UK Edition
WeWork could go the way of Myspace, predicts rival
WeWork is deluded about its own business prospects and may only be worth half its $47bn (£39bn) private valuation, the head of a rival office rental start-up has claimed.
Amol Sarva, chief executive of the flexible office provider Knotel, said his larger competitor was pursuing the wrong strategy by ploughing an "ungodly" sum of investors' money into desks for freelancers and small firms rather than bigger offices for large businesses.
He questioned the value of the office space giant, which has lost more than $900bn this year alone, saying it could go public at "easily half that" and that its financial pitch was "not rational". Mr Sarva compared the company to eBay and Myspace, saying that despite being early to the co-working trend, it would fail to capitalise on it.
It comes as WeWork prepares to make its stock market debut on the back of an investment prospectus which promised to "elevate the world's consciousness", but which many critics have said showed the company is overvalued.
"There was a time – not that long ago, 2005 – when eBay was worth twice as much as Amazon," said Mr Sarva. "That has reversed entirely. Amazon's worth fifty times fifty times more, because Amazon's insight was that it's not about the wacky things, it's about every thing.
"I know that WeWork is going to have to change but then again in 2005 I assumed the eBay people also noticed that they need to change, and they weren't that successful, and I'm sure that Myspace noticed that they needed to change when Facebook was eating their lunch.
"For all their effort and all their billions, they don't even have half their business as enterprise when 90pc of the world's office market is enterprise. They're massively over-indexed to basically really small teams and freelancers. That's too bad, but we have been growing so fast because I think we are focused on the right market."
The co-working wars
Knotel is among a number of flexible office and co-working providers who see opportunity for the whole sector in WeWork's hotly-anticipated public float, even as they battle to escape the shadow of its breakneck expansion and its prodigious wall of capital.
Last week, WeWork, technically called The We Company, released its prospectus for future investors, showing that it pulled in $1.5bn in revenue in the first half of 2019 but made a net loss of $905m.
The document was widely mocked for its mystical-sounding epigraph, which read: "We dedicated this to the energy of we – greater than any one of us but inside each of us." Nevertheless, if WeWork goes public at anything close to its current private valuation it will be the second biggest float of any American company this year, after Uber's $82bn public offering in May.
Rivals took the opportunity. John Arenas, chief executive of the co-working provider Serendipity Labs, accused it of being "funded by magic money". Jamie Hodari, chief executive of a similar firm, Industrious, said investors would "come to their own conclusions... on the underlying business model."
Sarah Travers, chief executive of the Boston-based coworking business Workbar, who spent 15 years working for Regus/IWG, the original flexible office provider, said: "WeWork has made the sales job of a lot of IWG employees easier." Her offices are "surrounded on all sides" by WeWorks – but, she said, "we think we'll win against them."
Amid such scepticism, WeWork has pointedly sought to cast itself as a tech company rather than a real estate company, given that even profitable real estate companies such as Regus are valued at far lower amounts.
Its charismatic founder, Adam Neumann, has gone further, describing it not as a corporation but as a way of life, which will one day provide an all-embracing communal environment for a younger generation who don't believe in being chained to a traditional office.
That vision has netted him a cool $26bn in capital from investors including the Softbank Vision Fund, which is backed by Saudi Arabia. The company now 528 locations in 111 cities.
The race to Amazonise real estate
By contrast, Knotel, also based in New York City, has around 200 locations in 11 cities. It has just closed a $400m funding round led by the sovereign wealth fund of Kuwait, bringing its capital raised so far to $560m, and is valued at $1bn.
But the company says that it is beating WeWork in terms of the number of buildings it operates in. At its current rate of expansion, a spokesman said, it will be the largest flexible office provider by building count in London, having already reached that milestone in New York City and Paris.
Moreover, Mr Sarva argued that WeWork's model is "not scaleable" because its focus on freelancers and start-ups requires it to burn money at a "usurious rate" in order to grow. "We use a quarter of the capital to accomplish every dollar of revenue," he said.
Knotel's spokesman added that before the company's recent funding round, it had taken 90 cents of investment for every one dollar of revenue earned since its foundation – whereas, he claimed, WeWork had required $4.40 of investment per dollar.
Mr Sarva said that is possible because Knotel focuses ruthlessly on the most lucrative markets in the most bustling cities. It has no co-working spaces whatsoever and its average office contains 100 people. Unlike WeWork, those offices are branded according to the tenant's wishes, and not with the icons of Knotel itself.
He compared the office industry to the takeaway food industry. Companies such as Just Eat and Delivery Hero saw an opportunity to simplify and centralise the process, letting customers browse and order on their smartphone rather than calling each restaurant individually. What they did not do was "elevate" the food we eat.
"The thing the co-working people screwed up is that they thought the office was going to change. And that's like thinking the pizza is going to change," said Mr Sarva. "They went really hard on this totally different notion of how people will work... but companies know how offices should work. The thing that has to change fast is how they consume [them].
Asked if Knotel is a tech company or a real estate company, he laughed and said: "Yeah, no, we're a real estate company." Nevertheless, he described its mission as trying to do for office space what Amazon's cloud computing arm, AWS, did for IT – a comparison WeWork also likes to make.
The idea is bind and simplify numerous functions into one simple service, so that customers can simply pick options from a menu instead of having to build, furnish, maintain, clean and cater to buildings by themselves.
"If you bought an iPhone and had to assemble it yourself, you'd be outraged," he said. "But to get an office, that is how it normally works. You get one that's totally unusable and you have to spend a year making it work for you... the vast majority of office for companies is still this incredibly laborious process."
Like WeWork, Knotel plans to make extra money by selling its software and methods to others, as well as letting out office space. In WeWork's case that means running companies' existing facilities through a service called Powered By We; for Knotel, it means selling a system called Geometry, which helps users rapidly outfit a space using modular walls and furniture, and another called Baya, which aggregates data about various buildings to help the user pick between them.