• Triton

Does WeWork even make sense?

By filing to go public and also raising a fund to take even more risk on the underlying real estate it rents out, both in the same 10-day period, WeWork has asked for attention it suddenly may not want.

Investors have two separate but related questions:

1. Does WeWork make sense for the public market?

2. Does WeWork make sense at all?

On the first question – we are starting to get a clearer picture. Unless Uber and Lyft suddenly find themselves in favor and return to values at or north of their private-market benchmarks, it's hard to see WeWork coming into the public market without valuation haircuts that look more like amputations.

On the second question – the investors behind WeWork who have seen all the numbers and are highly competent may know something we can't see from the headline revenue and loss figures.

But the basic math of taking long-dated real-estate liabilities and great overall market conditions, adding cool millennial vibes, glass partitions, and retail markups – at turbo scale – doesn't seem like a great recession-proof moneymaker-for-the-ages that supports a $47b valuation.

How much better would we like Uber if it had ten-year leases on all the cars, owned all the maintenance, insurance and operating costs, and every driver was an employee?

Not that this makes the WeWork proposition unattractive to customers. Anyone who has ever built out a physical office will tell you it is a gigantic pain, and if someone else wants to babysit the glass contractor and pull the ethernet cable through the wall and put the light switches in roughly the right place that is valuable and smart people should pay for that. Offering flexible spaces and lease terms is also a value, and letting the landlord take all that risk is surely something commercial tenants will pay for.

The current market practice of long office leases for a fixed amount of space that requires significant DIY customization is an expensive one-size-fits-none proposition that, once we focus on it, is ripe for improvement. Like San Francisco taxi service, this is pain we didn’t realize we were in until someone built an alternative.

Walking into a pre-built office and getting right to work without delay is good at the individual level, and the savings of collective wasted time could add up at the species level.

But even if the individual unit economics of a single occupied office work, that doesn't mean WeWork can manage all the risk of taking inventory and therefore occupancy risk on the big leases themselves, not to mention ownership of the assets. Especially in a down-cycle.

Somewhere there is a big model that says the math absolutely works and the returns on capital justify the whole thing. But most of us haven't seen that model.

It could be the WeWork "state of consciousness" only works in REM sleep.

Now that everyone has been jolted by the Uber IPO wake-up call, we'll have to see if it was all just a dream.