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.
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.
Investments are not part of your operating income. Your income only consists of flows that accrue over time. If you make a $1200 investment, the expense associated with the investment is accounted for by spreading that expense over the lifetime of the asset. For a 20 year asset, this would become a $60 expense per year.
It's not like it's a new thing that businesses need to invest to to acquire customers. The entire science/discipline of accounting exists to provide accurate metrics of business performance. Its ridiculous to say that "profits are a bad metric" because of this.
Also, WeWork is not a software business, since they do not sell software. Why would those metrics apply here when all their money is made through leasing office space?
I’m not an accountant so I’m not sure if there are specific rules that would make this not applicable to SaaS, but the thing you describe is precisely what proper accounting is designed to solve. If you buy a factory this month and then use it to make widgets for the next 10 years you don’t show a huge loss when you buy the factory, but rather capitalize the cost and then depreciate it over the useful life of the factory so that in every period you can match the revenue with the associated costs. Shouldn’t customer acquisition costs be similarly capitalized over the expected life? If the company is actually profitable then it should show a profit not a loss. Any reason why this isn’t more common among SaaS businesses?
How does it factor in that they are leasing their buildings? Won't their rents eventually go up, and won't they have to remodel all the time to keep up their hip/modern work spaces? It seems like funky math that I'm not understanding.
Also, when a recession hits, it seems like the first offices a company closes has are the ones on a short-term lease at a co-working space....
[Edit] My second comment is because I work for a large company who opened an office in a WeWork space to be more hip and relevant....and I see a lot of other "big" companies with offices in the building.
The issue I have with WeWork, aside from the fact that they're somehow a tech company, is that they have competitors that does the exact same thing... but who are profitable.
You have a company like Regus, that's not a tech company, they have a MUCH low evaluation, but makes a profit and having more offices.
Without looking at the actual accounting rules (GAAP or otherwise) used by WeWork it is difficult to say how the line costs are treated.
In your example, you have treated $1200 as an expense.
Lot of companies tend to capitalize these expenses (for example "deferred commissions" on Salesforce B/S). So, they will create a reserve on the Balance sheet of $1200, then decide on the useful life of the said expense and depreciate it on the P&L.
Let's say WeWork thinks the useful life of the $1200 expense is 24 months. The calculation will work like this:
P&L
Month 0: Depreciation Expense 0, Revenue 0 and Profit 0
Month 1: Depreciation Expense $50, Revenue $100 and Profit $50
Month 2: Depreciation Expense $50, Revenue $100 and Profit $50
so and so forth
BS
Month 0 - Asset $1200
Month 1 - Asset $1150 (Depreciation $50)
Month 2 - Asset $1100 (Depreciation of another $50)
> 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)
Great post. In a recent interview this is exactly what Masa Son is talking about: https://www.youtube.com/watch?v=eDpdcWz_F_0 What I don't fully understand - isn't this covered by GAAP accounting in some way?
A more succint way of explaining it is that WeWork is just a real estate company, and real estate is about achieving positive cash flow (rental income > lease or mortgage expenses), not "profits" since a lot of the profit comes from selling the appreciated properties down the line.
Curious if they are even landlords. Aren't they just subleasing, such that no equity (of theirs) is being paid down? Or do they actually own the buildings?
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.
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?
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.
"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.
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.
I agree their hot desking sucks. But as a two-person team in Berkeley looking for our own dedicated space, WeWork was a godsend. There just isn't any office space like that around is affordable for < 6 person teams.
For low $1000s we have a fully sealed glass room with a door and an amazing view just a few blocks away from a BART stop. Comes with a chair, desk, coffee and basic office amenities. The next best option was a crappy art studio with one window way out in the middle of nowhere. Sure there's better spaces but nothing that's even close to what we could afford as a small startup.
Barcelona has loads of startups as well as lifestyle creators, both big customers of such spaces.
WeWork is struggling with its position. On one hand, cool kids want a cool coworking space that's super central and with a lifestyle crowd (OneCowork in Barcelona). On the other hand, more serious people want a very functional office space without the cool factor, Regus.
No idea in the US but here in Barcelona, WeWork is too much in the middle.
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.
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.
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.
I'm at the WeWork in downtown, used to work at the CTRL Collective nearby before it got closed. Any advice? My WeWork is OK, but I'm always looking for a better deal.
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.
As a person who used to do business development kind of stuff, it's a completely different mindset with very different tasks, and loud office with a lot of things happening around you weirdly fits it very well.
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.
They bought meetup.com which charges a yearly fee for running clubs. Its is actually a decent platform for a lot of things, and charging helped reduce the spam you got by having an account. But its hard to compete with free sometimes.
[+] [-] malisper|7 years ago|reply
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-...
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|7 years ago|reply
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.
[+] [-] Areading314|7 years ago|reply
It's not like it's a new thing that businesses need to invest to to acquire customers. The entire science/discipline of accounting exists to provide accurate metrics of business performance. Its ridiculous to say that "profits are a bad metric" because of this.
Also, WeWork is not a software business, since they do not sell software. Why would those metrics apply here when all their money is made through leasing office space?
[+] [-] cstejerean|7 years ago|reply
[+] [-] taude|7 years ago|reply
Also, when a recession hits, it seems like the first offices a company closes has are the ones on a short-term lease at a co-working space....
[Edit] My second comment is because I work for a large company who opened an office in a WeWork space to be more hip and relevant....and I see a lot of other "big" companies with offices in the building.
[+] [-] mrweasel|7 years ago|reply
You have a company like Regus, that's not a tech company, they have a MUCH low evaluation, but makes a profit and having more offices.
[+] [-] thisisit|7 years ago|reply
In your example, you have treated $1200 as an expense.
Lot of companies tend to capitalize these expenses (for example "deferred commissions" on Salesforce B/S). So, they will create a reserve on the Balance sheet of $1200, then decide on the useful life of the said expense and depreciate it on the P&L.
Let's say WeWork thinks the useful life of the $1200 expense is 24 months. The calculation will work like this:
P&L
Month 0: Depreciation Expense 0, Revenue 0 and Profit 0
Month 1: Depreciation Expense $50, Revenue $100 and Profit $50
Month 2: Depreciation Expense $50, Revenue $100 and Profit $50 so and so forth
BS
Month 0 - Asset $1200
Month 1 - Asset $1150 (Depreciation $50)
Month 2 - Asset $1100 (Depreciation of another $50)
[+] [-] ignoramous|7 years ago|reply
Andrew Chen, ex VP Growth at Uber, had a blog up on just this: https://andrewchen.co/how-to-actually-calculate-cac/
[+] [-] bachback|7 years ago|reply
[+] [-] gamblor956|7 years ago|reply
[+] [-] acchow|7 years ago|reply
[+] [-] GoodJokes|7 years ago|reply
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[+] [-] GoodJokes|7 years ago|reply
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[+] [-] shereadsthenews|7 years ago|reply
[+] [-] keiraarts|7 years ago|reply
https://www.wsj.com/articles/weworks-ceo-makes-millions-as-l...
[+] [-] tyingq|7 years ago|reply
[+] [-] baursak|7 years ago|reply
[+] [-] Ozzie_osman|7 years ago|reply
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|7 years ago|reply
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?
[+] [-] brisance|7 years ago|reply
[+] [-] Traster|7 years ago|reply
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|7 years ago|reply
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|7 years ago|reply
[+] [-] derekdahmer|7 years ago|reply
For low $1000s we have a fully sealed glass room with a door and an amazing view just a few blocks away from a BART stop. Comes with a chair, desk, coffee and basic office amenities. The next best option was a crappy art studio with one window way out in the middle of nowhere. Sure there's better spaces but nothing that's even close to what we could afford as a small startup.
[+] [-] avinium|7 years ago|reply
But in simple terms - they suck, they're loud, and I'm pretty sure the company will tank in the next few years.
[+] [-] topicseed|7 years ago|reply
WeWork is struggling with its position. On one hand, cool kids want a cool coworking space that's super central and with a lifestyle crowd (OneCowork in Barcelona). On the other hand, more serious people want a very functional office space without the cool factor, Regus.
No idea in the US but here in Barcelona, WeWork is too much in the middle.
[+] [-] omgbobbyg|7 years ago|reply
[+] [-] mgadams3|7 years ago|reply
[+] [-] chroem-|7 years ago|reply
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[+] [-] akurilin|7 years ago|reply
[+] [-] bogomipz|7 years ago|reply
[+] [-] code4tee|7 years ago|reply
At their age and size that’s both beyond insane and far outside what could be reasonably deemed “expansion costs.”
[+] [-] cs702|7 years ago|reply
Worst case, they can always try making up for the losses with greater volume.
[a] Quoting directly from https://www.wework.com
[+] [-] randomacct3847|7 years ago|reply
[+] [-] golergka|7 years ago|reply
As a person who used to do business development kind of stuff, it's a completely different mindset with very different tasks, and loud office with a lot of things happening around you weirdly fits it very well.
[+] [-] ww520|7 years ago|reply
[+] [-] unknown|7 years ago|reply
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[+] [-] just_myles|7 years ago|reply
[+] [-] threeseed|7 years ago|reply
Add a ping poll table, stock a fridge with free beer and invite meetups/incubators to hold their events there.
[+] [-] 908087|7 years ago|reply
Pretty cringeworthy.
[+] [-] acomjean|7 years ago|reply
[+] [-] xkcd-sucks|7 years ago|reply
[+] [-] Dangeranger|7 years ago|reply
[+] [-] pram|7 years ago|reply
[+] [-] ykevinator|7 years ago|reply