The word 'brand' appeared 70 times in WeWork's public filing, why that matters

 
WeWork.JPG
 
The power of brand took The We Company to US$1.8 billion in 2018 revenue. The question becomes, how will the brand hold up post IPO.
— Luke Bujarski

Brand Leverage

As with other recent decacorns, The We Company’s rationale and strategy for going public is built on future potential and imperative to scale faster than its competitors. Love it or hate it, the WeWork brand has serious leverage and plays a special role as the sauce that got the company to $1.53 billion in revenue in H1 2019, and a $48 billion valuation - but also $47 billion in lease commitments. Going forward, the brand will need to carry the company in new directions.

Brand promise offers a certain guarantee of product quality. WeWork has the flex office formula down. Localized design in hip neighborhoods in key city markets. People desire form as much as function. They also want to feel like they are part of something. WeWork is the Apple of branded offices. IWG (with a much bigger global footprint) is the Microsoft.

The brand has helped startups and small businesses look more legitimate and visible to clients. As WeWork scales globally, and as flexible office leasing takes off, the brand is also what enterprise clients have warmed up to. The value proposition with the flex office model is clearly there for corporations. They want quality space and access to key markets and savings, plus a guarantee and accountability on things like data privacy, security, and access to prime real estate.

Taking the company public will either build or shatter trust with enterprise clients, as financials come to light. WeWork has already integrated deep into the global corporate DNA. Forty percent of WeWork members already come from enterprise clients, up from 18 percent in 2016. Amazon has practically outsourced its entire New York City office strategy to WeWork.

More enterprise clients means more stability but also bigger partnership deals like the recent WeWork and Amex collaboration - which ups the stake, makes the company sticky, and further perpetuates the future of work model espoused in the company’s marketing message i.e. an intermediated layer of office space providers specialized in keeping employees happy - in which the We Co. reigns supreme.

The We Company is not a technology company, but rather a real estate company that takes advantage of technology to rework the value proposition that it offers to clients. Accessing its vast membership base, now over 500,000, becomes the draw in attracting more partners seeking access to that audience.

Brand Premium

Brand is also what fetches a premium on rents. WeWork is not the most luxury offering in the flex space market. Industrious, for example, serves a higher-end niche base. WeWork looks to reach a total addressable market of 255 million people. Impossible to do for niche players. Brand fetches a premium on WeWork spaces relative to other flex operators. More importantly, that brand reputation is critical for WeWork’s real estate partners and in courting favorable terms on master leases. Competition among flex space operators is mounting. Landlords of commercial real estate are in a good spot, as the flex industry rushes in with ever sweeter partnership deals and revenue share opportunities.

Brand clearly matters. It has played a huge role in getting We Co. this far. The question then becomes, will the brand hold up after IPO? Brand strategy and risk were vocalized in the S-1 filing. The word “brand” appeared a total of 70 times in the document - See below highlights.

The rush toward global market share is likely part scramble for more master leases and agreements with landlords, reaching scale before the next downturn, but also surfing out its brand momentum.

Aggressive growth helps keep the brand vibrant. It tells investors and partners that The We Co. is more than just an office space outsourcer. This will buy the company some time to raise more money and to build alternative revenue streams, not only in office but also multi-family, events, and education.

But how much time? The company will likely continue to lose money for the foreseeable future. According to the S-1 filing, it takes on average 24 months for any given WeWork location to start generating meaningful cash flow. Well over half of its total leases were signed since 2018. Rapid scale is the path towards faster profitability. Lucky for The We Co., in this era of Amazon economics, the markets and investors are more forgiving when it comes to showing profits.

That patience, however, appears to be running thin, as more money-losing behemoths go public on the promise of future returns.


Excerpts from public filings. Paragraphs containing the word “brand”.

Rebekah Neumann, Co-Founder, Chief Brand and Impact Officer, Founder and CEO of WeGrow

“Rebekah is one of our co-founders and serves as our Chief Brand and Impact Officer. She is also the founder and CEO of WeGrow. Rebekah is married to Adam Neumann. [Rebekah] has been a strategic thought partner to Adam since our founding and has actively shaped the mission and strategy of The We Company and its global impact agenda, as well as being the primary voice and leading advocate for the We brand. Rebekah has never been paid a salary from us.”

We have a global brand with a platform spanning 528 locations in 111 cities across 29 countries. Individuals and organizations turn to us directly to solve their workplace needs. As a result, we are able to aggregate demand and match an individual or organization to the right space, at the right time, at the right price.”

“The more locations we strategically cluster in a given city, the larger and more dynamic our community becomes. This clustering effect leads to greater brand awareness for our offerings and allows us to realize economies of scale, which, in turn, drives stronger monetization of our global platform. We employ a deliberate city expansion strategy within existing and new markets to achieve global scale. We believe that operating efficiencies and the benefits of global scale have allowed us to capture a multiplying demand for our space-as-a-service offering.”

“As we build and open more locations within existing markets, expand to new markets and scale our suite of products and services, we increase the value of our platform to our members and create additional capacity for incremental monetization of our platform. And as of today, we estimate that our market penetration in our 280 target cities globally is approximately 0.2%. We intend to continue deploying capital to grow and rapidly open new locations, relying on the experience, expertise, brand and scale that we have developed to date. We will leverage our leadership position to capture the global opportunity by growing in existing and new markets and expanding the scope of our solutions and the products and services we offer our members.”

“We believe [these] total opportunities reflect the amount employers are willing to spend and present an opportunity for us to capture greater wallet share through additional solutions and product and service offerings. We believe that we will be able to capture a portion of this existing spend per employee given our powerful brand and what we believe is a significant first-mover advantage over our competitors as the pioneer of the space-as-a-service model.”

“We built communities first in New York, then San Francisco, Los Angeles, Boston and Seattle. In 2014, we made a bold decision to expand internationally to cities around the world while simultaneously building our brand and presence in the United States. We started in London, followed soon after by Tel Aviv, and by 2016, we had opened our doors in Shanghai, the first of our locations in Asia, as well as in Mexico City, the first of our locations in Latin America.”

“We believe that individuals are more productive when they are able to express their full and authentic selves, so we aspire to be as inclusive as possible. Our design contributes to our success. We foster collaboration by providing design elements such as exposed internal staircases, open floorplans, communal meeting rooms and centrally located refreshments. Our spaces and their unique look and feel are the signature of our brand. All of our spaces follow global design guidelines but reflect freedom of expression at local level as part of our global-local playbook.”

“We have created a powerful ecosystem and brand that benefit not only our members and partners, but also our landlords, neighborhoods and cities through shared value creation. We believe our powerful brand, global footprint, scalable business model and cost advantage are significant competitive advantages that will allow us to further penetrate existing and new markets and maximize the future impact of the WeWork effect.”

Under Risk Factors:

“[our] ability to maintain the value and reputation of our brand.”

“Our success in this regard may increasingly depend on the financial success and cooperation of local partners and other third parties. For more information, see “—Our growth and success depends on our ability to maintain the value and reputation of our brand and the success of our strategic partnerships”.

“Memberships attributable to enterprise members generally account for a high proportion of our revenue at a particular location, and some of our locations are occupied by just one enterprise member. A default by an enterprise member under its agreement with us could cause a significant reduction in the operating cash flow generated by the location where that enterprise member is situated. We would also incur certain costs following an unexpected vacancy by an enterprise member. [In addition], in some instances, we offer configured solutions that require us to customize the workspace to the specific needs and brand aesthetics of the enterprise member, which may increase our build-out costs and our net capex per workstation added.”

Our brand is integral to our business as well as to the implementation of our strategies for expanding our business. In 2019, we launched a global rebranding effort that may affect our ability to attract and retain members, which may have a material adverse effect on our business or results of operations.”

Maintaining, promoting and positioning our brand will depend largely on our ability to provide a consistently high quality member experience and on our marketing and community-building efforts. To the extent our locations, workspace solutions or product or service offerings are perceived to be of low quality or otherwise are not compelling to new and existing members, our ability to maintain a positive brand reputation may be adversely affected.”

“In addition, failure by third parties on whom we rely but whose actions we cannot control, such as general contractors and construction managers who oversee our construction activities or facilities management staff, to uphold a high standard of workmanship, ethics, conduct and legal compliance could subject us to reputational harm based on their association with us and our brand.

“As we pursue our growth strategies of entering into joint ventures, revenue-sharing arrangements and other partnerships with local partners in non-U.S. jurisdictions, such as through ChinaCo, JapanCo, PacificCo and IndiaCo, we become increasingly dependent on third parties whose actions we cannot control.”

“Historically, many of our members have signed up for memberships because of positive word-of-mouth referrals by existing members, which has reduced our need to rely on traditional marketing efforts. To the extent that we are unable to maintain a positive brand reputation organically, we may need to rely more heavily on traditional marketing efforts to attract new members, which would increase our sales and marketing expenses both in absolute terms and as a percentage of our revenue.”

“We currently hold various domain names relating to our brand, most importantly wework.com, we.co, wegrow.com and welive.com, as well as several other @we and @wework social media handles. Competitors and others could attempt to capitalize on our brand recognition by using domain names or social media handles similar to those we hold. We may be unable, without significant cost or at all, to maintain or protect our use of domain names and social media handles or prevent third parties from acquiring domain names or social media handles that are similar to, infringe upon or otherwise decrease the value of our trademarks and other proprietary rights in our domain names.”

“If the measures we have taken to protect our proprietary rights are inadequate to prevent unauthorized use or misappropriation by third parties or such rights are diminished or we are prevented from using intellectual property due to successful third-party challenges, the value of our brand and other intangible assets may be diminished and our business and results of operations may be adversely affected.”

While we have already expanded our operations to a number of non-U.S. markets, the success of our expansion into additional non-U.S. markets will depend on our ability to attract local members. The solutions, products and services we offer may not appeal to potential members in all markets in the same way it appeals to our members in markets where we currently operate. In addition, local competitors may have a substantial competitive advantage over us in a given market because of their greater understanding of, and focus on, individuals and organizations in that market, as well as their more established local infrastructure and brands. We may also be unable to hire, train, retain and manage the personnel we require in order to manage our international operations effectively, on a timely basis or at all, which may limit our growth in these markets. Further, we may experience variability in the terms of our leases (including rent per square foot) and in our capital expenditures as we move into new markets.”

“Other revenue includes revenue from our Powered by We solution performed and recognized using the percentage-of-completion method based primarily on contract cost incurred to date compared to total estimated contract cost, as well as income generated from sponsorships and ticket sales from branded events and revenue generated by any new solutions or services not directly related to the membership and service revenue earned through the operation of our workplace solutions, such as Flatiron School and Meetup.”

“As we build and open more locations within existing markets, expand to new markets and scale our suite of products and services, we increase the value of our platform to our members and create additional capacity for incremental monetization of our platform. And as of today, we estimate that our market penetration in our 280 target cities globally is approximately 0.2%. We intend to continue deploying capital to grow and rapidly open new locations, relying on the experience, expertise, brand and scale that we have developed to date. We will leverage our leadership position to capture the global opportunity by growing in existing and new markets and expanding the scope of our solutions and the products and services we offer our members.”

Configured. Our configured workplace solutions are designed to offer the full WeWork experience within a menu of options around specific space needs, workplace objectives and brand aesthetics. Targeted at larger companies and enterprises seeking more select workspace environments, our configurable options include acoustics upgrades, additional meeting rooms, upgraded furniture and A/V performance as well as branding and signage upgrades. As part of our configured membership options, we offer Headquarters by WeWork, a product targeted at the needs of teams or organizations. These spaces are delivered with a basic set of amenities and community features at a lower membership cost. Members can add amenities and services from a menu of options, in addition to adding their own brand customizations into the design process.

Build. We design each space with a specific community and neighborhood in mind while leveraging our centralized procurement, supply chain, design and construction processes to create vibrant and welcoming spaces that are cost-efficient to build and cost-effective to maintain. Before we take possession of a space, we engage with engineers, designers, architects, layout experts and decorators to be ready to start construction the moment we take possession of a space. While construction is primarily a local function, we have multiple coordination points on global design, layout, brand, sourcing and creative standards. We use purpose-built technologies and proven off-the-shelf solutions from various components of the construction industry to achieve this coordination. We benefit from our scale and global presence in benchmarking cost opportunities for every location, across multiple cities and countries. We source both globally and locally, and our purchasing at scale gives us the opportunity to lower furniture, fixture and equipment costs, smooth manufacturing demand and reduce delivery cycle times. Finally, our technology allows us to learn layouts, predict space defects and forecast furniture, fixture and equipment needs. Smart algorithms, new engineering techniques and a growing database of experiences allows us to start to automate many aspects of the design and layout of a raw space. We continue to develop and refine our process from possession to opening of our spaces, and we expect our growth and scale to provide efficiencies in opening new spaces for the foreseeable future.

Lifestyle. We entered into a partnership with Rent the Runway because we believe in making our members’ lives easier and that our global platform could become Rent the Runway’s physical retail outpost. Rent the Runway is a subscription fashion service that allows users to rent unlimited designer styles for everyday and evening wear. We started by adding physical drop-off boxes in our locations across six cities. Due to the combination of a high density of people in our locations and the convenience of co-located drop-off boxes, Rent the Runway’s customer engagement has increased significantly in our initial partnership cities. As of June 30, 2019, Rent the Runway has seen over 300,000 items returned to drop-off boxes, and the partnership was recently awarded Glossy’s 2019 honor for Best Brand Collaboration. This is a win-win partnership: we have provided a significant convenience to hundreds of thousands of working women, we have helped fuel Rent the Runway’s physical expansion strategy and we have monetized underutilized areas of our locations by creating a new higher-margin revenue stream for our platform.

The WeWork Effect

We have created a powerful ecosystem and brand that not only benefit our members and partners, but also result in landlords, neighborhoods and cities all benefiting from shared value creation, or what we call the “WeWork effect”.

At the core of the WeWork Effect is the diversity of creativity and the culture of community that we bring to a project. Our spaces are home to distinct groups of entrepreneurial businesses, whose passions infuse and activate the spaces they occupy, and well-established enterprises that crave energy and want to capitalize on the combination of design, community and technology that we offer. Our partners benefit from being in our ecosystem in multifaceted ways, from landlords who see their assets increase in value to our cities and neighborhoods that see our engaged member base impact their environments.

We have a global brand with a platform spanning 528 locations in 111 cities across 29 countries. Individuals and organizations turn to us directly to solve their workplace needs. As a result, we are able to aggregate demand and match an individual or organization to the right space, at the right time, at the right price.

We strive to operate our business so that each new location is accretive to our long-term financial performance, resulting in growing contribution margin. We strategically cluster locations in cities leading to greater brand awareness and economies of scale, which, in turn, drives stronger monetization of our global platform.

We have created a powerful ecosystem and brand that benefit not only our members and partners, but also our landlords, neighborhoods and cities through shared value creation. We believe our powerful brand, global footprint, scalable business model and cost advantage are signific

Regional Joint Ventures

In 2014, we began to expand internationally to cities of the world at the same time that we were still building our brand and presence in the United States. We started in London, followed soon after by Tel Aviv, and by 2016, we had opened our doors in Shanghai, the first of our locations in Asia, as well as in Mexico City, the first of our locations in Latin America.

To facilitate our expansion into Asia, we formed a number of joint ventures, strategic partnerships and similar entities to drive growth in a capital-efficient manner. We now operate in China, Japan and the broader Pacific region through a series of joint ventures, which we refer to as ChinaCo, JapanCo and PacificCo, respectively. Our key investors in ChinaCo are Softbank, Hony Capital and Trustbridge, and we own 59% of the entity. Our joint venture partner in JapanCo is SoftBank, and we hold a 50% interest in the joint venture. Our key investor in PacificCo is SoftBank, and we own 60% of the entity. We also operate in India through a strategic partnership from which we receive a revenue and profit share. For each of ChinaCo, JapanCo and PacificCo, in addition to our equity interest, we are entitled to a percentage of revenue in exchange for providing certain intellectual property and trademark rights and other services.

These strategic relationships have allowed us to expand into new regions without putting our capital at risk. Our relationships with local partners have helped us establish a foothold in these key markets and laid the foundation for our future growth. We have therefore negotiated the right to buy out our strategic partners in each of these regions after a set period of time.

Our proprietary innovation supports our growth and brand. We devote significant resources to developing the technology and methods to build our locations efficiently and to provide an outstanding member experience.

In November 2016, the Company entered into an agreement with WeWork India Services Private Limited (“IndiaCo”), an affiliate of Embassy Property Developments Private Limited (“Embassy”), to subscribe for convertible debentures to be issued by IndiaCo in an aggregate principal amount of INR, which equated to $5.2 million as of December 31, 2018. The Company fully funded this investment in April 2017. The debentures will earn interest at a coupon rate of 6% per annum and have a maximum term of twenty years. The Company also has a buy-outoption that it may exercise to purchase Embassy’s equity shares in IndiaCo, at fair value, after June 30, 2021 or earlier upon the occurrence of certain triggering events. The debentures are convertible into equity shares of IndiaCo upon certain trigger events which include: (i) changes in control, and (ii) defaults in regards to certain agreed upon provisions. IndiaCo will construct and operate workspace locations in India using WeWork’s branding, advice, and sales model. Per the terms of the agreement, the Company will receive an advisory fee from IndiaCo based on an agreed upon profit allocation. The Company earned none, $0.5 million and $3.7 million, respectively, in advisory fee income from IndiaCo during the years ended December 31, 2016, 2017 and 2018, respectively. The advisory fee income is included within revenue in the accompanying consolidated statements of operations.


Other Revenue—Other revenue includes income generated from sponsorships and ticket sales from WeWork branded events and is recognized upon the occurrence of the event. Other revenue also includes other management and advisory fees earned, design fees earned and revenue generated from various We Company offerings. The Company recognizes these revenues over time, on a monthly basis, as the services are performed.

JapanCo

During 2017, a consolidated subsidiary of the Company (“JapanCo”) entered into an agreement with investors for the sale of a 50% membership interest in JapanCo for an aggregate contribution of $500.0 million which will be funded over a period of time. As of December 31, 2018, JapanCo had received contributions totaling $300.0 million. Pursuant to the terms of the agreement an additional $100.0 million is required to be contributed in each of 2019 and 2020. The portion of consolidated equity attributable to the outside investors’ interests in JapanCo are reflected as redeemable noncontrolling interests, within the mezzanine section of the accompanying condensed consolidated balance sheets as of December 31, 2018 and June 30, 2019. As long as the investors remain shareholders of JapanCo, JapanCo will be the exclusive operator of the Company’s WeWork branded co-working businesses in Japan. After July 13, 2024 and, prior to that date, in the event of default on the contributions to be made, the Company may elect to purchase, at fair value, all JapanCo membership interests held, other than any interests issued in connection with an equity incentive plan. The Company may elect to pay the buyout consideration in either cash, WeWork shares, or a combination thereof.