I translated it from Chinese with the help of Google translation.
The original Chinese text is here. It was a speech delivered on a Gaorong Capital conference.
When we did our research, we found that WeWork rents offices around the world, with a revenue of about $8 billion a year. With a revenue of $8 billion, how can you qualify a valuation of $17 billion? Yes, it can't be qualified. But there is something under the table. What's under the table? I began to dig. The first brick was dug up and it read, "In the five and a half years of business, 21 of the 92 subsidiary companies have been listed on the NASDAQ."
How is the value estimated? I do not know either. Is there a valuation? Too much value. How did the 92 companies come? I started digging again.
In the beginning, Wework opened three co-working offices, with a bunch of companies inside. Some are startups and some are not. Various companies are inside. Later, several partners said, “Many of these companies can make money. Let’s stop being only the third-party service provider and start to make money from them” “How do you make money from them?” “Consider what kind of service is most needed by the companies and we’ll buy a company to serve them.”
Where to buy? Aren’t hese companies serving each other already? WeWork would purchase 5%-10% of the shares of the serving company and make them continue expanding their services. They started to purchase when there were only 100 companies inside, and now when they approached 7,000-8,000 companies they have bought the shares of 92 companies. It’s not a huge amount, but covers all kinds of service.
For example, I read a report on New York Times earlier and saw WeWork bought 10% of the shares of a data company who can provide a visitor registration system for all WeWork companies. Why is this? Every year, hundreds of thousands of people go in and out of the co-working space, and the visitors’ data are all in it. After buying company, WeWork can get access to the data.
Under such an idea, rents and equity gains are all his.
Looking deeper, we found that WeWork owns about a quarter of the co-working site. We thought that is this not a real estate company? How can it be considered a TMT company? Going down another layer, his house is all bought with REITs (Real Estate Trust Investment Fund). Again, WeWork has a real estate fund, and the model is closed.
How is this model closed?
The right hand is engaged in co-working and shared office. The biggest energy of co-working is that the office it found is always cheaper than the surrounding ones. The rent for the house is 60% of the surrounding office buildings, and he already has the 40% as profits. As for the left hand, he put the co-working companies in the office and calculated the EBITDA (profit before tax depreciation and amortization) of each site. For example, for a particular site, EBITDA is 5% for three years and 8% for six years, which is in line with the US REITs exit criteria. The company used REITs to convince the owners to sell the house for more money. For Wework, it can definitely exit after the house is bought, because the EBITDA he designed is in line with the EBITDA that allows REITs to exit. Left hand and right hand, one hand plays assets, the other plays operation. Wework has a large income besides the income of the desk rent, but the income of the REITs, and such income can be extremely impressive.
So I went to Wall Street this time and found that Wework could come up with $700 million to buy buildings. Is that the money it raised? That is the money of REITs.
This closed loop is very beautiful. The hundreds of millions of dollars in rental income on the table that everyone can see are its cash flow, and it will not generate most of its profit. Under the table, there are shares of a bunch of service companies inside as well as a lot of buildings assets, which it exits every three years or six years. Then it would issue more REITs to buy buildings, and open new co-working sites.
How do the investors feel? This is a company that operates light assets plus asset securitization and asset capitalization. It was originally enough with rental income and REITs operation, but it added up to it profits from the acquisition of a stake in a group of companies.
This is its strategy. It’s the story that it have been telling the investors for so many years, repeatedly. After every round of fundraising it would do two things: with a sum of money in hand, first it would buy 5%-20% of the shares of several companies and then make REITs to buy buildings. It does so round after round.
The original Chinese text is here. It was a speech delivered on a Gaorong Capital conference.
When we did our research, we found that WeWork rents offices around the world, with a revenue of about $8 billion a year. With a revenue of $8 billion, how can you qualify a valuation of $17 billion? Yes, it can't be qualified. But there is something under the table. What's under the table? I began to dig. The first brick was dug up and it read, "In the five and a half years of business, 21 of the 92 subsidiary companies have been listed on the NASDAQ."
How is the value estimated? I do not know either. Is there a valuation? Too much value. How did the 92 companies come? I started digging again.
In the beginning, Wework opened three co-working offices, with a bunch of companies inside. Some are startups and some are not. Various companies are inside. Later, several partners said, “Many of these companies can make money. Let’s stop being only the third-party service provider and start to make money from them” “How do you make money from them?” “Consider what kind of service is most needed by the companies and we’ll buy a company to serve them.”
Where to buy? Aren’t hese companies serving each other already? WeWork would purchase 5%-10% of the shares of the serving company and make them continue expanding their services. They started to purchase when there were only 100 companies inside, and now when they approached 7,000-8,000 companies they have bought the shares of 92 companies. It’s not a huge amount, but covers all kinds of service.
For example, I read a report on New York Times earlier and saw WeWork bought 10% of the shares of a data company who can provide a visitor registration system for all WeWork companies. Why is this? Every year, hundreds of thousands of people go in and out of the co-working space, and the visitors’ data are all in it. After buying company, WeWork can get access to the data.
Under such an idea, rents and equity gains are all his.
Looking deeper, we found that WeWork owns about a quarter of the co-working site. We thought that is this not a real estate company? How can it be considered a TMT company? Going down another layer, his house is all bought with REITs (Real Estate Trust Investment Fund). Again, WeWork has a real estate fund, and the model is closed.
How is this model closed?
The right hand is engaged in co-working and shared office. The biggest energy of co-working is that the office it found is always cheaper than the surrounding ones. The rent for the house is 60% of the surrounding office buildings, and he already has the 40% as profits. As for the left hand, he put the co-working companies in the office and calculated the EBITDA (profit before tax depreciation and amortization) of each site. For example, for a particular site, EBITDA is 5% for three years and 8% for six years, which is in line with the US REITs exit criteria. The company used REITs to convince the owners to sell the house for more money. For Wework, it can definitely exit after the house is bought, because the EBITDA he designed is in line with the EBITDA that allows REITs to exit. Left hand and right hand, one hand plays assets, the other plays operation. Wework has a large income besides the income of the desk rent, but the income of the REITs, and such income can be extremely impressive.
So I went to Wall Street this time and found that Wework could come up with $700 million to buy buildings. Is that the money it raised? That is the money of REITs.
This closed loop is very beautiful. The hundreds of millions of dollars in rental income on the table that everyone can see are its cash flow, and it will not generate most of its profit. Under the table, there are shares of a bunch of service companies inside as well as a lot of buildings assets, which it exits every three years or six years. Then it would issue more REITs to buy buildings, and open new co-working sites.
How do the investors feel? This is a company that operates light assets plus asset securitization and asset capitalization. It was originally enough with rental income and REITs operation, but it added up to it profits from the acquisition of a stake in a group of companies.
This is its strategy. It’s the story that it have been telling the investors for so many years, repeatedly. After every round of fundraising it would do two things: with a sum of money in hand, first it would buy 5%-20% of the shares of several companies and then make REITs to buy buildings. It does so round after round.
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