It would be hard to find a more disputed startup valuation than the $20 billion at which investors have pegged WeWork. It’s America’s fourth most-valuable startup after Uber, SpaceX, and Airbnb, but what it does—rent office space—is not rocket science, nor is it as transparently revolutionary as the car- and home-sharing networks built by Travis Kalanick and Brian Chesky.
In fact, ragging on WeWork has become something of a pastime for financial journalists. “A $20 Billion Startup Fueled by Silicon Valley Pixie Dust” was the Wall Street Journal’s headline for Eliot Brown’s October story, a devastating assessment that calculated that WeWork’s valuation per square foot was nearly 40 times that of the larger but less cool office leasing company IWG. Is that the multiplier effect of a kegerator? Well before that, Scott Galloway, founder of the business intelligence firm L2, called WeWork the most overvalued company in the world.
Founder Adam Neumann likes to position his startup as something greater or lesser (but certainly different) than a sublease juggernaut with a talent for interior decorating. In a softer, subtly brutal New York Times feature, the company’s defenders argued it transcended traditional financial assessments: “WeWork isn’t really a real estate company. It’s a state of consciousness, [Neuman] argues, a generation of interconnected emotionally intelligent entrepreneurs.”
Well, OK. How do you put a price tag on emotional interconnection?
The company was in the news this week because it sold a bunch of bonds to raise money. The related financial documents revealed details of the company’s business model to financial analysts (skeptical!), the media (skeptical!), and investors … who bought up the bonds like hotcakes. Is that an affirmation of the WeWork model? Only in the least important way.
The documents portrayed WeWork as a company with a cash flow problem rivaled only by Uber’s: The company lost nearly $1 billion, and expenses more than doubled. WeWork has signed on to pay more than $18 billion in lease payments. (It rents office space, then sublets it.) Ratings agencies took a dim outlook, grading the bonds near junk status.
On the positive side: The company now has 220,000 members. It says it’s comfortably above the occupancy rates it needs to cover costs, and its customer base is made up increasingly of large corporations trying to tap into the WeWork mystique—not the freelancers who give the company its reputation.
The sale itself, which went swimmingly, isn’t a crystal ball for WeWork’s fortunes. Venture capital firms have different qualifications for assessing companies than bond-buyers. VCs are supposed to be comfortable with high levels of risk, for example; bond-buyers are, stereotypically, your dad. With a yield rate of 7.875 percent, WeWork’s were junk bonds—meaning, a lucrative but risky investment relative to, say, buying U.S. Treasuries—but the offering nevertheless exposed the company’s odd business model to a wider audience.
They bought it. Demand was so high that the company raised $702 million, instead of the $500 million it had aimed for.
Analysts took issue with a metric the company used to represent the sale: “community-adjusted Ebitda.” Typical earnings reports talk about plain-old Ebitda: “earnings before interest, taxes, depreciation and amortization.” WeWork invented a new way to measure earnings that, well, subtracted a whole lot of the company’s costs. Axios determined the metric essentially got rid of “company-wide expenditures,” such as marketing, administration, design, and development costs. (It did not get rid of the rent WeWork pays on its office space.)
Everyone was amused by this sleight of hand—Dealbreaker called it “a rage-inducing Silicon Alley pile of thought horseshit”—but at Bloomberg View, Matt Levine defends the idea for bondholders, noting that their priorities—getting paid what they’re owed when they’re owed it—are very different from those of Japan’s SoftBank, which has put billions into WeWork. “Strip out the growth and the events and the corporate-level compensation,” Levine writes, “focus on the basic economics of rent coming in and rent going out, and see if it’s enough to cover the debt.”
It is: Using “community-adjusted Ebitda,” WeWork says it’s $233 million in the black in 2017. That’s more than a billion dollars improvement over the straight earnings. Someone do some community-adjusted Ebitda on my paycheck.
And yet: Even the most charitable interpretation of WeWork’s financials just shows the start-up has figured out how to make money managing commercial real estate. It is not the first to do that, and the discovery hardly seems worth $20 billion.