
WeWork’s Annual Loss Doubles to Nearly $2B Amid Rapid Expansion - JumpCrisscross
https://www.wsj.com/articles/weworks-annual-loss-doubles-to-nearly-2-billion-amid-rapid-expansion-11553552216
======
malisper
I'm seeing a lot of people in this thread balking at the $2B in losses. The
thing is that aggregate profit is a terrible metric for measuring companies
that have a recurring revenue model with high upfront costs (as WeWork, Uber,
and many other tech startups do).

The reason for this is profit doesn't factor in investments. Let's say I
invest $1200 to acquire one customer who pays me $100/month. If you look at
month 0, I have -$1200 in profit. At first glance, this looks really bad.
Alternatively, you can see it as I am now making $100/month. Because of the
$100/month, after one year I'll have made my original investment back and
still be making $100/month. After two years, I'll have made a profit of $1200.

This is probably exactly what's happening here with WeWork. If you look at
things in aggregate, WeWork is spending a ton of money investing in opening
new offices while they make a much smaller amount of money from their old
offices. This makes them look like they are lighting money on fire. In reality
they are investing their money in new offices and expect each office to make a
return on investment over a few years. As long as they are spending more money
investing in new offices than they are making from the old ones, they will
appear unprofitable.

For a typical software business, a pair of metrics that are much better than
profit are CAC (cost of acquiring a customer) and LTV (the life time value of
a customer). As long as a product's LTV is sufficiently greater than CAC (a
successful SaaS company typically has LTV > 3 * CAC), it makes sense to invest
more money into the business.

This For Entrepreneurs post goes in great depth about good ways to measure a
SaaS business and gives you a few models you can play with:
[https://www.forentrepreneurs.com/saas-
metrics-2-definitions-...](https://www.forentrepreneurs.com/saas-
metrics-2-definitions-2/)

Now all of this doesn't mean that WeWork is a healthy business. All it means
is that we can't tell based on how much money they are losing alone.

~~~
jelling
Conflating WeWork, Uber, and SaaS businesses is inaccurate.

With a SaaS business - most of which are b2b - there are tremendous costs to
switching providers and going without is typically not an option. For example,
if company uses Salesforce, they must have a CRM and it will likely save them
little to no money to switch to a competitor (ex. Hubspot) but it will create
enormous organizational disruption as people and processes are built around
the existing platform. So customer life-cycle is likely 10 years or more for
the customers that generate the majority of their revenue. And if we do have a
recession and they bleed customers, Salesforce can always reduce costs by
cutting sales and support staff. The existing capital investments in the
software are already paid-off.

In comparison, WeWork's model is predicated on being easier to join and
_leave_ than a typical office space. As a result, they attract businesses with
shallower capital reservoirs. Meanwhile, WeWork is holding inventory risk in
that they hold the long-term lease or the property itself. So in the event of
a recession their customer base will be the first to die out or cut costs via
less desks and/or working from home.

(WeWork may or may not be off-setting this risk via financial engineering but
the question is at what cost as someone has to take the other side of the bet
and the downside risk here is pretty obvious. And, oh look, the yield curve
just inverted.)

Finally, 10 years in, Uber is still a commodity business. I generally think
Uber is better than Lyft and worse than Via, but none of their advantages are
anywhere near as durable as a SaaS business. Don't like Ubers new prices?
Don't like the the CEOs new haircut? You can use one of their other
competitors starting tomorrow. Even if you use Uber today there is zero reason
you can't switch to Waymo/Apple/whatever in the future. And in the worst case
scenario, Uber paid CAC to educate consumers who will use something else in
the future.

~~~
jameslevy
Uber has network effects. It's definitely possible and inevitable even that
they won't be on top anymore at some point, but what they are doing is not
exactly a commodity if it relies on a dense two-sided marketplace.

~~~
jhwang5
While it does have network effects, I'd argue it's not recession proof (mildly
cyclical, even), and there's low switching costs to using other forms of
transport (for example, I haven't used Uber in lieu of Lyft / driving my own
car and had no issues)

~~~
0xB31B1B
Uber has shown great growth in markets during recessions: ex Brazil. The
theory is that ridesharing is a driver constrained market, and during
recessions, more people drive for uber to make ends meet. Also, people invest
less in large purchases (cars) and instead spend more on services with a
higher marginal cost (taxi, ride share.

------
shereadsthenews
Only the truly innovative can lose money by being landlords.

~~~
keiraarts
The CEO is in a great position!

[https://www.wsj.com/articles/weworks-ceo-makes-millions-
as-l...](https://www.wsj.com/articles/weworks-ceo-makes-millions-as-landlord-
to-wework-11547640000)

~~~
lucisferre
Turning billions into millions!

~~~
kgwgk
Turning billions of other people's money in millions for yourself is not that
bad (for you).

------
Ozzie_osman
Things have gotten a little crazy in late-stage "tech" companies. I mean, I
understand that some companies need to grow for years before they can become
profitable, and until then, investors can be OK with your losses growing.

But there are too many of these types of companies. It doesn't make sense.
You've got Lyft, Uber, WeWork, and probably a whole host of others who have
kept their financials close to their chests.

Maybe one or a couple of these companies figure out how to turn a profit that
justifies these losses and valuations. My guess is most of them won't. I only
wish I could confidently say which is which.

~~~
csmeder
I’m confused, why would they sell large portions of equity (for billions) if
they didn’t plan on spending those billions? So by definition any company that
raises billions is planning on being unprofitable (by billions) or they
wouldn’t raise money right?

Companies don’t sell equity for fun, they only do it if they have no other
choice (they aren’t profitable yet, or they plan to become unprofitable due to
new expansion. For the latter they may be able to raise debt instead of
venture capital investment) right?

~~~
Nasrudith
They don't think it is worth billions or that their value would drop perhaps?

I honestly wouldn't be surprised if WeWork did that just to cargo-cult a
successful company.That or it involves a plan of "playing dress up as a
successful company" given the sheer "B ark feel" to the place. Other plausible
explanations are that WeWork is an embezzlement scheme, fraud, or money
laundering operation since nothing about the place makes sense.

------
Traster
This isn't really news. Basically WeWork have just expanded to a lot more
locations. 105% increase in revenue, 103% increase in losses. So essentially
they're keeping the same revenue, same costs at a larger scale. So the message
here is really that they're continuing to execute to their plan- fast
expansion. At some point they're going to need to turn all this into
profitability, but they're not actually planning to do that right now, so
there's no point in judging them for failing to be profitable since they
aren't trying.

They seem to have plenty of cash on hand (1 year runway in cash plus much more
available from softbank). So the losses really aren't a problem.

Another thing I've heard is "But during a recession their long term rents will
eat capital and demand will collapse". But that might not be true- it may be
that they have deep enough pockets to weather a recession, pick up new cheap
property in long-term agreements _and_ gain customers. Hear me out: Maybe they
can make a play during the recession that their short-term flexible leases are
low risk for clients during a recession making them a great choice. It would
mean they come out of the next recession with great market share and then can
focus the next business cycle on starting to squeeze out those profits.

I've got to admit I actually believe they could get to profitability - but the
only way I see is by growing to a size where they can drop prices in local
areas to force out competition and charge monopolistic prices elsewhere.

~~~
sonnyblarney
"so there's no point in judging them for failing to be profitable since they
aren't trying."

Point taken, but, we can definitely 'judge them' in the case of unit
profitability.

Expansion is one thing, it's loaded with startup costs for each unit - but the
key is, 'are the long running installations running at unit profitability,
even when accounting for corporate overhead'.

That's the first order thing we need to know, because if not, then it's a
problem because the only way to make more money would be to jack rent or cut
overhead, neither good options.

The other thing is of course the inherent risks in their contracts. Are their
margins so thin they can't withstand a real-estate shock? What happens when
there's a down cycle and they have a lot of empty space? Are their contracts
subject to flexibility? Or are they toast? Surely, they're 'always room to
negotiate' because if there is a downturn, their landlords will get it on some
level and rather WW stick around than have an empty building, but there might
not be enough room to manoever given possible overhead of running the place +
corporate overhead.

And lastly is the sustainability of their advantage. Do people really like the
WW brand that much? Or are they betting on juicy corporate contracts with fat
margins they can sink their teeth into like Oracle.

I think that's where the bulk of the material grey areas reside.

------
ww520
I have used WeWork couple times and not impressed. The amenities are minimal.
Some of the basics in the building are filmsy and are not even completed. The
toilet paper holders are not securely screwed in and would come loose with the
slightest shake. There are no toilet seat covers in half of the bathroom. The
place is 90% empty. Not sure how they can sustain.

~~~
omgbobbyg
dude, why were you pulling on the toilet paper holders?

~~~
ww520
I was pulling on the toilet paper and the holder came off from the wall. And
it's not an isolated incident. All the single room bathrooms have the same
poor workmanship.

------
mgadams3
The WeWork I'm in was 30% occupancy for the first 4 months it was open... then
literally overnight it jumped to 90% because a couple big companies came in
and took over an entire floor and blocks of offices on another floor. In 24
hours I went from a WeWork skeptic (for good reason, they acquired my company
and I chose not to stay on) to cautiously optimistic that my stock may be
worth something some day. Who knows how it'll play out in the end but they do
provide a product people really want and that's worth something if they don't
run out of money before that happens.

------
chroem-
With the recent yield curve inversion, I think the writing is really on the
wall right now for a lot of startups/tech businesses.

~~~
nodesocket
Typically the inversion to watch as I understand is the two year and ten year,
which has not inverted (yet).

~~~
nickles
3m/10y inversion is a better predictor of recession than 2s10s, and it
recently inverted.

[0] [https://www.frbsf.org/economic-
research/publications/economi...](https://www.frbsf.org/economic-
research/publications/economic-letter/2018/august/information-in-yield-curve-
about-future-recessions/)

------
jaequery
Here in LA, I've found a couple incubators that offers beautiful co-working
space, and also provide a far better value than WeWork when it comes to
connecting with people. It seems to me the Airbnb of work space is the future,
and not WeWork.

~~~
cameldrv
What I've noticed is that a lot of WeWork's business is largish companies that
have a very small sales or support presence in probably a number of cities.
WeWork is logistically attractive because it's totally uniform across the
country. It's very easy to grow and shrink an office as well. For companies
that might fly in a team for a couple of months to stand up a new customer and
then move on, it's perfect. I notice that many of these offices are empty
during the day.

~~~
just_myles
I see. I guess that is why they are hemorrhaging so much money.

------
code4tee
They are literally losing more than a dollar for every dollar in revenue.

At their age and size that’s both beyond insane and far outside what could be
reasonably deemed “expansion costs.”

------
cs702
Yes, but they would argue: Where else can you find a "space to elevate
work?"[a] A space that "has the power to transform business -- unlocking the
potential of people and organizations?"[a] A space "where company becomes
community?"[a] Clearly they believe they offer something new and unique.

Worst case, they can always try making up for the losses with greater volume.

[a] Quoting directly from [https://www.wework.com](https://www.wework.com)

------
randomacct3847
WeWorks are so loud. I have no idea how people work there

~~~
ww520
That's one way to encourage people to upgrade to private office. I just put on
a headphone.

~~~
CalChris
_3M Peltor X5A ear muffs._ When I ordered them from Amazon, I actually had to
accept a click through agreement that said that I was a professional. I
thought about it for a second and decided that yes, I am a professional.

~~~
wikibob
Check out the 3M Peltor Optime III Earmuffs

The X5A's are 31dB reduction, the Peltor Optime III's are 35dB.

Edit: I was wrong, the X5A's are a bit better for reducing human speech than
the Optime III (Optime 105)'s.

[https://remembereverything.org/my-top-6-noise-blocking-
earmu...](https://remembereverything.org/my-top-6-noise-blocking-earmuffs-
review/)

~~~
CalChris
Given the weight of the Peltors (15oz) I'm going to look at the behind the ear
version. For the Peltor, that's the X5B. The Optime IIIs are also a little
lighter (11.4oz). This review says the III is the same as the 105.

[https://remembereverything.org/my-top-6-noise-blocking-
earmu...](https://remembereverything.org/my-top-6-noise-blocking-earmuffs-
review/)

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just_myles
What kind of services do they offer besides leasing office space?

~~~
908087
From what I could see when a friend who had set up there dragged me along one
day, top knots and brogrammer wantrepreneurs. The feeling I got was that it's
the shared workspace version of a "see and be seen" restaurant/club/whatever.

Pretty cringeworthy.

~~~
just_myles
I looked at the prices for the spaces and it is quite high.

------
ykevinator
Is it possible its just not a profitable business unless they double the rent?

