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WeWork Used These Documents To Convince Investors Its

WorthBillions
What the $10 billion co-working companys internal nancial documents tell us about how a decacorn is built.
posted on Oct. 9, 2015, at 11:44 p.m.

Nitasha Tiku
BuzzFeed News Reporter

Tim Lahan for BuzzFeed News

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Startups dont turn into unicorns the buzzword for companies valued at a billion dollars
or more without a good story attached. For WeWork which leases office space,
divvies it up into desk-sized chunks, and rents it out month to month, largely in
fashionable cities like San Francisco and New York the narrative revolves around
catering to a new generation of young workers who want to be creators and collaborators,
not office drones. Its that promise of personal fulfillment that allows CEO Adam
Neumann to claim that his companys short-term subleases are changing the way people
work. Business is going so well that soon, the five-year-old company expects to change
the way people live, too, by offering shared residential micro-apartments under the brand
name WeLive.
Investors are bullish on the tale. The company has raised $1 billion in less than half a
decade, and its valuation has grown commensurately. In February 2014, WeWorks
financiers said it was worth $1.5 billion. In December 2014, a new set of financiers
pumped that number up to $5 billion. Half a year later, most of those same investors
injected another round of funding that doubled WeWorks valuation to $10 billion. At that
price, WeWork is one of the most valuable startups to emerge from the tech boom, more
valuable on paper than Slack, Draft Kings, Lyft, 23andMe, and Warby Parker combined.
Even in a technology cycle whose defining characteristic is mega-financing rounds
where investors pour hundreds of millions in funding into a company on the chance that
it will be worth billions WeWorks rapidly multiplying valuation (an appraisal of a
companys worth by its investors) has perplexed and alarmed observers. The NewYork
Times, the WallStreetJournal, and even random bystanders on Medium have scratched
their heads wondering how free beer and flexibility could add up to a $10 billion business
model. Believe It read Wireds dubious headline about the companys $5 billion
valuation last year. Writing in the Commercial Observer last month, Charles Clinton,
CEO of the real estate investing company EquityMultiple, called it perhaps the most
polarizing recent valuation many [real estate] industry insiders find the gaudy
valuation to be completely insane. CompStak, the commercial real estate database, said it
felt compelled to investigate WeWorks margins, because [l]ike many in the CRE
industry, we were curious to understand the math behind WeWorks fast growth.
Neumann likes to present WeWork as a star of the sharing economy, a technology
platform that connects consumers to office space, just like Uber and Airbnb connect them
to cars and homes, respectively. But how can an infrastructure-dependent real estate
venture scale like a low-overhead software startup? How can a company that signs 15-year
leases but sells monthly memberships expect to survive a downturn? How can an
entity that doesnt own its own real estate be worth more than three times as much as
the New York Yankees? Why does WeWorks future look so bright when it sits smack in
the middle of two bubbling markets (that is, tech and commercial real estate)? Why would
a business model that drove one high-profile dot-com darling promising the office of the
future into bankruptcy succeed this time around?

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October 2014 fundraising documents obtained by BuzzFeed News reveal how Neumann
answers those questions behind closed doors. The material was shared with BuzzFeed by
someone familiar with the company, on the condition of anonymity, and independently
verified. WeWork would only comment on a couple of aspects of its fundraising pitch. It
includes a five-year financial forecast and a slide presentation (also known as a pitch
deck), both embedded below, as well as a company overview. After reading these
documents, investors such as Goldman Sachs, Harvard University, and JPMorgan handed
WeWork $355 million in funding, along with the $5 billion valuation, as part of its Series
D funding round in December 2014.
WeWork expected operating profit of
$4.2 million from revenue of $74.6
million by the end of 2014. By 2018, the
company predicted operating profit of
$941.6 million on revenue of $2.86
billion. The number of co-working
members were to set to explode from
16,279 to 260,000 in the same time
period. WeWork forecast 376 shared
office ___location in 2018, up from 24 in
2014.
This material was prepared a year ago.
Based on data from WeWork's ve-year forecast (page 1).

Since sharing this data with investors,

WeWork has raised yet another $433

million (mostly from the same firms). In the interim, its predictions have changed
significantly, as have some of its business practices. So these documents are less useful as
a peek into WeWorks current financial state than they are as a snapshot of a high-profile
company on its way up (and up, and up) in a moment when investors are flush with cash
and open to any company with the faintest veneer of technology, if it sounds like the
upside is Uber-sized. Indeed, if these documents tell us anything, its that WeWork has
mastered the kind of storytelling that locks down massive rounds and can earn what is
essentially a real estate company the privilege of being discussed as and valued like a
nimble Silicon Valley software startup.
The story is a good one. All told, the fundraising documents portray a company on a
phenomenal trajectory. Profits, membership, and locations grow at an enviable rate, while
occupancy hovers just below 100%. But the material also reveals that WeWork relied on
enormous demand projections and certain accounting tricks both of which are popular
tactics among private companies to keep its profit margins looking as high as its
aspirations.
None of this is unique to WeWork thats precisely the
point. Its business model is atypical for tech, but the
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economic and cultural practices that made it a $10 billion

company pervade Silicon Valley. To its detractors, at least,
WeWork is the poster startup of a funding climate fueled
by FOMO and driven to extremes, where valuations can
double in a matter of months and where investors who are
so desperately afraid of missing out on the next unicorn
will slap a horn on a horse.
But like most private companies, WeWork publicizes only metrics that paint the company
in a better light, so skeptics have relied on back-of-the-envelope math and gut-level
instinct. WeWorks presentation (published for the first time below) is perhaps our best
clue to understanding how startup valuations get made. It offers a glimpse into the dealmaking behind a decacorn the latest Silicon Valley jargon for a $10 billion company,
and another term that gets tossed around with little irony about the kind of magical
accounting it may take to conjure up so many mythical beasts.

Michelle Rial/BuzzFeed

TheInformation first reported some of the financial data in these documents in late
August, highlighting WeWorks use of accounting practices that make rent look lower in
the near-term and shove off expenses further down the line. Ultimately, TheInformation
concluded that these practices could make its forecast tough to meet.
They have extraordinary, hockey stick
like projections, Eric Sussman, senior
lecturer of accounting at UCLAs
business school and chair of the
investment management firm Causeway
Capital, told BuzzFeed News after being
shown the documents. Which in and of
itself is not uncommon. But they seem
very, very aggressive.
Fundraising documents are designed to
dazzle. Investors spend only three

Based on data from WeWork's ve-year forecast (page 1). Background photo
courtesy of WeWork

minutes and 44 seconds on average

flipping through a pitch deck, so companies have to make the future look big and bright.
In fact, a WeWork spokesperson told BuzzFeed News that when its time to actually cut
the check, our large institutional investors have access to audited financial statements.
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In other words, investors are shown two presentations: one that uses standardized
accounting practices and one that doesnt.

From WeWork's pitch deck (page 33).

But the initial presentation gets them into the funding groove. Its the best deck Ive ever
seen! one tech executive told BuzzFeed News, jokingly referring to the optimistic
projections in slide after slide of WeWorks pitch.

Heres how WeWork works, according to the documents: The company doesnt own real
estate, but instead takes long-term leases in centrally located neighborhoods in gateway
cities. So in order to make a profit, it has to charge members more than it pays landlords.
WeWork is relying on additional revenue from raising office rents, selling services like
health care, collecting commissions off its real estate deals, and signing people up for its
co-living product.
WeWork started leasing office space in 2010, when the commercial real estate market had
yet to rebound after the 2008 financial crisis. Now that the market is hitting record highs,
WeWork is pursuing a different strategy: negotiating with landlords for considerable
concessions. These concessions, detailed in the 2014 documents, include reduced rent,
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periods of free rent, and infusions of up-front capital to build out and refurbish locations.
In exchange, the documents state that WeWork would share 25 to 50% of its profits with
landlords, and take longer leases than is normal. WeWork refers to these profit-sharing
deals as asset light, in both the fundraising materials and in the press, but their
weightlessness is debatable. CompStak analyzed 21 of WeWorks leases in New York City
and found that 17 lasted more than 15 years, including six leases signed in 2015.

From WeWork's pitch deck (page 16).

(WeWork has since pivoted away from the profit-sharing aspect or below market rents.
Asset light now means the company get about 75% of the cost of build-out covered by
the landlord, but WeWork keeps the upside. Landlords have been willing. Thats the nice
thing about a billion-dollar price tag it opens a lot of doors.)
In WeWorks financial forecast,
concessions like free rent are not stated
using standard accounting practices
(GAAP), which call for the discounts to
be divided up over the length of the
lease. WeWork instead accounts for it all
at the beginning. And when the free rent
ends, expenses go up. WeWorks extraTable uses data from WeWork's pitch deck (page 16).

long leases and number of new leases

mean that even a five-year forecast wont

show potentially significant jumps in cost. This accounting strategy gives WeWork higher
income projections in the early years of a ___location, as David A. Kessler, national director
of commercial real estate for the accounting and advisory firm CohnReznick, told
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BuzzFeed News. The same principle follows for other concessions: Landlords fronting the
cost of building out a ___location make WeWorks initial costs appear artificially low.
Relying on optimistic numbers is de rigueur for startups. For example, WeWorks
documents also make frequent reference to EBITDA a financial initialism meaning
Earnings Before Interest, Taxes, Depreciation, and Amortization which, according to
Sussman, is commonly used in banking and valuation, but you wont see that term or
figure in audited financial statement. Private companies are not obligated to use GAAP,
and the vast majority of startups avoid those rigorous standards until an initial public
offering exposes them to SEC oversight. Moreover, while investors are still unicornhunting, companies like Uber can keep raising massive funds from the private market,
saving themselves from the scrutiny of Wall Street, which tends to obsess over numbers.
WeWorks unique financing deals are great for cash flow, Kessler explained: WeWork is
simply using landlords to help while it builds up a revenue stream. Yet despite increasing
costs, WeWork forecasts that its margins will rise, relying on a massive growth in
members and a bump in the amount that those members will pay. Kessler pointed to
rising revenue per square foot an increase he called unusual. The company further
boosts its margins by predicting that its marketing and payroll costs will dwindle as a
percentage of revenue despite its ambitious expansion and a growing number of
smaller competitors. Sussman pointed out that even a popular company like Netflix will
have to spend more to get that 50 millionth American.
Essentially, Kessler said, [WeWork] must believe that demand will continue to increase
in order to drive the rates.
But WeWork cant predict demand. Valuations are a story about the future and no one
knows what the future holds. Even the most iconoclastic Silicon Valley companies are still
lined up against their competitors in order to estimate future potential. In WeWorks case,
thats Regus, a publicly traded corporation that lets tenants make temporary offices look
like traditional ones; WeWork claims its unit margins are 44%, compared with 16% for
Regus. But the two companies are peers only in the broadest sense of shared office space.
Regus, which went bankrupt in the year 2000, is not a name brand. Regus isnt roided
out with a $1 billion investment, and no ones wearing Regus-branded T-shirts or going to
Regus summer camp which is partly why all of the experts BuzzFeed News consulted
had a hard time assessing whether WeWorks margins were sustainable.

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Screenshot from WeWork's company overview.

What happens when your whole business model is based on being hip and youve got to
re-hip it? Steve Weikal, head of industry relations for MITs Center for Real Estate, asked
BuzzFeed News. Youre supposed to be at the leading edge of cool, and whats the cost? I
doubt that landlords will be paying for that the next time around.
WeWork argues that it has a number of global macro trends working in its favor,
including an increasing percentage of the workforce going freelance, and the shrinking
usage of corporate real estate.
Commercial real estate is a very large
asset class, it is highly fragmented and
predominantly caters to larger
companies, a WeWork spokesperson
told BuzzFeed News. Todays modern
workforce is increasingly independent
and has fundamentally different needs,
with a preference towards flexibility and
a willingness to share space and services.
They also enjoy the social and business
benefits of being part of a broader
community which WeWork offers.

From WeWork's pitch deck (page 25)

WeWorks vision for what will happen to these trends in lean financial times is sunny to
the point of blinding. In the slide below, WeWork expects its occupancy in a downturn to
dip to 85%, which is what Regus gets in a good economy.

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Screengrab from WeWork's company overview.

At face value, WeWork should evaporate

when the tech bubble bursts because its
co-working spaces are filled with tiny
startups that will eventually either run
out of funding or return to the coffee
shops and home offices from whence
they came. The company counters that
its diversified into industries beyond
tech and brought on larger tenants, who
will want to downsize if times get tough.
WeWork also insists that it will retain
cost-conscious members, pointing out
that it launched in a downturn. But back
then, competition offering the same sleek
aesthetic was slim. Now venture
capitalists are contemplating raising

Data for WeWork rent from CompStak report (June 2015). / Via blog.compstak.com

their own real estate fund for live/work

spaces so investment dollars cant be siphoned off by WeWork.
All these vagaries are what make the cash flow statement (below) so crucial, said
Sussman. Its the holy grail, the show me the money financial statement. For example,
WeWork would have ended 2014 with a net negative cash flow of $78 million if not for a
$101 million infusion of capital. Thats not a bad thing. Growing companies usually bleed
money, Sussman said.

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Cash ow statement from WeWork's ve-year forecast (page 2).

Indeed, the fundraising documents were quiet on the question of present-day profitability
(WeWorks operating profit for 2014 was a slim $4.2 million), looking at unit economics
instead. Take this impressive slide about WeWorks Proven, Profitable Business Model.

From WeWork's pitch deck (page 10).

Profits look less certain when you read the fine print: Each ___location is shown at
maturity, even though almost half launched earlier that year, which likely means that
WeWork didnt factor in the initial costs of construction and development.

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From WeWork's ve-year forecast (page 1).

These slides show how easy it is to create a good-looking growth curve not just for
WeWork, but for all of its peers in the current tech climate. You put together a model. It
spits out whatever it spits out based on the inputs, Sussman told BuzzFeed News. I
always say, If you gave David Copperfield or Harry Potter Microsoft Excel, they could do
even more amazing magic. The basis for WeWorks five-year forecasts, he said, all rests
on its assumptions. Key metrics like membership growth, pricing, and square footage
leased drive the whole model. Change those inputs and everything changes. Input in,
pivot out.

According to the documents, WeWorks biggest gamble of all appears to be WeLive, the
companys upcoming leap from office to home. Two sources familiar with the companys
business plan told BuzzFeed News that Neumann tells his investors that co-living will one
day be a bigger part of the business than co-working.
A big reveal like that is part of the show. Its a bit of a trope, one tech company executive
told BuzzFeed News. Investors want to hear a story, so founders know to frame current

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plans as merely the beginning. Whatsbiggerthanworking?Living! the executive

explained.
According to the documents, WeLive is expected to supply 21% of the companys overall
revenue by 2018 even though it has yet to launch and bring in $605.9 million in
annual revenue three years after its debut. Locations were slated to open in October and
November, but a source close to WeWork says it was pushed to the end of the year.

From WeWork's pitch deck (page 30).

Much like WeWorks office-rental arm, projected earnings from co-living depend on a
steady stream of customers willing to sacrifice privacy for proximity to like-minded
people.
Part of that calculation is premised on the idea that WeWork is cheap: WeLive promises
36% savings on annual housing costs. But its micro-apartments may actually be more
expensive than their nonbranded counterparts. Monthly rent in Manhattans Financial
District (the site of the second WeLive ___location) is $5 per square foot, according to the
real estate database Zillow. Based on WeWorks forecast, which lists 276 square feet per
available bed, WeLive tenants could pay $6.5 per square foot in 2015 and up to $7.2 per
square foot in 2018. The price goes up if you include WeLives services fee, which is set
to double to $100 a month by 2018. The company would likely argue that price per square
foot doesnt factor in shared space like a rooftop lounge, but thats a tough sell when more
millennials are moving back in with their parents even as the job market improves.

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From WeWork's pitch deck (page 29).

WeWorks cost-effectiveness claim is debatable for its office space as well. The company
says it saves tenants 25% on a standard office lease, once you factor in cleaning, internet,
and convenience, but the markups add up. Its starter package of $45 a month buys one
day of free desk space per month and charges $25 an hour for conference rooms as well as
$50 a month to use WeWork as a business address. The hourly price for conference rooms
increases during peak hours, just like Uber cars.
Tenants are well aware that its scandalously priced per square foot, but an on-demand
office is worth it for entrepreneurs who want to Do What You Love, as WeWorks neon
sign says.
That may be why WeWorks investors are nonetheless on board for Neumanns grand
plan, one source told BuzzFeed. Financiers in search of the next big thing still think
theres an untapped market of apartment renters who care less about personal space and
more about the perks of a built-in social network. Id live in a living room with just a
kettle and a fridge if I could use a big kitchen sometimes, one tech investor (who has not
funded WeWork) told BuzzFeed News. The investor thinks that the idea of a rich guy
commune will be huge but, hey, Im single.

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In July, venture capitalist Bill Gurley wrote a blog post about why pitch decks rule. His
top reason was the importance of narrative. Investors are not solely evaluating your
companys story, he said. They are also evaluating your ability to convey that story. If
you can convince Goldman Sachs that micro-apartments are the next Snapchat, you can
convince freelancers to pay $450 a month for a desk, and then you can convince CocaCola that it really needs to start co-working next to these creators.
Theres a formula to the narrative Gurley and the rest of his industry reveres. Your
destruction target should be framed as a stodgy industry just aching to be upended by
increased efficiency. Your company should appeal to coveted customers, such as young
people and/or citizens of the developing world. It should swear that it can scale on
software alone (thats why Uber insists its not in the transportation businesses even as
it develops driverless cars). And your narrative should impel would-be investors to look
away from short-term profitability and instead gaze upon the mammoth size of the
potential market (often one of the more cringeworthy slides in most pitch decks.)
The framework of WeWorks fundraising
documents fits the formula perfectly.
MILLENNIALS ARE REDEFINING
THE WORKFORCE, the company
proudly shouts at the beginning of the
deck, with references back to its techsavvy user base throughout. In one slide,
WeWork describes itself as space as a
service, a play on software-as-a-service
companies like Salesforce. WeWork also
refers to itself as a subscription model
From WeWork's pitch deck (page 2).

basically anything but Regus. And just as

Uber won hearts and minds by proving

that demand for its service is not limited to the size of the taxi market, WeWork says it
can get $1 billion in annual revenue with just 1% penetration in key cities but a closer
look reveals that WeWork has a very broad definition of potential customers: every single
company with up to 100 employees in industries that use office space and 20% of
companies that have 100 to 5,000 employees.

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From WeWork's pitch deck (page 18).

WeWork can make a credible claim to all these characteristics, but the story is so
compelling because weve been watching it (occasionally) come true and no one ever
got mega-rich on a safe bet. WeWorks ability to graft this formula onto office space
subleasing may have baffled real estate insiders, but by punctuating its pitch with
buzzwords like sharing economy and asset light, the company has been able to hide
out in the startup sector.

A companys valuation is often calculated based on a multiple of its earnings. Tech

startups command much higher multiples, because building and shipping software is
relatively cheap and easy compared to making physical products. (Thats part of why
WeWork calls itself a tech company and not a real estate company.)
To figure out a fair multiple, investors look at how competitors are valued which may
be why one of WeWorks board members is fond of comparing it to Chipotle and Uber.
Based on operating income from 2015, WeWorks $5 billion valuation was 100 times its
earnings. That matches what Neumann told the WallStreet Journal in December. Since
then, WeWork has more than doubled from 23 locations to 52, but that multiple is still
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stratospheric: Office-space landlords often trade at a multiple of 18 to 20 times earnings,

and Regus trades at around 13 times operating income.

From WeWork's ve-year forecast (page 1).

Its not all froth and games, of course: When youre growing at hyper-speed, current
results offer a clearer picture of potential. Real estate investors, for example, pay more
attention to cash flow because it reflects what a company will be able to generate. But in
order to bring those multiples down to earth, its common practice to include puffier
metrics.
In December, law professor and author Steven Davidoff Solomon wrote that investors
have been willing to play along with aggressive assumptions just to secure the privilege of
investing during the frenzy to find the next Uber in which companies are priced to
perfection. Solomon name-checked WeWork as an example of this trend. These
companies may have ideas that work, he argued. But more likely, everyone is
overestimating market share and pushing assumptions. In other words, WeWork and its
cohort of decacorns could find successful business models and still not grow into their
valuations.

Potentially misleading financial metrics were a hot topic this summer. In June, the Wall
StreetJournal reported that startups were playing the numbers game by sharing
inflated stats that far exceed actual revenue, only to deflate once the company goes
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public or is forced to abide by SEC standards. The practice got so out of hand that the
venture capital firm Andreessen Horowitz and Sam Altman, president of the incubator Y
Combinator, simultaneously felt compelled to issue stern guidelines to startups this
summer about financial misstatements.
The blame runs both ways. In a February 2015 blog post, Gurley said late-stage investors
have essentially abandoned traditional risk analysis. Investors are assuming that the
numbers they see in the fund-raising deck are the same as those they might see in a
heavily scrutinized IPO filing, he wrote. Perhaps he was warning his officemates. Gurleys
firm, Benchmark Capital, invested in three of WeWorks five rounds, including the ones
that assumed the co-working company was worth $5 billion and $10 billion.
Aside from Benchmark, WeWorks recent investors are the late-stage ones Gurley warned
about. The $355 million round that WeWork picked up based on the strength of these
documents was led not by Silicon Valley, but by Goldman Sachs, T. Rowe Price Associates,
and Wellington Management; the other investors participating in that round were
JPMorgan and Harvards endowment. They may be hungrier for a hot deal after watching
a herd of unicorns pass them by. In an analysis of WeWorks $10 billion valuation,
technology analyst Ben Thompson said it made sense for funds like Fidelity, which
invested in WeWorks last round, to earmark a fraction of a percent of their cash toward
building a unicorn portfolio. Mutual funds have been investing in startups so
aggressively recently that Fortune wondered if it wouldnt start affecting retirement
funds.
Sussman emphasized that Boston Properties and WeWorks other institutional investors
are very sophisticated. They likely looked at shifting trends in office space for
example, a decline in the number of square feet reserved for each employee. WeWork is
part of this trend; these guys are trying to buy into it, said Sussman.
Six months after the funding round from these documents was announced, investors
anted up on the trend with another $433 million. In theory, this is how its supposed to
work. A startup mesmerizes investors with tales of an undiscovered market and financiers
keep the company afloat until it dominates this new world. But when funding comes so
fast and easy and suffused with so much FOMO, it can sound like investors are buying
their way into value as much as buying into a trend. After WeWork was marked with its
$10 billion price tag, CEO Adam Neumann told the WallStreetJournal that a higher
valuation with more cash invested by investors just means you need to deliver higher
returns. In other words, sketching out a grand vision will only get a decacorn so far. At
some point, that story about the future becomes a demand from the present.

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WeWork Pitch Deck

Wework Five-Year Forecast (October, 2014)

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WeWork Company Overview (October, 2014)

Nitasha Tiku is a senior writer for BuzzFeed News and is based in San Francisco.
Contact Nitasha Tiku at [email protected].

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