WeWork is a controversial company because many experts consider it overvalued and not having a solid business model. Despite the criticism and Wework business model, the company has managed to secure huge amount in funding.
WeWork is mainly a commercial real estate company. It signs long term contract with landlord for physical space and rents it out to the company of all sizes for short terms. WeWork makes money on the margin.
Adam Neumann came to United States in the year 2008 after briefly serving in Israeli Military and Navy to start a business. He met Miguel McKelvey, an architect in New York. They both wanted to start something but were short on ideas. They both are in building which had a lot of vacant space.
Together they get together and they are thinking about this vacant space, how they could do some short of sharing with it. They were conceiving business ideas and the bright idea would be green desk.
Adam Neumann and Miguel McKelvey founded Green Desk to share office work space in the year 2008. They changed the name of the company to WeWork in the year 2008.
WeWork, a commercial real estate company is one of the fastest growing office sharing startups. After suffering $2 billion loss in 2018, the $47 billion valued unicorn startup has filed its registration confidentially in December with the Securities & Exchange Commission.
The process of registration will enable WeWork to make the decision to become publicly traded, subject to market and other conditions,” WeWork said in a statement.
Started in the year 2010, WeWork received its first funding in the year 2012 and the company has never looked back since then.
The company for the first-time saws turbulent times last year. Although, WeWork maintained that the sales of the company were double than last year but the loss were also doubled from the previous year.
The WeWork business model is not totally a new one. Companies like Radius, Boston properties and Vornado are at the same time older and have more location and are present in more countries than WeWork. But WeWork is valued substantially higher than them not like a typical commercial real estate company but more like fast growing tech startup.
WeWork Business Model
WeWork is an American company that provides shared workspaces for technology startup subculture communities, and services for entrepreneurs, freelancers, startups, small businesses and large enterprises.
Before the development of WeWork business model, the typical office rent model was a closed office space with a contract for a year or more.
Value Proposition of WeWork Business Model
So, the first innovation of WeWork business model was in the value proposition block. The company decided to offer hot desks and open spaces in addition to private offices and all of them for flexible monthly rent terms. So, there clients didn’t have to engage themselves financially for year or more.
WeWork simply took advantage of the freelancing and startup trend where more and more people are independent workers. The growth in ventures and capital funds startups that need renting contract flexibility also helped WeWork to grow their business.
Although WeWork were not the first co-working space of its kind but WeWork managed to create a brand and position itself as the champion of this social change.
WeWork in its business model also managed to master the attractiveness of its location with beautiful design and community perks like ping pong tables, food court, free coffee and beer etc. So, by doing this WeWork also innovated on the type of Customers.
Customer Segment of WeWork Busines Model
The business model of WeWork allowed it to target freelancers and startups along with established small and large offices as its customers. WeWork managed to increase its customers segment in its business model but there is slight problem in doing so. The problem with this segment is that these are also the types of customers that will go bankrupt in a time of economic downturns.
One major reason for the criticism of WeWork business model is that in a time of economic downturn the company will not be stand such a downturn.
Because the company will still have to pay its long-term rent to landlord while not having enough client to generate substantial margin not even talking paying back to investor.
But thinking that WeWork only has precarious types of clients is wrong. There are also big corporation that rent spaces at WeWork locations just as there are established non venture capital small and medium companies.
How WeWork makes money?
The revenue stream of the WeWork business model are: Office rent, Housing rent and fitness center. WeWork business model uses a lot of data analysis to pinpoint the best area within a city to open any location.
The company track foot traffic within their location using sensors and the company create 3d models of their buildings to design the best possible office structure.
WeWok office structures integrate common spaces, private office hot desk and all the other rooms in the most harmonious comfortable way possible.
Why there is Criticism around WeWork business model?
However, it all sounds amazing until we work ourselves again where does WeWork main revenue come from and its delta between what they pay to the landlord and what charge to their customers.
As of today, even though WeWork community aspect make more attractive than its competitors the price for office in co-working space remains essentially the same across the industry.
While WeWork has much higher expenses than those typical commercial real estate companies because they do all this community building stuff.
It’s unlikely for WeWork to charge substantially higher prices just for this community aspect to cover these expenses. In addition to this, it is also true that many of WeWork Customers would be in the weakest position in case of economic downturn which is big risk.
The criticism around WeWork financial viability from many experts has been around that same reason. But this doesn’t take away from WeWork brand success and the differentiation that they achieved compared to typical office providers. So, the innovation is great but the question is: will all these investments be covered by a substantially higher revenue?