Bits vs. Bricks & Branding:
The Math behind a $5 Billon Coworking Company Valuation
Much has been made lately of the value of investing in “bits vs. atoms”, that is to say investing in the digital bits and bytes of technology companies vs. the bricks and brands of traditional manufacturing and consumer businesses. The highest startup valuations have been reserved for companies that disrupt and reinvent industries through scalable and mobile computing power and propagation through social, digital networks.
Witness Uber and AirBnB. Now comes the jaw-dropping $5B valuation for WeWork, a 4 year old short term office rental company that has opened two dozen shared workplace facilities in down-market, urban office buildings. So far, the company has almost exclusively located to serve technology startups and the freelance workers of the creative class.
So how can an astute set of institutional investors value these bricks like they are bits? Looking at the conventional valuation metrics, it’s hard to see at first. With already $150 million in run-rate revenues, the roughly 33x valuation multiple suggests that investors must be taking into consideration a much bigger opportunity still. To put this in perspective, publicly traded Regus, a traditional small office rental business, with 2,000 locations worldwide, $2.5B in Revenue and $150m of earnings is valued at just $1.9billion. While Regus addresses the trillion dollar market for corporate real estate users, WeWork has already placed a bet of over $1B in real estate lease commitments on serving the more fragile, early stage tech-centric micro markets.
Bricks and Branding: WeWork, unlike traditional small office rental companies, has been focused on serving up a carefully designed, emotionally charged brand experience that reflects the specific set of cultural values of millennial-led startups. The company offers workplace memberships with private glass enclosed workspaces that are complimented by communal areas designed with soft seating, exposed brick walls, rough hewn wood accents and a bar. An exhaustive schedule of member socials, seminars, skill-sharing events and outings drive connection and participation among the members of this unique workplace community. For startups, the community found within a given location is valuable for attracting young talented creatives who want to live work and play in the same neighborhood. However, the value of access to a network of locations can be harder to realize, since most members are part of small local teams with very little use of far flung locations.
Addressable Market Math: A large valuation requires a huge addressable market and economically scalable growth prospects. Recent market research on workplace and mobility from Forrester to the US Department of Labor confirms what most can now plainly see. The US knowledge worker has become increasingly free from conventional employer relationships and therefore free from conventional employer-provided workplaces. 30% of US workers (50m) now work independently, a number projected to reach 60% of the workforce by 2020. Add the increasing liberation of corporate workers who’s employers are looking to “variable-ize” and reduce conventional office space commitments and you have a nation of workers in need of a better way to work. This has created a class of tens of millions of “grownups” that are increasingly mobile, transient workplace consumers, who have until recently chosen among solitary work at home, crowded cafes or renting a room in a 20th century style executive suite. And the best news for coworking providers is that according to the Global Workplace Association, the current stock of US shared workplace operators (a $4Billion industry in the US) can only accommodate about 200,000 members. More capacity is needed.
Product Extensions Needed: According to Emergent Research and a 2014 MBO Partners study, however, only 20% of independent workers are millennials. The growing cohort of these 10 million independent millennials can be well served by down-market coworking brands like WeWork and other creative class coworking brands like Neuehouse, with its beguiling, high-end, boutique collective and Grind Spaces with its open-plan desk sharing offering, along with dozens of others that have also entered the market offering millennials their own unique workplace experience. With its recent $355m raise, WeWork could open 300 additional, 30,000sf locations (9m sf of leases), to take it to $1B in revenue. That alone, although impressive (and expensive to achieve), would still not fully justify the $5B valuation, especially in light of risks associated with its target demographic and related coworking competition in its segment.
Valuation Math: Some rough valuation and return estimates can be made as follows: Assuming an eventual valuation of 2x revenues, current investors in WeWork should be aiming for revenues of $10B to get to a $20B valuation and an approximate 3x-4x on their recent investment. This would require opening 3,000 more 30,000sf locations. Despite the growth in demand from independent millennial workers, there are simply not enough tech-centric creative class enclaves to serve. Therefore, achieving a target return commensurate with this growth stage will require significant investment beyond the current product set and brand offerings. One such product extension, as has been noted in media reports, is their ongoing investment in “WeLive” micro apartments serving the urbanized, millennial customer base.
Another option is to enter the corporate workplace services category with a coworking brand that targets the much larger market of 40m independent and corporate mobile workers ages 30-55. This category of corporate coworking customer has a more obvious use for a network of branded locations that can replace or extend a corporate real estate footprint and attract top talent with ubiquitous locations and corporate service level standards. This positioning between traditional short term office rentals like Regus and the down-market millennial coworking is a deep and wide opportunity for new market entrants. For example Serendipity Labs has opened in New York and Chicago and has more than 50 franchised coworking locations under development across the US in urban, suburban and secondary markets in office buildings, residential towers, hotels and retail centers. Backed by an investment from Steelcase, Serendipity Labs has successfully positioned its brand experience and inspirational design to attract members from a full cross-section of industries, company sizes and age cohorts, providing a network that can offer larger companies outsourced workplace solutions. Made possible by a unique, proprietary, centralized technology platform, Serendipity Labs is also able to pursue cost-effective franchising opportunities that leverage the capital, local market knowledge and operating expertise of sophisticated institutional franchisees as the company builds out a world-class national network
The Next $5B Coworking Company: With institutional investment continuing to flow and the industry leaders like WeWork, Serendipity Labs and Regus continuing to set new standards for quality and innovation, the bar for all coworking providers has been raised. Coworking has become a multi-billion dollar hospitality industry with several lifestyle brands emerging. Leadership and scalable growth in the industry now requires coworking brands to deploy integrated technology platforms that can ensure great customer experiences, security, safety, and access to intuitive tools like mobile booking apps. The coworking industry is now on a path towards brand segmentation and is being found in all real estate asset classes, not just office buildings. Some brands will focus on the needs of corporate workers for high performance workspace, security and service. Others will continue to serve the down market, creative class and technology sector.
The addressable market is huge and growing, and there are untapped customer segments to serve. Institutional investors are now betting on the meta trends that are shaping the way we all conduct our lives. With brand and product extensions, WeWork can grow into its $5B valuation, but look out for the next $5B coworking company, it may be right around the corner, bits or not.