Tim Lahan for BuzzFeed News
Startups don’t turn into unicorns — the buzzword for companies valued at a billion dollars or more — without a good story attached. For WeWork — which leases office space, divvies it up into desk-sized chunks, and rents it out month to month, largely in fashionable cities like San Francisco and New York — the narrative revolves around catering to a new generation of young workers who want to be creators and collaborators, not office drones. It’s that promise of personal fulfillment that allows CEO Adam Neumann to claim that his company’s short-term subleases are "changing the way people work.” Business is going so well that soon, the five-year-old company expects to change the way people live, too, by offering shared residential micro-apartments under the brand name WeLive.
Investors are bullish on the tale. The company has raised $1 billion in less than half a decade, and its valuation has grown commensurately. In February 2014, WeWork’s financiers said it was worth $1.5 billion. In December 2014, a new set of financiers pumped that number up to $5 billion. Half a year later, most of those same investors injected another round of funding that doubled WeWork's valuation to $10 billion. At that price, WeWork is one of the most valuable startups to emerge from the tech boom, more valuable on paper than Slack, Draft Kings, Lyft, 23andMe, and Warby Parker combined.
Even in a technology cycle whose “defining characteristic” is mega-financing rounds — where investors pour hundreds of millions in funding into a company on the chance that it will be worth billions — WeWork's rapidly multiplying valuation (an appraisal of a company's worth by its investors) has perplexed and alarmed observers. The New York Times, the Wall Street Journal, and even random bystanders on Medium have scratched their heads wondering how free beer and flexibility could add up to a $10 billion business model. “Believe It” read Wired’s dubious headline about the company’s $5 billion valuation last year. Writing in the Commercial Observer last month, Charles Clinton, CEO of the real estate financing company EquityMultiple, called it “perhaps the most polarizing recent valuation … many [real estate] industry insiders find the gaudy valuation to be completely insane.” CompStak, the commercial real estate database, said it felt compelled to investigate WeWork’s margins, because “[l]ike many in the CRE industry, we were curious to understand the math behind WeWork’s fast growth.”
Neumann likes to present WeWork as a star of the sharing economy, a technology platform that connects consumers to office space, just like Uber and Airbnb connect them to cars and homes, respectively. But how can an infrastructure-dependent real estate venture scale like a low-overhead software startup? How can a company that signs 15-year leases — but sells monthly memberships — expect to survive a downturn? How can an entity that doesn’t own its own real estate be “worth” more than three times as much as the New York Yankees? Why does WeWork’s future look so bright when it sits smack in the middle of two bubbling markets (that is, tech and commercial real estate)? Why would a business model that drove one high-profile dot-com darling promising “the office of the future” into bankruptcy succeed this time around?
October 2014 fundraising documents obtained by BuzzFeed News reveal how Neumann answers those questions behind closed doors. The material was shared with BuzzFeed by someone familiar with the company, on the condition of anonymity, and independently verified. WeWork would only comment on a couple of aspects of its fundraising pitch. It includes a five-year financial forecast and a slide presentation (also known as a pitch deck), both embedded below, as well as a company overview. After reading these documents, investors such as Goldman Sachs, Harvard University, and JPMorgan handed WeWork $355 million in funding, along with the $5 billion valuation, as part of its Series D funding round in December 2014.
Based on data from WeWork's five-year forecast (page 1).
WeWork expected operating profit of $4.2 million from revenue of $74.6 million by the end of 2014. By 2018, the company predicted operating profit of $941.6 million on revenue of $2.86 billion. The number of co-working members were to set to explode from 16,279 to 260,000 in the same time period. WeWork forecast 376 shared office location in 2018, up from 24 in 2014.
This material was prepared a year ago. Since sharing this data with investors, WeWork has raised yet another $433 million (mostly from the same firms). In the interim, its predictions have changed significantly, as have some of its business practices. So these documents are less useful as a peek into WeWork’s current financial state than they are as a snapshot of a high-profile company on its way up (and up, and up) in a moment when investors are flush with cash and open to any company with the faintest veneer of technology, if it sounds like the upside is Uber-sized. Indeed, if these documents tell us anything, it’s that WeWork has mastered the kind of storytelling that locks down massive rounds and can earn what is essentially a real estate company the privilege of being discussed as — and valued like — a nimble Silicon Valley software startup.
The story is a good one. All told, the fundraising documents portray a company on a phenomenal trajectory. Profits, membership, and locations grow at an enviable rate, while occupancy hovers just below 100%. But the material also reveals that WeWork relied on enormous demand projections and certain accounting tricks — both of which are popular tactics among private companies — to keep its profit margins looking as high as its aspirations.
None of this is unique to WeWork — that’s precisely the point. Its business model is atypical for tech, but the economic and cultural practices that made it a $10 billion company pervade Silicon Valley. To its detractors, at least, WeWork is the poster startup of a funding climate fueled by FOMO and driven to extremes, where valuations can double in a matter of months and where investors who are so “desperately afraid” of missing out on the next unicorn will slap a horn on a horse.
But like most private companies, WeWork publicizes only metrics that paint the company in a better light, so skeptics have relied on back-of-the-envelope math and gut-level instinct. WeWork’s presentation (published for the first time below) is perhaps our best clue to understanding how startup valuations get made. It offers a glimpse into the deal-making behind a “decacorn” — the latest Silicon Valley jargon for a $10 billion company, and another term that gets tossed around with little irony about the kind of magical accounting it may take to conjure up so many mythical beasts.
Michelle Rial/BuzzFeed
The Information first reported some of the financial data in these documents in late August, highlighting WeWork’s use of accounting practices that make rent look lower in the near-term and shove off expenses further down the line. Ultimately, The Information concluded that these practices could make its forecast "tough to meet.”
Based on data from WeWork's five-year forecast (page 1). Background photo courtesy of WeWork
“They have extraordinary, hockey stick–like projections,” Eric Sussman, senior lecturer of accounting at UCLA’s business school and chair of the investment management firm Causeway Capital, told BuzzFeed News after being shown the documents. “Which in and of itself is not uncommon. But they seem very, very aggressive.”
Fundraising documents are designed to dazzle. Investors spend only three minutes and 44 seconds on average flipping through a pitch deck, so companies have to make the future look big and bright. In fact, a WeWork spokesperson told BuzzFeed News that when it's time to actually cut the check, "our large institutional investors have access" to "audited financial statements." In other words, investors are shown two presentations: one that uses standardized accounting practices and one that doesn't.
From WeWork's pitch deck (page 33).
But the initial presentation gets them into the funding groove. "It's the best deck I've ever seen!" one tech executive told BuzzFeed News, jokingly referring to the optimistic projections in slide after slide of WeWork’s pitch.
Here’s how WeWork works, according to the documents: The company doesn’t own real estate, but instead takes long-term leases in centrally located neighborhoods in gateway cities. So in order to make a profit, it has to charge members more than it pays landlords. WeWork is relying on additional revenue from raising office rents, selling services like health care, collecting commissions off its real estate deals, and signing people up for its co-living product.
WeWork started leasing office space in 2010, when the commercial real estate market had yet to rebound after the 2008 financial crisis. Now that the market is hitting record highs, WeWork is pursuing a different strategy: negotiating with landlords for considerable concessions. These concessions, detailed in the 2014 documents, include reduced rent, periods of free rent, and infusions of up-front capital to build out and refurbish locations. In exchange, the documents state that WeWork would share 25 to 50% of its profits with landlords, and take longer leases than is normal. WeWork refers to these profit-sharing deals as “asset light,” in both the fundraising materials and in the press, but their weightlessness is debatable. CompStak analyzed 21 of WeWork’s leases in New York City and found that 17 lasted more than 15 years, including six leases signed in 2015.
From WeWork's pitch deck (page 16).
(WeWork has since pivoted away from the profit-sharing aspect or below market rents. "Asset light" now means the company get about 75% of the cost of build-out covered by the landlord, but WeWork keeps the upside. Landlords have been willing. That’s the nice thing about a billion-dollar price tag — it opens a lot of doors.)
Table uses data from WeWork's pitch deck (page 16).
In WeWork’s financial forecast, concessions like free rent are not stated using standard accounting practices (GAAP), which call for the discounts to be divided up over the length of the lease. WeWork instead accounts for it all at the beginning. And when the free rent ends, expenses go up. WeWork’s extra-long leases and number of new leases mean that even a five-year forecast won't show potentially significant jumps in cost. This accounting strategy gives WeWork “higher income projections in the early years” of a location, as David A. Kessler, national director of commercial real estate for the accounting and advisory firm CohnReznick, told BuzzFeed News. The same principle follows for other concessions: Landlords fronting the cost of building out a location make WeWork’s initial costs appear artificially low.
Relying on optimistic numbers is de rigueur for startups. For example, WeWork’s documents also make frequent reference to EBIDTA — a financial initialism meaning Earnings Before Interest, Depreciation, Tax, and Amortization — which, according to Sussman, is commonly “used in banking and valuation, but you won’t see that term or figure in audited financial statement.” Private companies are not obligated to use GAAP, and the vast majority of startups avoid those rigorous standards until an initial public offering exposes them to SEC oversight. Moreover, while investors are still unicorn-hunting, companies like Uber can keep raising massive funds from the private market, saving themselves from the scrutiny of Wall Street, which tends to obsess over numbers.
WeWork's unique financing deals are great for cash flow, Kessler explained: WeWork is simply using landlords to help while it builds up a revenue stream. Yet despite increasing costs, WeWork forecasts that its margins will rise, relying on a massive growth in members and a bump in the amount that those members will pay. Kessler pointed to rising revenue per square foot — an increase he called “unusual.” The company further boosts its margins by predicting that its marketing and payroll costs will dwindle as a percentage of revenue — despite its ambitious expansion and a growing number of smaller competitors. Sussman pointed out that even a popular company like Netflix will have to spend more to get "that 50 millionth American."
Essentially, Kessler said, “[WeWork] must believe that demand will continue to increase in order to drive the rates.”
But WeWork can't predict demand. Valuations are a story about the future — and no one knows what the future holds. Even the most iconoclastic Silicon Valley companies are still lined up against their competitors in order to estimate future potential. In WeWork’s case, that’s Regus, a publicly traded corporation that lets tenants make temporary offices look like traditional ones; WeWork claims its unit margins are 44%, compared with 16% for Regus. But the two companies are peers only in the broadest sense of shared office space. Regus, which went bankrupt in the year 2000, is not a name brand. Regus isn't 'roided out with a $1 billion investment, and no one’s wearing Regus-branded T-shirts or going to Regus summer camp — which is partly why all of the experts BuzzFeed News consulted had a hard time assessing whether WeWork’s margins were sustainable.
Screenshot from WeWork's company overview.
from BuzzFeed - Tech http://ift.tt/1L3WDz8
via IFTTT
Hiç yorum yok:
Yorum Gönder