also slight differences in the amenities
members have access to, such as how many credits they receive
toward conference room rental per month, and whether package
and mail delivery is included with their membership.

On top of the hot desk and dedicated desk options, WeWork also
offers a third, lower-commitment option: We Membership. For $45
per month, We members receive credits for booking workspace
or conference rooms, with the option to add additional days for
$50/day for workspace and $25/hour for conference rooms. A We
Membership also comes with access to other We members via the
app and member network.

Private Office

The next step up in price from shared workspace options, private

office memberships are intended primarily for small teams, remote
workers, and small companies. A private office membership sets
members up in a dedicated enclosed space with access to shared
spaces and amenities, such as meeting rooms, lounges, coffee,
and printing services.

According to the WeWork website, private offices can be configured

to accommodate anywhere from 1-100+ people. Pricing for private
offices starts at $410 a month for a single person in low-cost
markets and reaches $1,200+ in high-cost ones.

How Does WeWork Make Money? 20

Office Suites

Once a private office no longer serves a business’s needs, the

next step up is what WeWork calls an Office Suite, intended for
teams of 20-250 people. The main differentiator from lower-tier
offerings is that, instead of sharing communal spaces with other
WeWork members, office suites come with their own private
reception, conference rooms, executive offices, phone booths, and
pantries. However, the space is still managed by WeWork, with
considerations like cleaning, maintenance, IT, and utilities handled
by WeWork staff.

Headquarters by WeWork

The tier above office suites, headquarters by WeWork is WeWork’s

“white label” solution for enterprise clients. Rather than setting the
company up with a space inside an existing WeWork, headquarters
are set up in standalone locations sourced by WeWork in a
neighborhood of the client’s choice. Client companies choose one
of four “configurable layouts,” ranging from an open bullpen to
executive suites. Clients for this service also opt to have internal
staff manage day-to-day operations for their location, with WeWork
taking what the website refers to as a “behind-the-scenes” role.

How Does WeWork Make Money? 21

WeWork Labs

A striking example of how WeWork leverages value-added services

to draw companies deeper into the WeWork network comes in the
form of WeWork Labs.

WeWork Labs is WeWork’s “global innovation platform” —

essentially an in-house startup incubator that augments the
core WeWork workspace offering with additional features,
including dedicated program managers, weekly events, pitch
nights, workshops, and investor introductions. Relaunched in
2018, the program is currently offered in more than 60 locations —
16 in the United States and others in major cities across the world,
including in Brazil, China, Israel, Singapore, the UK, and Thailand,
among others.

The company says 1,000 startups have been incubated through

the program as of December 2018. According to the WeWork Labs’
global head, Roee Adler, the plan is to grow WeWork Labs to 100
locations by the end of 2019.

The key factor that differentiates WeWork Labs from other startup
accelerators is the business model: in place of the standard
incubator model of taking equity in the business, WeWork Labs
charges a flat fee, essentially an up-charge to what the startup
would otherwise pay for a space at WeWork. Prices for the
program’s US locations range from $300-$600 per month.

There’s a strategic dimension to WeWork Labs as well: as

successful companies graduate from the program and grow into
full-fledged companies, they become potential customers for
WeWork’s expanding suite of services.

How Does WeWork Make Money? 22

WEWORK ENTERPRISE
Enterprise clients are where WeWork’s model kicks into high
gear. Enterprise clients (defined in WeWork’s IPO materials as
organizations with 500 or more full-time employees) bring with
them more members, more stability, more money, and more data —
all of which serve to reinforce WeWork’s flywheel approach.

For the first few years of WeWork’s existence, the company

overwhelmingly served freelancers, solopreneurs, and fledgling
startups. But starting around 2017, the company started to
shift more of its focus to larger organizations. As of June 2019,
corporate clients make up 40% of WeWork’s membership, an
increase from 30% at the same time last year. Notable enterprise
clients for the company include Microsoft, Facebook, BlackRock,
Adidas, Citi, and Salesforce. In fact, according to the S-1, 38% of
the Global Fortune 500 are WeWork clients.

WeWork has doubled the representation of enterprise businesses in its customer base since
2016. Image source: The We Company

There are several reasons for the shift. First, the change brought
some stability to WeWork’s memberships as larger clients are more
likely to sign longer leases. From December 2017 to June 2019
— a time period aligning with the shift to enterprise clients — the
average commitment term of WeWork’s membership agreements
nearly doubled from 8 months to 15. Longer lease terms translate
to an increase in the company’s revenue backlog, which it reports
has gone from $500M to $4B over the same time period.

How Does WeWork Make Money? 23

The pivot to enterprise clients also allowed WeWork to diversify
the types of businesses that it works with. A major concern with
cultivating a customer base of startups and software companies
was that it left the company vulnerable to a market downturn, since
a recession affecting the tech sector could stymie many of these
companies and, presumably, WeWork’s membership count as well.
However, documents from WeWork’s first bond sale in 2018 show
that the company’s clientele is more diversified than many realized:
only 15% of WeWork occupants at the time were in software, while
20% were in business, financial, or legal services.

For enterprise clients, WeWork carries over the standard Private

Office and Office Suite options described above and adds three
additional services: Global Access, Custom Buildout, and the “data-
as-a-service” consultancy option Powered by We.

Global Access

Designed primarily for businesses with traveling and remote

workforces, the Global Access option essentially allows
businesses to buy memberships for its employees to WeWorks
around the world. WeWork also provides utilization reports to
client companies that allow them to monitor which locations their
employees are using — a feature that the WeWork website says
allows businesses to “make data-driven decisions about the future
of your realty portfolio.”

Custom Buildout

WeWork’s custom buildout option gives corporations the option

to have WeWork design and build out a completely custom office.
WeWork scouts the real estate, reconfigures the space according to
the client company’s criteria, and then manages operations much
the same as it would at typical WeWork locations.

How Does WeWork Make Money? 24

Powered by We

WeWork claims to be an “office space-as-a-service” and the

company’s Powered by We service, launched in 2018, is arguably
the purest distillation of that ambition to date. In this model,
WeWork does not build or manage any new spaces. Rather, it
position itself as an office space consultant, leveraging data,
engineering, and design expertise to reconfigure enterprise
clients’ existing spaces in a bid to boost productivity. The company
can then manage the space in much the same way that it manages
branded WeWork spaces.

Powered by We promises to import the signature WeWork ambiance and efficiency to enter-
prise clients’ existing spaces. Image source: WeWork

As of July 2018, Powered by We had 30 customers, including

Standard Chartered and Pinterest. The division generated $13.7M
in 2017, according to Bloomberg — just 1.5% of the company’s
overall revenues of $886M for that year. However, the “office
space-as-a-service” offering could be a core part of the company’s
strategy moving forward. Costs under this model are significantly
lower than the costs of opening a WeWork, and the model gives
WeWork entry into a whole new market in the form of more mature
businesses with existing, established workspaces. Additionally,
the model provides WeWork with a recurring revenue source
disentangled from the commitment and risk of a long-term lease.

How Does WeWork Make Money? 25

OTHER PROJECTS
WeWork accounts for the vast majority of The We Company’s
revenues. But the company has been acquiring companies and
introducing new projects and initiatives at an impressive clip,
spanning everything from coding schools and gym concepts to
co-living spaces.

The expansion feeds into the flywheel effect that WeWork is

building towards. The more value WeWork provides to its
members, the more it incentivizes them to stay within the
WeWork ecosystem for everything from living space to
childcare to fitness to continuing education.

Broadly, we can divide WeWork’s other ventures into two main

categories: non-real estate services for WeWork members, and
other real estate concepts.

NON REAL ESTATE SERVICES

Flatiron School

In 2017, WeWork announced that it had acquired The Flatiron

School, a coding education platform that offers a combination of
online and offline classes to people looking to retrain for a career in
tech. The mostly stock deal was worth a reported $40M, according
to Reuters.

Flatiron School has served more than 1,500 students since opening
in 2012, according to a 2018 student outcomes report published
by the company. For the time being, Flatiron School continues
to function relatively independently from WeWork. The school
continues operating its in-person and online programs with plans
to expand to other educational models and courses, as well as to
explore new opportunities for the WeWork member community.

How Does WeWork Make Money? 26

Flatiron School could become a revenue center for the company, but the coding education
space is crowded, and competition is fierce. Image source: Flatiron School

Meetup

WeWork acquired social networking platform Meetup in 2017 for a

reported $200M. The synergy between the two businesses is clear:
Meetup’s goal is to get people away from their computer screens
and interacting in the physical world, and WeWork’s goal is to foster
connectivity and interaction… in WeWork buildings, of course.

Meetup is the most mature business that WeWork has brought into
the fold so far: founded in 2002, the company reached profitability
in 2009 with revenues of $9M. Meetup continues to operate as
an independent business, but it may have value as a customer
acquisition vehicle for WeWork. As of the acquisition, Meetup had
35M users (vs. WeWork’s 400,000 members), including many in
markets where WeWork does not have a presence.

How Does WeWork Make Money? 27

OTHER REAL ESTATE CONCEPTS
WeLive

In 2016, WeWork announced its first expansion outside the world

of co-working with the introduction of WeLive, a co-living concept
that applied the turnkey convenience of WeWork to apartment
living. The hypothesis behind the concept is simple: WeWork
members who like the co-working model might find similar value in
a communal, convenient living arrangement

WeLive adapts the turnkey quality of co-working to living space. Image source: WeLive

Early expectations for the WeLive concept were high. In 2014, the
company projected that it would add 14 locations by the end of
2016 and that WeLive would account for 12% of the company’s
revenue. However, as of 2019, WeLive has just two locations. The
drastic scale-back in ambitions is likely a product of the project’s
high setup costs and continued doubt about the viability of co-living
in the US.

How Does WeWork Make Money? 28

WeGrow

In 2017, WeWork announced the launch of WeGrow, an

experimental elementary school concept. Again, there’s a direct
connection to the company’s mission to establish WeWork as the
center in its members lives: if WeWork members can send their
kids to school in the same building as their offices, that’s one more
tether between members and the WeWork ecosystem.

WeGrow connects students with mentors sourced from the WeWork community.
Image source: WeGrow

While the project shares a name with one of the newly formed
divisions of The We Company, it seems unlikely that the project
will be able to scale up significantly in its current form. The first
program included just 46 students — 60% of whom received aid
from WeWork to offset the prohibitive $36,000-$42,000-per-year
price tag. Only one in three students enrolled at WeGrow are
children of WeWork employees or members.

How Does WeWork Make Money? 29

Rise by We

In 2017, WeWork announced the opening of a new fitness concept

called Rise by We, located in a Manhattan-based WeWork. Reviews
have been lackluster — Yelp gives the location 3.5 stars based on
18 reviews — and the concept has yet to add a second location.
If the goal is to expand, further growth will be difficult given the
demographics of luxury gyms and the high competition in
the space.

Rise by We brings the signature We design sensibility to the fitness space. Image source:
Rise by We

How Does WeWork Make Money? 30

COMPETITOR COMPARISON: IWG
While WeWork has shown an interest in expanding into verticals
outside the original co-working vertical, temporary space rentals
remain its primary line of business. This means that, for the
time being, the most useful gauge in sizing the company up is to
measure it against a competitor in the space rental sector.

WeWork is not the first organization to see a business opportunity

in providing outsourced workspace solutions to organizations —
IWG (formerly Regus) has been doing that for more than 30 years.

IWG is a multinational organization originally founded in 1989. The

company has five main brands: Regus, Signature by Regus, Spaces,
HQ, and No18.

IWG is significantly larger than WeWork: it has a total of 3,000+

locations in 1,000 cities versus WeWork’s 650+ locations in 115
cities. WeWork has a significantly higher employee-to-customer
ratio than IWG, likely due at least in part to the younger company’s
emphasis on community management.

IWG surpasses WeWork in square footage, membership, revenue, and profit — but its market
cap is a fraction of the younger company. Image source: Recode

How Does WeWork Make Money? 31

IWG is significantly larger than WeWork: it has a total of 3,000+
locations in 1,000 cities versus WeWork’s 550+ locations in 124
cities. WeWork has a significantly higher employee-to-customer
ratio than IWG, likely due at least in part to the younger company’s
emphasis on community management.

Unlike WeWork, IWG is profitable. In 2018, the company reported

$200M in operating income and $140M in net income on revenues
of $3.3B.

Unlike WeWork, IWG’s revenues and expenses rise and fall together.
Image source: Financial Times

How Does WeWork Make Money? 32

IWG may be the co-working company best positioned to challenge
WeWork on a global scale, but evidence suggests that the
company is looking to get out of the WeWork game. In January
2019, Bloomberg reported that IWG was exploring options to sell
its Spaces unit. The news comes in the wake of flagging financial
performance for IWG, which saw pre-tax profit down 8 percent in
2018.

Spaces has approximately 180 locations in 50 countries with plans

to reach 400 locations this year. According to IWG CEO Mark Dixon,
the division will become about the same size as WeWork in 2019
— and is a profitable business. With its emphasis on larger spaces
and a more modern aesthetic, experts have speculated Spaces
may be the brand best positioned to challenge WeWork.

Dixon told the Financial Times that IWG has fielded interest in the
deal, and that the company is “considering all options.”

“These are also people that are interested in investing in the

sector as opposed to looking to buy… We are clearly saying
‘watch this space.’”

How Does WeWork Make Money? 33

3 Cost Centers

WeWork has been growing revenues at an impressive rate. But the

company’s costs have been growing just as fast. Net losses hit
$1.9B in 2018 — up 103% from 2017. Location operating expenses
as a percentage of total revenue was 80% in the first half of 2019,
according to the company’s S-1 filing.
Those sky-high costs are a product of WeWork’s aggressive
expansion trajectory. The company almost doubled its presence
in the last year alone. As a result, WeWork’s most significant
costs are the $18B in rental commitments the company has made
through 2023, as well as renovation and construction costs. The
company appears to be following the Amazon model: focus on
building out infrastructure and achieving brand ubiquity first, then
flip the switch on profitability later.

WeWork’s real estate operating lease costs doubled from 2018 to 2019. Image source: The We Company

How Does WeWork Make Money? 34

According to executive Arthur Minson, the mismatch between
WeWork’s profit and loss is purely a product of the upfront costs
inherent in building out a physical space. “We incur the expense
today and the revenue and the operating margin of those buildings
will come on next year,” he said to Reuters.
At least one WeWork location is profitable. The company’s London
location at Moor Place reached an operating profit margin of
$2M in 2017, up nearly 450% from the year prior. The location
— WeWork’s largest in Europe with space for 3,000 members —
originally opened in 2015.

How Does WeWork Make Money? 35

RENT
Rental commitments continue to be the most significant cost
on WeWork’s balance sheet. The company currently leases
approximately 14M square feet of office space — a number that
equates to “a small city’s worth of commercial square footage,”
according to Quartz. As of June 2019, WeWork had a total of
$47.2B in lease obligations.

In times of strong economic growth, WeWork’s rental commitments

will not be a problem, since the company can reasonably expect
occupancy rates to stay high enough to cover the expense.
However, if a recession should hit and membership flags, WeWork
could be left holding the bill for rent obligations it cannot meet.

Some analysts have suggested the very extent of WeWork’s

holdings could shore the company up should markets go down.
WeWork has said it’s the largest real estate tenant in New York,
London, and Washington, and ranks in the top five in several other
cities — some claim this renders it “too big to fail,” since these
cities would likely help the company out rather than let the city’s
entire real estate market go under.

WeWork doesn’t appear to be counting on this eventuality. The

company has taken several steps to reduce risk in the real estate
markets, including targeting more enterprise clients, shifting from
leases to co-management deals, and moving toward longer lease
terms for members — all with the apparent goal of improving the
stability and profitability of its commitments.

WeWork has also purchased property in several locations. In

2017, the company announced a deal to buy the famous Lord &
Taylor building in Midtown Manhattan, a deal the company closed
in partnership with private equity firm Rhone Group. The deal for
the 676,000 square-foot space cost $850M, and the costs to
refurbish the space in the hallmark WeWork style could reach
an additional $200M.

How Does WeWork Make Money? 36

Some critics have expressed concern about the deal, pointing out
that it essentially makes WeWork its own landlord using other
people’s money. “There’s huge potential for conflicts,” Harvard
Business School lecturer and long-time real estate fund advisor
Nori Lietz told the Wall Street Journal. “They’re using other people’s
money, and they’re on both sides of the transaction at the end of
day.” The Journal also points out that the fund could tilt decisions
on things like lease rates in favor of WeWork.

Also raising eyebrows is the relationship that WeWork CEO Adam

Neumann has to the real estate industry. Neumann has ownership
stakes in several buildings where WeWork is a tenant, effectively
meaning that Neumann is operating as both landlord and tenant
in these deals. Investors have expressed concern that the setup
could result in a further conflict of interests, as Neumann stands to
benefit on rents or other terms reached with the company.

WeWork has $47B in rental commitments that it will be responsible for paying throughout the
next 5-10 years. Image source: Pixabay

How Does WeWork Make Money? 37

CONSTRUCTION & RENOVATION
After rental commitments, the next most significant cost center
on the WeWork balance sheet is the build out of the locations
themselves. But as the company scales, it acquires more data
that results in more targeted decision-making and enables it to
negotiate better and better deals with partners and suppliers. As
COO Arthur Minson put it to Bloomberg: “This is a business where
scale matters. We’re building global supply chain capabilities, which
allows you, frankly, to build cheaper than anyone else out there —
materially cheaper.”

Space efficiency is the name of the game for WeWork in renovating

its spaces. When a single additional desk can add up to $80,000 in
sales over 10 years, it’s not difficult to understand the company’s
commitment to optimizing every inch of floor space it can.

To that end, WeWork has invested heavily in improving its

construction capabilities. Several of the company’s acquisitions
have been geared toward that, including the 2015 acquisition of
architecture consultancy Case Design and the 2017 acquisition of
construction communication platform FieldLens.

The investment appears to be paying off. Net construction costs

per desk fell 22% in 2017 to more than $5,600. Gross capital
expenditure per desk also decreased over the same period, from
$14K in 2016 to $9.5K in 2017.

How Does WeWork Make Money? 38

MEMBER ACQUISITION & RETENTION
Rent and build out costs may be WeWork’s most significant
upfront costs, but once the spaces are developed, it’s time to
recruit members. That comes with costs of its own — costs that
have increased alongside revenue as the company continues to
prioritize expansion.

WeWork’s business model rests on the ability to keep occupancy

rates high. Experts estimate that WeWork needs to keep at least
60% of its desks full in order to meet its rent obligations.

So far, it has been largely successful, thanks at least in part to high

employment and steady economic growth. In the S-1 filing, the
company reported average occupancy of 89% in buildings that have
been open for at least 18 months.

Getting those seats filled comes at a cost. Sales and marketing

expenses at WeWork exceeded $320M in the first half of 2019, up
from $140M during the same period in 2018.

How Does WeWork Make Money? 39

This may be another explanation for the company’s increased focus
on enterprise clients over the past few years. As already mentioned,
40% of WeWork’s members now come via enterprise customers.
By going “upstream” of individual employees and marketing directly
to employers, WeWork essentially acquires members in bulk rather
than marketing to each freelancer and solopreneur individually.
Corporate clients also tend to lead to longer membership
commitments, significantly reducing turnover.

WeWork’s occupancy rate is reportedly well above what the company needs to meet its rental
commitments. Image source: GoToVan

How Does WeWork Make Money? 40

4 The Future of WeWork: Challenges & Threats

Ultimately, what The We Company needs is time for the numerous

flywheel mechanisms it has put into place to gain traction and build
momentum at scale. But it’s time that the company may not have —
with capital starting to dry up, competitors honing in on the market,
and a possible recession looming, there are plenty of potential
roadblocks ahead that make WeWork’s path to profitability anything
but a sure thing.

CAPITAL CONSTRAINTS
While WeWork continues to seek a path to profitability in the long-
term, in the short-term, it will continue to need infusions of cash
to continue its aggressive growth trajectory — and that cash may
be harder for the company to come by in the future than it has
been so far.

In the past, the obvious answer to WeWork’s financial needs was

SoftBank, by far the company’s largest single investor; however,
relations between the co-working company and the Japanese
investing giant appear to have shifted. In January 2019, SoftBank
scaled a planned investment of $16B back to just $2B — a move
that some have speculated signals a reevaluation of The We
Company’s profit potential.

WeWork has publicly stated that it is not concerned with the

change in the deal size. The company’s CEO, Adam Neumann,
told CNBC that the $2B SoftBank investment is “above and beyond
what we need to fund the company for the next four to five years.”

How Does WeWork Make Money? 41

COMPETITION
While the company’s growth trajectory is impressive, it’s unclear
whether aggressive expansion and a knack for millennial branding
alone will be enough to protect against competition in the co-
working space long-term.

There were around 19,000 co-working locations around the world

as of September 2018, according to Harvard Business Review. In
London, one of the biggest flexible office markets, the three largest
providers accounted for about 17% of the city’s total flexible office
supply in 2017, according to workspace broker Instant.

Younger companies are emerging as well with an express mission

of taking on the WeWork behemoth. In 2018, co-working startup
Convene announced a $152M Series D fundraising round, bringing
it up to $266M in total disclosed funding. The company is still
relatively small — it expects to operate 1.7M square feet of office
space across 10 cities by the end of 2019.

The takeaway is that WeWork’s hold on the co-working space is

far from ironclad. While none are as well-capitalized as WeWork,
it’s not outside the realm of possibility that a challenger could
emerge as a Lyft to WeWork’s Uber. And with bigger rivals would
come a raft of new obstacles for WeWork to contend with, including
increased customer acquisition costs, more competition for leases,
and potentially a limited supply of lucrative enterprise clients.

How Does WeWork Make Money? 42

WeWork appears to be aware of this as it has been taking a
proactive stance, poaching members with offers of months of free
membership and, in some cases, buying potential competitors
outright. In 2018, WeWork acquired Chinese co-working startup
Naked Hub for a reported $400M — a move that may be intended
to protect the company’s recent expansion into Asia. WeWork also
has a significant investment stake in The Wing, a women-focused
co-working company with 7 existing locations and an additional 4
scheduled to open through 2020.

The threat of competition is also why the company’s integration of

data is so critical. Space is a commodity and data is a resource.
If WeWork can accumulate a critical mass of data from its users,
and leverage that data into more unique offerings, it may be able to
create the kind of strategic moat that challengers will find difficult
to cross.

MARKET VOLATILITY
Despite WeWork’s efforts to move more of its leases onto long-
term plans, purchase property, and otherwise insulate itself from
risk, an economic downturn on par with the 2008 recession could
still hurt WeWork’s business significantly. As already mentioned,
WeWork has taken on $18B in rental commitments, which it will be
responsible for paying out over the next 5-10 years. If a recession
should hit, membership flags, and client companies either tighten
their belts or are forced to shutter operations altogether, WeWork
could find itself holding the bill for obligations it cannot meet.

How Does WeWork Make Money? 43

A useful case study comes in the form of WeWork’s current main
market competitor, IWG/Regus. Regus launched in the late 1980s
and expanded rapidly through the 1990s. However, in the wake of
the dot-com bubble and the subsequent recession, demand for
work space plummeted, and Regus declared Chapter 11 bankruptcy
in 2003. The company was slow to rebound after the downturn
--- it took 12 years after its bankruptcy filing for Regus returned to
its 2000 IPO stock price, despite having grown its office space 6x
during that time, according to WSJ.

This is the fate that many critics believe awaits WeWork should
another recession hit — and some believe that another market
downturn is fast approaching. It is also what makes diversification
of revenue streams so crucial. WeWork needs something to fall
back on if real estate markets should fail. This appears to be what
the shift to enterprise clients and data-centric services like Powered
by We are intended to do: provide the company with some steady,
resilient business lines it can rely on should the markets take a turn
for the worse

How Does WeWork Make Money? 44

THE FUTURE OF WE
WeWork’s business model is built on principles of compounding
returns. By combining scalable office space solutions with a
growing array of services and amenities, WeWork attracts an
ever-expanding ecosystem of solopreneur, startup, small business,
and enterprise clients. As membership grows, WeWork is able
to leverage the size and quality of this network to offer better
lease terms to its landlords, which in turn leads landlords to offer
WeWork better deals on space. Better deals lead to more space,
more space leads to more members, and more members lead
to better deals. The result is a self-reinforcing cycle that builds
momentum as the company grows, allowing WeWork to unlock
network effects, efficiencies of scale, and, eventually, profit.

In January 2019, the company announced that it had officially

rebranded as The We Company, with a self-proclaimed mission
to “elevate the world’s consciousness.” The move gestures at
a vision for the company that expands way beyond co-working,
spanning living spaces, fitness spaces, schools, a startup
accelerator, and more.

WeWork has built a brand on big vision and big expectations. With
the rebranding as The We Company, and its upcoming arrival on
the public market, it seems that vision is about to get bigger still.
But so much about the company — from the profitability of the core
co-working business to the financial viability of its new ventures to
its ability to deliver value that can justify that $47B valuation — is
still hypothetical.

If the company can maintain its growth trajectory and successfully

leverage the treasure trove of data it’s gathering in a bid to become
“the Google Analytics of space” and survive threats to its survival
in the form of capital constraints, competition, and a possible
market downturn, it may yet be able to live up to the promise of
its valuation.

How Does WeWork Make Money? 45

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How Does WeWork Make Money? 46