
WeWork Isn’t a Tech Company - jmsflknr
https://hbr.org/2019/08/no-wework-isnt-a-tech-company-heres-why-that-matters
======
rlucas
It's a 1920s (pre-FDIC) bank, or a 2008-style risky financial instrument, like
an Auction-Rate Preferred.

WeWork's business model is "borrow short, lend long." That is, they accept
very short term promises to pay (month to month leases from customers), and
aggregate them to make very long term promises to pay (mutli year leases from
suppliers). Keep the spread.

This works as long as there are lots of customers who will pay a premium for
short term flexibility. We can presume that will be somewhat cyclical,
although in fairness they also probably have caught a secular trend toward
remote / coworking / flexibility.

When the cycle turns down, those short termers are done but the long term
promises to suppliers keep going ...

That also leaves aside the question of leases with escalators. I have heard a
rumor that some WeWork locations have substantial out-year escalator clauses
(meaning the rates they owe to suppliers sharply increase in future), meaning
that even if customers stay on board, WeWork will face a need to raise prices
substantially to meet its obligations.

~~~
99052882514569
Their business is structured in such a way that the leases they signed on
their locations aren't really enforceable against WeWork itself, but rather
against "special purpose vehicles", I'm guessing one per lease?[1] It costs a
bit in insurance but substantially limits their liability. So, in a downturn,
even if "short termers are done", they can shed properties too, basically with
impunity.

[1] [https://stratechery.com/2019/the-wework-
ipo/](https://stratechery.com/2019/the-wework-ipo/)

~~~
polygotdomain
Each WeWork office has an SPE that's just for that lease. Every landload wants
WeWork on the lease, but won't get it, as WeWork tends to have significant
leverage with either the space that they're going after or the desire to have
WeWork on the rent roll.

When things are booming, WeWork is advantageous for landlords, and
appraisers/the market/potential buyers will underwrite that space positively.

However, there's minimal guarantees that WeWork will actually pay long term,
or that you'll have any legal recourse. On top of that there are significant
capital costs to a WeWork lease that landlords have to shell out up front.
Their leases are typically structured with a lot of free rent up front, so the
break even point for a landlord may be many months or years farther out than a
typical tenant leasing comparable space.

The losers in the WeWork deal are the landlords, as they're bearing a lot of
the risk, and get minimal upside. I'd expect to see a high degree of
correlation between WeWork's IPO/stock price and REIT valuations. Underwriting
will push the value of a WeWork lease if they can, which will only give more
momentum to the bubble.

Source: Worked at a nationally invested REIT that had several WeWork leases in
our portfolio

~~~
chiefalchemist
> The losers in the WeWork deal are the landlords, as they're bearing a lot of
> the risk, and get minimal upside.

Couldn't this be interpreted differently? That is, landlords are having less
and less choice. Something from WW is better than an empty building. Is WW a
canary of sorts? It tells us about changes in the economy (less growing small
to mid-size companies in major metro area?), as well as the health and
strength there of?

And if building owners are own details space their choices are less robust. WW
might not pay out well, but it's better than nothing.

~~~
rbg246
Yes and No. Part of the No answer is that as an real estate investment company
your building's worth is effectively present value of future rent, so
sometimes it's better to preserve the valuation of your building rather than
set a new market rent which will negatively affect your building valuation
which in turn affects the cost of financing your building etc etc etc

So you get an extra $1m in rent but it now costs you an additional $2m in
interest costs financing your building and your share price (or the building
capital valuation) has now dropped 15%.

Sorry totally simplified example...

~~~
chiefalchemist
"so sometimes it's better to preserve the valuation of your building rather
than set a new market rent which will negatively affect your building
valuation "

I understand that, and thus the question about WW being a canary in the
economic coal mine. If there are more and more building owners who literally
can't afford to "preserve the valuation" \- and WW's success seems to hint at
that - then doesn't that say something about the economy that aggregate
numbers aren't seeing?

I understand the theory of "preserve the valuation", what I suggesting is that
in reality less and less building owners are able to preserve that theory. And
some of that is direct result of demand (read: the lack there of) not being in
parity with demand.

~~~
rbg246
Yes precisely, if things become systematic then there is no avoiding the new
reality.

I am no expert on real estate I used to be a property accountant at an
international commercial property company and so used to compute out growth
rates on rent and valuations for owners.

I do find WW's business model difficult to follow, there maybe something I
fail to appreciate, I guess time will tell.

------
paxys
I like that WeWork is finally forcing us to have the conversation about WTF a
"tech company" even is. A company that sells software? Or one that employs a
lot of engineers? Or companies that use a lot of tech in their operations?
Companies with a presence in San Francisco and Kombucha on tap? Are big banks
tech companies? Insurance providers? Hospitals, auto manufacturers, oil and
gas... What _isn 't_ a tech company?

~~~
baddox
Is it really that important to define the term precisely? It doesn't seem like
the term is _used_ precisely, so what's the point in _defining_ it precisely?

~~~
thorwasdfasdf
It makes a big difference in the aggregated analysis of the IPO market. Tech
is one of the few IPO areas that actually come close to matching the S&P500
returns (tech did better than any other IPO category). So, most companies
going public want to be considered and valued as "tech".

~~~
flukus
For them wouldn't a tech company and a software company be synonymous? It
seems like software is by far the easiest way to create the growth they're
after.

------
tjpaudio
Might as well be a REIT, and as its books stand, its a crappy one. I wouldn't
touch wework unless it had a dividend. What their CEO has done with inside
dealing should be considered fraud to investors.

------
buboard
... and yet it will be valued as one. At this point it doesn't matter if
anything really is tech or not. Rich people just want to park their money away
from banks.

(As an aside, i think WeWork’s S1 has turned to a remarkable feat of
marketing, making buzz around the company in cycles who are likely to be their
customers)

~~~
tryitnow
Bingo. Although I don't know about rich people wanting to park their money
away from banks. It's more like we have a massive capital glut, there's so
much capital sloshing around we don't know what do with it.

So some wealthy people will buy bonds with negative yields, others will buy
equity at inflated valuations like WeWork.

Strange times.

~~~
roymurdock
Large and continued slowdown in global productivity combined with huge amounts
of liquidity/easing from the world's largest central banks.

Pretty good time to have a lot of money (it's always a good time to have a lot
of money), to own a business in a developing economy, to start a "tech"
company to be acquired in a developed economy, to be in private equity, or to
fraud/bluff your way into a lot of money in a developed economy (true
productivity-increasing products/technologies are currently few and far
between but globalization of technology and outsourcing is still going
strong).

Not a great time to be poor, a saver, a licensed professional, or worker of
any sort in a developed economy (aside from working at a "tech" company).

------
rossdavidh
I'm starting to think that WeWork may be an interesting experiment on the
current state of the stock market. It's not just HBR; Bloomberg and virtually
every other mainstream financial news analysis outlet has had an article
explaining why WeWork is overvalued at its current IPO price.

If it, nonetheless, sells at this price, it seems that it will more or less
prove that IPOs don't have much to do with the fundamentals.

~~~
quaquaqua1
Yup, definitely. An IPO is a liquidity event (money goes to owners) paid for
by some group of individuals who believe they will make more money down the
road by purchasing this stock.

The way that those individuals arrived at that decision can either be through
really technical analysis, or "I heard about it from my dog", or anywhere in
between.

------
mrtksn
I really don't understand the negativity on HN towards WeWork.

In principle, how it is different than AirBnB or Uber in regard of being a
tech company? It's not like Uber or AirBnB's core compentancies are tech, I'm
sure WeWork can also build a dev team making frameworks and research that some
day might be used in their core business.

The article argues that the difference is that Uber, AirBnB, Yelp, Twitter is
a tech company because they have "scalable virtual models that can be
exponentially magnified overnight with little additional costs" but this seems
to bu untrue since they did not took over the world. Maybe they are just
humble but I think it's simply that their business model is "low touch high
scale" and this is being mistaken with Microsoft's ability to develop
technology and sell it infinite times with at no addditional cost per copy.

What stops WeWork from embracing the Uber model? Maybe you have an empty flat,
you can turn it into WeWork location by furnishing the place according to the
WeWork standarts and install some kind of kiosk and smart lock system. Uber
makes the driver to use cars that obey certain standarts, why wouldn't WeWork
do the same and "scale overnight"?

~~~
the_gastropod
> In principle, how it is different than AirBnB or Uber in regard of being a
> tech company? It's not like Uber or AirBnB's core compentancies are tech,
> I'm sure WeWork can also build a dev team making frameworks and research
> that some day might be used in their core business.

Some day, maybe they could?! But their current business is selling short term
office space leases. They have _massive_ liabilities in their long-term
leases. If Uber (an absurd business in its own right) bought all the cars and
paid their drivers salaries, that'd be a closer approximation to what WeWork
is doing. It would be just another taxi company, and worth at least an order
of magnitude less than it is today.

~~~
mrtksn
Most technology IPO were of companies that were losing money, people bought
what they might become one day. Nothing new here, maybe they will change the
way they operate when they establish the brand and optimize the operations.

~~~
human20190310
The depth of the hole they're in at IPO time has some bearing as to whether or
not they'll climb out of it.

~~~
mrtksn
But this doesn’t say if they are a tech company or not. If you think that it’s
a bad investment simply don’t invest? Why is the “WeWork ain’t tech company”
uproar?

~~~
the_gastropod
It seems like you're just not listening. They're not a tech company because
they, while they may _use_ software for some things, it's _not_ their
differentiator.

Tech companies are valued at higher multiples because software doesn't deal
with scarcity. It costs Microsoft virtually nothing to sell an extra copy of
Windows. So each extra sale is pure profit. WeWork sells OFFICE
SPACE—something with real world scarcity, and each additional sale / customer
they get has very real costs and overhead associated with it.

~~~
mrtksn
i’m not convinced that this is true because they can embrace the Uber or
AirBnB business models to do just that. If They can be Tech companies, WeWork
can too.

I suspect that the value is in the brand, just like with the Uber or AirBnB.
Making a booking software or mobile app is not such a big deal but they are
called tech companies for some reason.

~~~
ohashi
Your argument is the company can pivot post-IPO to something it's never done
and it's magically a successful tech company?

I feel like you didn't read the article or being purposefully dense.

~~~
mrtksn
But the thing that “never done” is not some technology. How this will change
the status of WeWork as a tech company or not?

Also I wouldn’t call it pivot, their users even don’t have to notice a thing.
They can do it concurrently. Pretty much like McDonalds owning some of the
restaurants and providing franchises to the rest.

~~~
ohashi
It would be closer in alignment with what was defined as a tech company. The
article is pretty explicit defining the features of a tech company. WeWork
isn't. Saying they could do something that would fit some of those
characteristics and it's easy doesn't magically make it true.

If McDonalds is so easy, how come everyone else isn't as globally prevalent?
It's not easy. It's competitive as hell. It's a completely different model.

But you're not making arguments in good faith, you're just being intentionally
dense.

------
JJMcJ
A lot of "tech" companies aren't.

One reason, to avoid the scrutiny describing their actual business would
expose them to more scrutiny, e.g., Uber is transportation company, not a
software company.

Once the BBC described Google as an "American advertising company", now that's
cold.

~~~
SamBam
I think, from the article, that the reason that Uber would be considered a
tech company and not a transportation company is a matter of assets and how it
can scale.

Uber is not a bus company. It does not own a gigantic fleet of cars or large
depots to store them in, nor does it employ mechanics and cleaners to tend to
them, or have long-term contracts for gates at stations around the country.

Uber is a tech company because it really only owns software and lawyers. The
cost of bringing 10,000 new vehicles on the road is minimal -- they simply
increase the incentives to drivers in that area.

Likewise, Air BnB is a tech company, for the same reason.

WeWork, however, is simply an office real estate company. Its business model
is closer to a hotel chain.

~~~
AlexandrB
> Uber is not a bus company. It does not own a gigantic fleet of cars or large
> depots to store them in, nor does it employ mechanics and cleaners to tend
> to them, or have long-term contracts for gates at stations around the
> country.

Ironically, if Uber achieves its self-driving dreams it will have acquire all
of these things.

~~~
geolqued
And in doing so giving up their only "innovation" \- externalizing the capital
costs and risk.

------
yalogin
Of course its not a tech company. They might want to paint themselves that
way, but they operate in the real estate space. Which is why I think they have
a severe downside if a recession comes.

------
machbio
Very Interesting that the company that Supports Wework is in YC Summer batch
[1]

> Narrator: Narrator is a full-service data team for startups of any size. The
> team behind Narrator built WeWork’s data infrastructure, and wants to target
> more startups as early customers. The company says they’re generating
> $91,000 per month with this business model, but they aren’t stopping there.
> Narrator wants to build as a cross-company universal standard for data and
> grow out this library of shared analyses. This strategy allows the company
> to repurpose the analyses they produce and offer it to new customers.

[1][https://techcrunch.com/2019/08/20/here-are-
the-82-startups-t...](https://techcrunch.com/2019/08/20/here-are-
the-82-startups-that-launched-on-day-2-of-ycs-s19-demo-days/)

~~~
Agathos
So We is a real estate company, that doesn't own its own real estate, that
wants to be seen as a technology company, that doesn't develop its own
technology.

------
patkai
Related: while reading this thread I got an email with a job advertisement for
COBOL programmers. It starts with "SIXT is an IT company with a very large car
pool". Big words for a car rental firm, but I do hope they will be a tech
company.

------
tim333
I'm not sure the founder sees it as a tech or real estate company but
something more:

>In 2017, Neumann declared that WeWork’s “valuation and size today are much
more based on our energy and spirituality than it is on a multiple of
revenue.” He has long maintained that categorizing WeWork as a real-estate
concern is too limiting; it is a “community company” with huge ambitions. “We
are here in order to change the world,” Neumann said that same year. “Nothing
less than that interests me.”

~~~
DebtDeflation
>our energy and spirituality

>it is a “community company”

>“We are here in order to change the world,”

Can some explain to me what renting out shared workspaces has to do with any
of this?

~~~
Nasrudith
Simple - it is marketing bullshit to lionize renting out shared workspaces. It
has precedence like the use of "blast processing".

------
abalone
I would like to understand this better because WeWork has a lot of open
positions right now. Is it all a front? Much of this article seems to focus on
it not having the margins and network effects of Apple, Facebook, etc.

Devil’s advocate: Amazon has dinky margins and was unprofitable for many of
its early years. Physical servers have “wear and tear”. But they are a winner
because they have developed competencies and efficiencies that let them rent
out infrastructure that fast growing companies would rather not own and
manage. Could WeWork be like AWS for office space?

Looking at their open positions they have teams around evaluating, visualizing
and instrumenting spaces. In addition to the flexibility to scale up and down.
There’s a lot that’s sketch about their company structure but if companies are
going to outsource say payments to 3rd parties like Stripe, why wouldn’t they
do it for office space which is a huge PITA?

~~~
sytelus
You don't want to look at margins by subtracting expenses from revenue. For a
growing company, this can be zero or even negative. The key thing is this: Are
customers paying top dollars for the space they sell then elsewhere? That
answer seems to be yes which means they have better margin than competitors
given their brand and amnesties. However, they might decide to reinvest all
that money to build assets in other markets which will put their balancesheet
in red.

------
avocado4
Why would anybody claim it's a tech company? What kind of tech do they
leverage to differentiate?

~~~
baybal2
> Why would anybody claim it's a tech company?

Because a company calling itself "tech" and "sophisticated" automatically gets
higher stock market valuation by unscrupulous investment analysts.

Thus, a company is priced higher the more techy and sophisticated is its
image.

Have you heard of Chinese companies' price jumping just from them adding word
"blockchain" or "o2o" to their name? This is what it is.

[https://www.independent.co.uk/news/business/analysis-and-
fea...](https://www.independent.co.uk/news/business/analysis-and-features/is-
the-chinese-stock-market-bubble-about-to-burst-10346773.html)

Though everybody runs to point fingers on "oriental mindset" of some fund
managers, few notice that this happens in the West in a form that is even more
extreme.

A perfect example of that is a company called Netflix. They sell videos over
the internet, but they are priced a whole ∞ more than companies selling videos
on physical tapes

------
paggle
“Tech” is now a requirement of so many different businesses that the concept
of a “tech” company needs to change. There is now a spectrum of “techness”
where your companies like Spanx are on the left (still needing marketing
automation, logistics, and a bunch of other tech), AMD is on the right, and
Facebook etc are somewhere in the middle as a blend of tech and marketing. It
hardly matters where you draw an imaginary vertical line and call everything
to the right “tech” as the tech is now an input to the business the way that
electricity is.

------
tt
Video of our team's analysis on this subject:
[https://www.youtube.com/watch?v=d2RwG7U_GEU](https://www.youtube.com/watch?v=d2RwG7U_GEU)

------
dawhizkid
It isn't right now, but if you buy at this valuation you're betting that they
can diversify away from memberships as their main source of revenue to
something more "techy."

Personally I am bearish because I don't think they can hire the engineering
talent to pull that off. They should've gone on a tech hiring spree long ago
if that was their intention but I know of no prominent tech leaders who work
there.

~~~
Benjammer
>They should've gone on a tech hiring spree long ago

They've been hiring (and acquihiring) like mad in NYC for the entire year.
They just took over the old Spotify office near Union Square as their new
"tech HQ," and all of engineering sits there now.

------
rosege
They don't have an R&D budget which a tech company of this size should have.
They are similar to Regis which is actually profitable.

------
kbos87
If WeWork could figure out how to do what it’s doing without actually owning
real estate or holding long term leases, it might be closer to a tech company.
That isn’t the case, though. Their network are their own buildings and their
financial structure looks much more like that of an asset heavy real estate
holding company.

------
DebtDeflation
Interesting article, but putting aside abstract definitions of a "tech
company" based on variable costs and scaling, exactly what "tech" does WeWork
even have that companies like Regus don't?

------
jgalt212
It's fun and all to dump on WeWork, but at the end of the day they are going
to get what they want. Why? Because no one on planet earth pays more fees to
the banks than Softbank.

------
einpoklum
After having read the title: Whoever thought WeWork was a tech company? It's a
real-estate company (assuming it's not a stockholder-targeting scam...)

------
baristaGeek
It's a startup though. The same way that GAP (the sweatshirts) wasn't a tech
company but was a startup that raised Venture Capital before going public.

------
just_myles
Correct. I thought it was in the real estate business.

------
sprafa
Amazing that we need an article to say something we all already know because
the company is so deceitful.

------
acomjean
They do own meetup.com, so unless they divested it they have a web services
division..

------
anthony_doan
So WeWork is more like McDonald?

I wonder how close they are to McDonald in business model.

~~~
steve19
I thought McDonalds owns a lot of real estate? WeWork just had leases. WeWork
is more like hotel chains that have long term leases or licenses for the
buildings.

------
acchow
Anyone know what percentage of their employees are programmers?

~~~
benatkin
The percent of open positions in Technology according to
[https://careers.wework.com](https://careers.wework.com) is 25.8%. Glancing at
Technology it appears to be mostly engineering or engineering management. Of
course the number of open positions isn't the same because they're looking to
staff up or staff down, but to me it seems about typical for a tech company
with 20+ employees (a software-heavy 5 person startup might have 3 or 4
coders).

------
CodeSheikh
It is a real estate company to the very least.

