The Growing Concerns of WeWork’s Risky Gambit

Earlier this month, American office space rental and co-working company WeWork announced that it would be rebranding as The We Company. Originally a provider of shared workspaces for technology startup communities and office services for small businesses and large enterprises, WeWork plans to expand its vision. At an internal conference earlier this year, CEO Adam Neumann outlined the company’s restructure, which split the business into three parts: WeWork, containing its core, original business; WeLive, a new residential initiative; and a new and more amorphous offering, WeGrow, that currently offers a gym, elementary school and coding school.

WeWork’s rebranding comes after a long planning period.  According to The Real Deal, an original pitch deck for WeWork dating back to 2009 describes an entire ecosystem of We services, including hotels and financial services.  Described as “the physical social network,” the We Company’s vision was a service suite catering to every facet of a professional lifestyle.  Neumann says that WeWork is now financially strong enough to begin acting on these plans.  WeWork will continue its existence as the commercial real estate arm of The We Company’s new, three-part business structure.

While the ambitious nature of The We Company’s rebranding is admirable, it also raises several questions, such as whether the wide-ranging nature of the group’s planned offerings is compatible with the utility that customers currently receive from working with the company. In addition, a recent round of failed funding has endangered The We Company’s expansionary pursuits. The We Company’s continued commitment to realize its restructure despite these issues is cause for concern, as its unprecedented vision given the obstacles is revolutionary in its industry.

Creating a client base that engages with The We Company’s multiple offerings, as opposed to customer base segmentation, will be a serious consideration for The We Company moving forward.  In 2017, corporate customers accounted for roughly 25 percent of The We Company’s $1 billion revenue.  These customers are generally longer-term, enterprise-level customers who see WeWork’s offerings as convenient office spaces.  As The We Company expands into other verticals (residential, education, etc.), one can imagine “package deals” of sorts in which customers who rent through The We Company for their commercial and residential needs receive discounts. However, capturing these economies of scope might be difficult for the newcomer in the residential space.

A recent deal with Japanese conglomerate Softbank that would have resulted in as much as a $16 billion investment into The We Company was abandoned in favor of a much smaller deal of just $2 billion, also from Softbank. This comes after an existing $8 billion investment from the Softbank Vision Fund.  While it is hard to say for certain that The We Company’s decision to make its broad restructuring was predicated on the large Softbank investment, it is likely that this was the case. Thus one ought to wonder if continuing the plan without the investment is a sound competitive move.

The decision to move ahead with The We Company’s restructuring despite the planned investment has also caused industry analysts to double down on a critique of the business that predates the rebranding: that WeWork, a property rental company, is unjustifiably valued as a technology company.  The critique is not made unfairly: while The We Company does utilize advanced data collection methods to guarantee that each space is outfitted to maximize renter productivity, the fact remains that their core business is buying and flipping rental properties.

Up to this point the core business has been lucrative for The We Company.  Internally, it has been reported that operating margins are generally at a healthy 30-40 percent and a general move away from independent freelancers towards long-term enterprise customers means that The We Company has guaranteed itself a consistent user base that pays a solid premium for its services.

Considering its competitive advantage in maximizing office productivity and securing high rents, the move towards residential and educational offerings comes as somewhat of a surprise.  What makes Neumann think that expertise in commercial offerings will easily translate to residential, where productivity is not necessarily the primary driver for a resident?  Residential offerings, at least, are similar in scope to existing commercial rental services, but services like banking and education are not in the same ball park. This leads one to question how the company plans to fight incumbents in the space, especially without the large Softbank investment.

The expansionary decision thus indicates a potential mania on the part of the executive team at The We Company to make good on their technology company valuation, which currently sits at $45 billion, without much regard for how they go about doing so.

So far, the operations have had mixed results.  Of a planned 68 residential properties, The We Company has developed just two, for which reviews have been mixed.  WeLive offers dorm-like living and daily activities for residents (boosted by the acquisition of activity-planning company MeetUp), but high prices keep residents from seeing their WeLive homes as little more than a temporary measure while finding a permanent residence.  Like the successful transition to long-term renters that WeWork has managed, getting away from short-term residents and moving towards more involved community members could be a major hurdle for The We Company as it continues to develop its residential offering.

The We Company has an uphill battle ahead.  CEO Adam Neumann’s decision to go ahead with the rebranding and expansion of offerings despite the lack of a planned $16 billion investment points towards a level of executive impatience to grow an empire that is optimistic, poorly outlined, expensive and that abandons much of what has made the company so successful thus far. Yet if the company pulls off the restructure successfully, such a success would revolutionize the industry of “the physical social network.”