$10 billion tech unicorn WeWork told us why it thinks it will survive if the bubble bursts
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I also asked the company a crucial question about how it expects its business to remain profitable in the event of a downturn in the market. WeWork's business model is widely misunderstood: Its reputation is that its main clients are venture-capital funded software developers. If that's true, it poses a problem for WeWork: If venture funding were to decline - due to an interest rate hike, for instance - then WeWork would be screwed because none of its clients would have the funding they need to pay the rent.
But it turns out this is not the case.
The WeWork I visited on London's South Bank looks exactly like its reputation suggests. It was sleek, quiet, and brimming with two- and three-person tech startups. And there was a working bar with a free beer tap. I was jealous - it was nicer than the space Business Insider UK rented in Shoreditch.according to the Wall Street Journal. It then re-rents that space at higher prices to small companies who don't mind paying the per-unit premium because they need very little space, and may not need it for a long time.
This is not a bad business model, assuming there is always an influx of new startups who need space. But the WSJ says, "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."
In fact, some people think it is worse than that. WeWork is engaging in a form of "arbitrage," according to a recent note from Ben Thompson, the respected tech writer who publishes the Stratechery blog. Thompson says:
And one more thing -- when the alleged bubble bursts, and all those startups on short-term WeWork memberships go bust, WeWork will be saddled with long-term leases and forced to give away whatever premium it had hoped to charge. That, critics argue, isn't anything close to a $10 billion company.
This question goes to the heart of the recent debate about whether we're in a tech bubble or not. If we are in a bubble, then tech funding will decline rapidly with widespread fallout for anyone who depends on funding rather than their own revenues. And WeWork's reputation is that many of its clients are venture-funded tech startups.
But it turns out this is not the case, a WeWork spokesperson tells us. Only a tiny fraction of WeWork clients are other tech startups:
Venture capital backed companies only make up mid-single digit of total population of our WeWork member companies. The membership is very diversified across multiple industries and our fastest growing segment is larger, more mature companies who have joined for the value proposition of more affordable space, community, network, and flexibility - as well as services (healthcare, payment processing, etc.).
This is interesting news, because we now know that WeWork is not dependent on tech VC funding. And the WSJ said the company was profitable, which also bodes well.
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