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- WeWork is preparing for an initial public offering and is expected to make public its IPO paperwork as soon as next week.
- The company has been valued like a tech company by private investors.
- But it faces numerous questions and concerns as it gears up for its offering.
- Among them: whether it really should be put in the same class as tech companies and how its business will fare in a recession.
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WeWork is gearing up for a big public offering.
But as it does so, it's facing some similarly big questions that could dampen investors' enthusiasm for its shares, limit the amount of money it raises in the IPO, and dog its stock on into the future.
The coworking business, which now calls itself the We Company, will reportedly make public its IPO documents as soon as next week. It is the most valuable startup to head for the public markets since Uber earlier this year.
Read this: WeWork's IPO filing will reportedly be revealed as soon as next week, giving us our best look yet at its business
With a $47 billion valuation, it has been treated like a tech company. And in some ways it has performed like one. It has expanded rapidly and more than doubled its sales last year while also doubling its loss.
But it's also been dogged by consistent concerns about its business model and about its CEO and founder Adam Neumann. Some of those questions may be answered by its IPO paperwork. Answers for others won't be known for months or even years after its debut on the public markets.
As the company prepares for its IPO, here as some of the biggest questions it faces:
SEE ALSO: WeWork has raised $6.1 billion and pioneered the co-working movement — but it increasingly looks like it doesn't understand commercial real estate
Just what is WeWork?
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Adam Neumann describes what the We Company is doing as a "global physical platform." But he's been investing heavily in technology and has bought a succession of software startups in recent years. The company has also argued that it's been and will generate valuable data about its clients over the years and how they use its space and that data could be offered as its own service or could form its own future products and services.
But many see We as just a real-estate company. Nearly all its revenue comes from memberships— essentially the rent payments made by its tenants. It's also likely that most of its investments are going toward leases on properties and furnishings for those properties.
The answer to the question about whether its more a tech company or a real estate firm is important because it could have a direct bearing on its valuation — and how much public investors will pay for its stock.
Neumann has been able to convince venture investors, including Softbank, that We is deserving of a valuation akin to a tech company. With a valuation of about $47 billion based on its last funding round, the We Company is worth more than 15 times its expected revenue this year.
By contrast, real estate companies are generally not valued so highly. CBRE Group, for example, has a market capitalization of $18.4 billion, or less than half We's. But the company posted $21 billion in sales last year — more than 10 times the startup — and it was profitable to the tune of $1 billion. Boston Properties, which is considered overvalued, generated about 50% more revenue than We last year, but its market capitalization is less than half that of Neumann's company.
Whether We is a technology company or a real-estate one is "the biggest fundamental question that people seem to be asking," said Robert Siegel, a lecturer in management at Stanford Graduate School of Business. He continued: "The jury is still out on that."
What happens in a recession?
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There are good reasons to worry about what might happen to the We Company when the next economic downturn hits.
The company was formed in 2010, after the economy was already starting to rebound from the Great Recession. So it has never experienced a downturn in the US, its largest market, or in many of the other markets it serves, and there's no way to now how it will weather one.
But Regus, which pioneered the co-working market, offers a cautionary tale. It saw a booming market during the 1990s, the last tech-led boom. But when that market went bust, it saw a sharp downturn in its fortunes and ended up filing for bankruptcy.
The concerns about We center around its business model. It rents space on long-term leases, then turns around and, essentially, sublets it to other companies on short-term, often month-to-months, deals. If the economy goes into recession, many of its startup customers could go out of business and many of its growing number of enterprise customers could sharply cut back on their office space. Because their deals with We are likely shorter term than their traditional leases, the startup could bear the brunt of their cutbacks.
"It has not been battle tested, and it's sitting right in one of the most cyclical sectors of the economy that we have," said Tom Smith, cofounder of Truss, an online commercial real estate marketplace. How it will endure a downturn, he continued, is "the many billion dollar question."
In an interview with Business Insider earlier this year, Neumann argued the startup will be well positioned in a downturn. It offers competitive rents that will be attractive to companies looking to cut costs. A growing portion of its customers are enterprise companies, and they're staying in its spaces for longer periods. And it could benefit from the downturn by getting lower prices on leases and seeing less costly construction costs for finishing out its spaces, he said.
Plus, the company has already experienced — and survived — downturns in Brazil, Argentina, and China, he said.
"We have proven in markets where [a recession] has occurred already," Neumann said in the interview. "We're stronger while [a downturn] happens and come out much stronger."
How much can and should investors trust Adam Neumann?
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Neumann dominates We. He has majority control of the company despite not having a majority economic interest in it, thanks to shares that give him extra voting power. Such arrangements have come under increasing scrutiny, because they've helped protect tech titans such as Facebook's Mark Zuckerberg, Alphabet's Larry Page, and Snap's Evan Spiegel from being held accountable by investors or the public at large.
But even before his company has gone public, Neumann has given potential investors reason to worry about how he'll exercise his power once it does.
He reportedly purchased buildings only to turn around and lease them to WeWork. Over the last five years, he's raised $700 million by selling off his WeWork shares or using them to guarantee personal loans. And he and the company reportedly set up a new corporate structure recently that will allow him and other insiders to avoid paying taxes on any dividends We may pay out — while sticking other investors with double taxation.
Those moves are "red flags" for potential investors, said David Erickson, a senior fellow in finance at the University of Pennsylvania's Wharton School of business.
When you consider them in combination with each other, "People start to get a little nervous about, geez is this right management?"
In May, We announced that it is setting up a $2.9 billion fund jointly with outside investors to purchase commercial properties that the fund will then lease to WeWork. Neumann plans to hand over his interest in the properties he's purchased and leased to WeWork over to the new fund.
But the fund raises its own questions, because its outside investors' interests may not always be aligned with We's.
Will this be another Uber?
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We is only the latest unicorn, or startup worth $1 billion or more, to head to the public markets this year. But it's the most valuable and, perhaps, the most anticipated since Uber.
But that's not necessarily such great company to keep. Uber's stock has performed poorly since its IPO and is trading below its offering price. And it's not alone. Lyft and Slack — two other mammoth, well publicized startups that went public earlier this year — are also trading well below their initial prices.
Uber in particular, though, may worry We and its watchers. The company's offering price was significantly below initial expectations and ended up valuing the startup at only a slight premium to its highest private valuation.
And public investors have proven less tolerant of its ongoing losses than its private backers. After announcing a $5 billion loss for its second quarter, the company saw its stock plunge.
If you're an institutional investor and bought shares in Uber or Lyft or Slack at the IPO, "you've lost money to this point," said Wharton's Erickson.
That's left a bad taste in the mouths of such investors, who are going to be crucial to the success We's debut.
"That creates a potentially challenging backdrop" to the IPO, he said.
How is competition affecting the market?
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When Neumann founded WeWork in 2010, his new company had few rivals other than Regus. But the market has changed drastically since then, especially recently.
Dozens of other startups now offer coworking spaces. And many of the established names in real estate are getting into the game, either by setting up their own coworking divisions or by teaming up with the players.
International giant Hines recently announced a deal with startup Industrious to create Hines Squared, focused on coworking. Boston Properties has Flex, its own coworking offering. Tishman Speyer, another big commercial landlord, last year launched Studio, yet another coworking concept.
Last year, 69 different coworking providers listed space on Truss, said Smith, its cofounder. This year, that number is past 256.
"A lot of people don't talk about that and aren't really aware of how many other competing coworking and [flexible lease] concepts are out in the market competing with WeWork that did not even exist a year ago," Smith said.
That growing competition could pose multiple challenges for WeWork. Much of its business model hinges on being able to charge a higher price for rent than it's paying landlords and, potentially, to be able to raise its prices over the life of its leases. But in a competitive market, it may not be able to raise prices and, in fact, may have to offer significant discounts to lure customers. That's particularly the case as other coworking concepts try to compete against it by offering more high-end features or targeting potentially profitable niches of customers.
But it also could face an increasingly competitive market not just for clients, but also for space. WeWork owns few of the buildings it uses. Landlords could lease space to rivals, reserve space WeWork would have gotten access to in the past for their own coworking arms, or only offer the startup space in less desirable buildings or areas.
For now, WeWork is kind of like the Kleenex of the coworking market, Smith said. It's the brand potential customers recognize and seek out. It also has a big advantage from its huge network of spaces; when they travel, its customers can often find a WeWork office in which to work if they need one.
But as its rivals become better known, begin to offer similar or better services, and build out or team up to create their own networks of spaces, those advantage could fade, said Walter Johnston, a vice president of credit ratings at research firm Morningstar.
"That's definitely a concern going forward," he said.
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"I've always had a mind toward business development — listening so that I can develop business and solve the problems of others, which leads to additional business," said Sweeney. "But when you know more and have a great education, you are better equipped to understand nuances and strategies in business." 
Wilkinson recalled that when she opened her company, the only thing that she was asked by insurance companies to get liability insurance was how many years of work experience she had, not how many years of business school. "You can read a million books on it, get lectured a million times about it, but nothing beats hands-on experience," said Wilkinson. "That is the true lesson and only schooling you will ever need. I would choose someone with years of experience running businesses over a new grad with an MBA any day."
"Within my industry, the CFA charter is often considered just as valuable as an MBA — but it costs only a few hundred dollars to sit for all three exam levels and maybe another few hundred dollars to purchase the study material," explained Haverty. "I decided to pursue the CFA charter rather than spend over $100,000 for an MBA." He added, though, that if he didn't work in finance and was not able to pursue a professional designation that was as valuable as the CFA charter, he likely would have opted for an MBA.
