WeWork Targets Asia as Valuation Hits $16 Billion
15th March 2016
Latest fundraising round makes office-space company one of world’s most valuable startups
Shared-office-space startup WeWork Cos. has raised about $430 million in a new round of financing led by Chinese investors, making it one of the world’s most valuable startups and clearing the way for a push into Asia.
Beijing-based private-equity company Hony Capital Ltd. and Legend Holdings, 3396 -1.49 % its parent company, led the round of financing, WeWork company executives said, giving the company a valuation of about $16 billion, up from $10 billion last summer.
That would make it the third-most-valuable publicly traded office landlord were it publicly traded, despite controlling a fraction of the square footage of the leading companies in the sector.
With the deal, six-year-old WeWork is gearing up to bring its hip, communal office spaces to China, South Korea and India, among other countries. Asia is an area company executives view as ripe for expansion.
“The quality of [WeWork’s] execution and fit for the Chinese culture is unparalleled,” John Zhao, Hony Capital’s chief executive, said in a blog post on WeWork’s website.
It is unclear how much global demand there will be for WeWork and its glassy co-working spaces. WeWork Chief Executive Adam Neumann said in a blog post announcing the news that “despite cultural differences, at the end of the day, we are all one and we all want the same thing. We want to pursue our passions.”
The fundraising round, which the company disclosed in corporate filings late Tuesday, comes even as a chill descends on the once-searing world of startups and venture capital. Money managers have grown cautious and marked down the valuations of their holdings in numerous late-stage startups.
The newfound restraint has forced numerous companies in need of cash to raise money at lower valuations than previous fundraising rounds. Such “down rounds” are increasing in frequency, sapping employee morale.
But the spigot hasn’t turned off completely, and companies such as Uber Technologies Inc., for instance, have seen their valuations grow as they have continued to raise funds.
WeWork has proved particularly adept at fundraising. Mr. Neumann has led fundraising rounds totaling more than $1.3 billion since the company started at a single Manhattan location in 2010 from companies including money managers Fidelity Investments and T. Rowe Price Group Inc. TROW -0.58 % as well as well-known venture-capital investor Benchmark Capital. These investors are betting WeWork’s model will be a dominant form of office space in the future, as Uber’s is becoming to urban transportation.
If startups like Uber and Airbnb are harnessing technological change, WeWork is depending largely on generational and cultural change. It is benefiting from younger workers’ gravitation to cities and communal atmospheres, as well as a boom in the startup sector.
WeWork’s business model is generally to rent space from landlords, turn it into a communal atmosphere and rent it out month-by-month at higher prices to companies and individuals. The workforce is largely young, and arcade games, plush couches and beer on tap are fixtures.
Today the company has grown to 65 locations, mostly in major U.S. cities, with a handful in Europe and Israel, and it is rapidly adding locations in new cities throughout the U.S. and Europe. Its shareholders say the centers generate healthy profits once they are open and filled.
Still, WeWork’s valuation is so high relative to peers that it has many in the real estate sector scratching their heads. Among the concerns are that rapid growth is difficult to maintain, and the company’s business model leaves it on the hook to pay fixed rents to landlords even if the rents WeWork can charge to companies fall.
“It is just not possible to grow that aggressively … and maintain those sorts of margins,” said David Alberto, a veteran operator of serviced-office centers, a similar business model that has caught on in the U.K. “I honestly think it’s a bubble.”
Regus RGSJY -17.04 % PLC, for instance, controls more than 40 million square feet of office space globally that it subleases out through a similar business model, though mostly with more traditional office space. Yet Regus—which had similar hopes for rapid expansion before the dot-com bust—has a market capitalization of only about $4 billion.
By that ratio, a $16 billion serviced-office company would have about 160 million square feet of space. As of early this year, WeWork had more than 5 million square feet open, although it has said it receives considerably more income than Regus a square foot, and it has a cultural appeal that differentiates it.
WeWork has far more ambitious plans, and company executives speak of reaching at least 1 million members, up from about 50,000 today. Executives said WeWork will ultimately become the host to numerous large companies that want a well-designed communal space.
In Asia, company executives said they would proceed at a measured pace, seeing how the first offices fare. But they hope to quickly expand and make Asia a large portion of the business. Cities including Beijing and Hong Kong are first on the company’s list.
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