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WeWork: A Tale of Two Businesses

A dirty little secret in tech-obsessed Silicon Valley is that most revenue in the startup economy goes to non-tech companies. We’re talking legal fees for IP and incorporation; or meals for programmers in the hyper-competitive and perk-driven technical jobs market. It’s things like HR services and real estate.

While most startups fail — an accepted reality — their volume and continued capitalization keep these old-school services fed. Venture funding cycles through tech startups and ends up fueling these support functions. And this is where the IPO-borne WeWork has built a real-estate arbitrage business.

It’s become a media darling in this “startups serving other startups” segment, but its financials were always a bit of a mystery. A lot of that has been cleared up by its S-1 filing this week, though there’s still some ambiguity and cringeworthy editorializing (“Our mission is to elevate the world’s consciousness”).

Going through some of its unit economics, there are two tales to tell. The picture isn’t pretty, but the roads have luckily been paved by forbears that established investor trust in the face of massive losses. Those include long-public companies like Netflix, not to mention the ultimate profitless machine, Amazon.

More recent public companies include Uber which continues to stack up losses as it invests in expansion and market share growth. Using Uber as an example given its IPO recency, how do WeWork’s numbers compare? The short answer is, not great. Here are a few finer points, care of CBS News.

— WeWork’s corporate parent We Company revealed in documents for its upcoming initial public offering that the office-share company lost more than $1.3 billion from its operations in the first half of this year.

— The losses for each WeWork member — about $5,200 per customer — are about 28 times what Uber loses per active rider.

— Another way to see it: WeWork loses 94 cents every minute one of its laptop-toting members spends in its creative-class work halls during a 40-hour work week.  

The question is if WeWork is overvalued and if public market tolerance for the above losses can stretch that far. The above precursors like Netflix and Uber indicate that they could, but we’ll have to wait and see. This will be important to establish a precedent for the subsector of “startups serving startups.”

There are also SMB implications. 60 percent of WeWork’s tenants are companies with less than 500 employees. That includes SMBs, startups and individuals. The figure is dropping (see below) as WeWork tries to stimulate growth among larger enterprise tenants, which have greater stability and retention.

Despite that shift, SMBs will continue to be a key constituency for WeWork. Though it’s often panned for micro-spaces with hipster-friendly vibes, it has atomized space in ways that are cash-flow friendly to a lot of startups and SMBs. And the entrepreneurial spirit that fuels its business appears to be going strong.

Meanwhile, the fate of WeWork and its IPO will further expose what the market will bear for SMB operational services. Specifically, it will be worth watching for “space as a service” demand signals, and the best practices in addressing them. Some valuable findings could result from that larger market experiment.

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