January 9, 2019

Breakingviews: WeWork needs path to profit, not enlightenment

by Breakingviews.

WeWork seems to be on a path to enlightenment, when what it needs is one toward profit. The cash-burning office-share outfit – dubbed “The We Company” as of Tuesday – wants to “elevate the world’s consciousness.” SoftBank is investing $2 billion more in the company, some at an eye-watering valuation. But that’s far less than an injection of up to $16 billion, on the table last year according to the Financial Times. WeWork broadening its ambitions as its backers shrink theirs is risky.

It’s one thing for Alphabet to pursue quixotic goals such as providing broadband via balloon or fighting biological aging. Shareholders can forgive a $727 million loss on the company’s many wacky bets in the third quarter of 2018 because the Google advertising juggernaut provided about $9.5 billion of profit in the period. WeWork doesn’t have this luxury. It lost $1.2 billion on $1.5 billion of revenue over the first nine months of 2018.

Most of the revenue and losses come from renting out office space. While the company could stanch much of its bleeding by stopping expansion – it pegs operating margins at about 30 percent in established buildings – that would make it very hard to justify the $47 billion valuation attached to part of SoftBank’s new investment. Hence WeWork’s breakneck expansion in new offices, and into new fields.

The We Company’s separation of offices (WeWork) and residential units (WeLive) is sensible enough. A third bucket, called WeGrow, is a convenient place to put everything else, including a lifestyle business, an elementary school, a coding academy and an online meetup service. It does introduce greater clarity, perhaps allowing potential partners to pick and choose more easily.

But that advantage is undone by the goals laid out by co-founder Adam Neumann. “WeWork’s mission is to create a world where people work to make a life, not just a living; WeLive’s mission is to build a world where no one feels alone; and WeGrow’s mission is to unleash every human’s superpowers.” Skeptics can be forgiven for interpreting this as throwing pretty much any spaghetti at the wall to see what sticks – when WeWork could instead be planning for when there are no more SoftBank dollars to burn.

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