By Eliot Brown
Six months after investors placed a $5 billion valuation on
WeWork Companies Inc., the New York-based provider of shared office
space to small companies and technology startups has reached the
$10 billion mark.
WeWork on Wednesday said Fidelity Management & Research Co.
had pumped $400 million of capital into the company. Chief
Executive Adam Neumann said the company's valuation is now roughly
$10 billion.
The transaction puts on display investors' ravenous appetite for
young, fast-growing companies.
At the current valuation, WeWork is larger than all but three
publicly traded office landlords, and more than half the size of
Boston Properties Inc., the largest by market capitalization with a
value of $19 billion.
Boston Properties owns more than 45 million square feet of real
estate, including some of the highest-priced office space in the
country. By contrast, WeWork leases about 3.5 million square feet
throughout the U.S. and in some global locations, highlighting
investors' expectations for growth--and the high risk to those
investors if the growth slows or reverses.
Early last year, WeWork's valuation was about $1.5 billion,
according to the company.
WeWork's main business is renting office space from landlords,
then building it out into an incubator-like space with small
offices and hip common areas meant to promote interaction. That, in
turn, is then rented to startups and small companies on a monthly
basis, and it also offers add-ons like health insurance and payment
processing.
The company's pitch to investors and its customers--and the
thesis for those pouring money into it--is that the world of office
space is changing with the rise of a younger generation tired and
wary of traditional corporate office culture.
At its essence, WeWork is involved in arbitrage: it rents the
office space at one price, then leases it out to a set of small
companies paying much higher rates. It has been the fastest-growing
company, by footprint, in New York in recent years.
The product has become appealing in part because of the
energy-filled environment WeWork has created, complete with free
beer on tap and large common areas with ping pong.
Mr. Neumann said the company hadn't been looking for additional
funding recently but kept getting a barrage of calls.
"We didn't seek this out," said Mr. Neumann, 36 years old. "We
kept having offers and kept ignoring them." Ultimately, he said, he
warmed to the offer, though he adds that it comes with higher
pressure.
"This is an increase in responsibility, an increase in
expectations," he said. "A higher valuation with more cash invested
by investors just means you need to deliver higher returns."
Given those expectations of extraordinary growth, the $10
billion valuation suggests traditional landlords might be worried
WeWork will upset their traditional business.
But for now, the old guard is hardly scared.
"I don't worry about [WeWork] one bit," said Martin Selig, one
of Seattle's largest office landlords, who currently owns a
portfolio of 4 million square feet, with another 1.5 million square
feet under way.
Mr. Selig said WeWork's new valuation is interesting, but added
that he doesn't feel his business is threatened. Rather, he sees
WeWork as a place that will incubate companies ready to move into
his buildings when they get larger.
There are risks for WeWork. Because the company signs long-term
leases with landlords and then rents it out to its members on a
monthly basis, its expenses are fixed while its revenue fluctuates
with demand.
Small office space has historically been highly sensitive to
downturns, and in the event of a bust in the technology
sector--from which it gleans many of its members--WeWork could be
stuck with high bills and little revenue.
Mr. Neumann declined to provide specifics on the company's
figures, except to say that they have met or exceeded growth
projections shared with investors at the last fundraising round in
December.
At the time, its valuation was about 100 times its operating
income, whereas many office landlords trade at about 20 times
earnings.
Mr. Neumann said he didn't expect any additional fundraising
rounds because the company is profitable. Previously he has told
others he expects an initial public offering in coming years,
according to people who have discussed the matter with WeWork.
Bloomberg News first reported that WeWork was seeking funds at a
$10 billion valuation.
Write to Eliot Brown at eliot.brown@wsj.com
Access Investor Kit for Boston Properties, Inc.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US1011211018