WeWork hit a 20bn valuation in its most recent funding round which left many scratching their heads on the basis of its valuation.
How can a firm which owns no real estate or other tangible assets incur such a high valuation?
How does WeWork’s valuation compare to industry standards?
WeWork’s valuation is 20x its 1bn revenue – CEO Adam Nuemann was quoted to say “No one is investing in a co-working company worth $20bn. That doesn’t exist. Our valuation and size today are much more based on our energy and spirituality than it is on a multiple of revenue”
Looking at the Tech industry which has garnered some of the highest valuation over the past few years – even DropBox, Pintrest & Toutiao are all valued sub-15billion & below WeWork.
On the other hand, if we look at the real estate industry, Cadogan Estate which owns 93 acres of land in West London & has a gross profit of 109m in 2016 is only said to be valued at £5.8bn.
Similarly, Boston Properties Inc., the largest publicly traded office landlord in the US, owns five times the square footage that WeWork manages and has a market capitalization of $19 bn.
So what are the bases of WeWork’s valuation?
Looking at the market, we know if WeWork had positioned itself as a Real Estate company, the valuation wouldn’t have reached 20bn. But how does WeWork differ from any other co-working space? WeWork’s cost and risk strategy are exactly of those in the traditional real estate market. WeWork simply leveraged its community to position itself into a Tech play.
Slicing through the hype
With Tech, comes hype.
Some might say that WeWork’s valuation is solely based on the hype of Tech – with LongFin & it’s recent ICO successes in mind, we certainly understand the power & impact hype has on investors.
Other firms who have ridden on the wave of hype includes On-line Plc who added ‘blockchain’ into its name & saw its share price soar 394% in one day.
Nowadays it certainly seems investors are experiencing a bad case of FOMO & quickly jump on the bandwagon hoping they’ll find the next decacorn.
So how is this impacting the market?
Inability to sift through the hype:
Companies with great technology, proposition & talent are losing out as investors are drawn to whatever is most shiny. Generating a disproportion of investment stunting our development of other key areas.
The low hit ratio dilemma:
As investors are forced to act quickly in fear of missing out, this means less time is spent on assessing the quality of the investment opportunity. This makes investments inconsistent with a poor hit ratio.
An inconstant state of affairs:
The industry lives in a constant fragile bubble where the market is hyper-sensitive. Firms & investors act without-thought in hopes the trends will continue making them ultra-exposed to risk. Investment & confidence can quickly take a bad turn & become stagnant if there is a slight ripple in the market.