WeWork IPO – Review. Turning WeWork into WeWoke.

 A commentary on the WeWork, The We Company (“WE”) IPO and what it means to the Flexible Workspace industry.

For better or worse, and it feels like mostly worse, the WE company IPO has generated primarily derogatory headlines about the company and has cast dark shadows on the coworking/flexible workspace industry.

My most glaring criticisms focus on governance.  I am no expert on corporate governance issues, but a disrespectful lack of accountability by CEO Adam Neuman to shareholders is glaringly obvious. His consolidation of power and authority is unacceptable by today’s standards and shareholders’ expectations. Perhaps he is simply being honest and transparent. How many publicly traded, personality-driven companies and their CEOs are just as unaccountable and power-centric, but not as blatantly honest? Neuman is putting it out in public that he is the ultimate decider, and therefore solely accountable. The problem I see is that there is no means to depose him, no check and balance. More concerning is, where the hell is Miguel? Miguel McKelvey is the co-founder with Adam, and not a drop of ink or bandwidth has mentioned his name. The news is all Adam, all the time. The disturbing governance issue feels a little like Lance Armstrong getting caught doping -- then admitting to doing what everyone else was doing, just on an epic scale. Corporate governance is, by and large, a farce in public companies. The WeWork leadership is arrogant enough to admit it. The criticism from bankers and media pundits then, are pious and hypocritical.

The more important issue is within the industry. Is the business for real, a sham, cutting edge or just repackaged old office-sharing that’s doomed, as Sam Zell predicted on CNBC, to go broke like (his words) “every company in this space.”  Zell personifies the disconnect that feeds the skepticism about coworking and new workspace industry. Let’s remember, Sam Zell made his fortune in the 1990s as a grave dancer. He is an opportunistic investor, not a world-class real estate operator. I find his commentary on evolving office market, then, to be irrelevant. He is operating from the same frame of reference as Lord Grosvenor did in the 17th century; Zell, like any institutional real estate player, remains mired in the past of an industry fundamentally unchanged for over 400 years.

Our startling and refreshing reality is the fact that the consumer, no longer the supplier, is driving the change and forcing modernization of the product offering.

Making a bullish case for the business.

WE implies in their offering that the addressable market is 255 million people in 280 target cities (as of June 2019, they are in 111); using their internal revenue per membership, theirs is a $1.6 trillion dollar market. Today, WE is estimated to own about 7% market share of the global flexible workspace.   Although the largest occupier in NYC, London and Washington, DC, theirs is but a miniscule market share of the overall office space market. Using reliable data from the Global Workspace Association Industry Report not just taking it on faith from WE, the industry can easily conclude that an enormous opportunity is ready to meet the growing demand of the office space consumer, large and small.

WeWork IPO is illuminating what may be the most important element in the shift of how office space is consumed. They are eliminating another “fixed-cost” liability, and turning it into a variable expense that can track growth or retraction. The new dynamic provides flexibility that makes the commodity cost less important -- and transforms a massive capital investment into a relatively controllable variable cost. Business of all sizes can consume what they need when they need it, and shed an enormous inhibitor to growth. By delivering workspace as a service, WeWork and the multitude of other workspace providers are freeing business up to do what they do best, and not be burdened with the resources-intensive office space acquisition process. The giant sucking sound of money, time and human capital is gone. Entering the building, instead, is an office acquisition process free of lawyers and brokers. Yes, I can hear my lawyer and broker pals picking up their pitchforks. But in the end, customers will be delighted, and businesses, communities and our nation will reap the reward of unleashed economic potential.

 The bear case.

The biggest fundamental flaw in the WeWork model is the lease arbitrage strategy.  WeWork’s model is primarily based on a buy by the pound, sell by the ounce model, one that demands massive amounts of capital, misaligned interest, excessive and unnecessary risk.  Their strategy does not really address the move away from the dysfunctional 400+-year old landlord/tenant model. 

Is WeWork AOL or Google?  

I think AOL, not Google.  I am going to predict that the IPO will be unsuccessful, if it ever actually does launch. Adam Neuman may end up looking for a job, or managing a wave tub. My fear is the trickle-down effect: that the relative and perceived success or failure of the IPO will be an indictment of the new workspace industry. Consumers do not move backward, and the momentum shift from a broken, unsatisfactory, economically inhibiting fixed asset acquisition process will give way to a better, cleaner, economically enhancing way of buying workspace.  WeWork will certainly be a player. But they are 1.0. Better versions are on the horizon, waiting impatiently for the upgrade.