I’ve always had a hard time understanding why anyone thought that WeWork, the real estate start-up, was worth almost $50 billion.
The business model seems reasonably simple: Lease a bunch of office space, add some walls and some beer and a nice coffee machine, and sublet smaller chunks of the space by the month. WeWork is basically a commercial landlord, and none of the traditional methods for valuing commercial properties seem as though they’d generate a total of $50 billion. Are the coffee and beer really bringing in that much extra cash? If so, why not just start a chain of coffeehouses/bars?
As WeWork prepares to go public, potential IPO investors are apparently also having trouble with this. On Thursday, the Wall Street Journal reported that WeWork’s parent company is considering reducing its valuation to the $20 billion range — which could mean less than half the valuation of its last private round of financing — after potential investors expressed “widespread skepticism over its business model and corporate governance.”
WeWork isn’t the only tech “unicorn” that has lost some of its magic. Uber and Lyft were probably the most famous of the unicorns — companies valued at more than $1 billion in private funding rounds. They’re also trailing their initial valuations by quite a lot since both companies went public this spring. Now another of the best-known unicorns seems to be molting. And perhaps that’s not an accident.
These companies got so famous, and got such stratospheric valuations, because they promised to be revolutionary rather than evolutionary. With Uber and Lyft, for example, investors were buying into not just a better way to hail a taxi but also an option on a future in which everyone outsources their car ownership.
Think about that: There are roughly 250 million cars in the United States, which are parked, on average, 95 percent of the time. To maintain that absolutely massive overcapacity, U.S. customers pay an average of $37,000 each for a total of about 17 million new vehicles a year.
If we could cut out even half of that unused capacity through ride-hailing, we could save hundreds of billions of dollars — not to mention the hassle of staring at traffic, and the environmental costs of all that metal and plastic. Give Uber and Lyft even half the money, and they’d be rolling in revenue.
Only in markets, when you see massive redundancy, it’s often actually doing something quite valuable: ensuring reliability of critical services. Consider my family, which seems perfectly adapted for a carless lifestyle. We live in a dense, walkable, urban neighborhood and, in 10 years, have put less than 20,000 miles on my car. So why bother owning a car at all?
One reason: His name is Fitzgerald, he weighs 160 pounds, and he is a frequent flier at veterinary poison control.
Until Uber can guarantee that we can be speeding toward the animal hospital in Virginia less than 10 minutes after Fitzgerald wolfs down a pound of raisins, we’ll be keeping the car. Most people don’t own voracious bull mastiffs, of course. But they often have kids or elderly relatives who sometimes need similar urgent car rides. Or they have jobs where they cannot get away with phoning the boss and saying, “Sorry, my Uber canceled, I’ll be late.”
Those people can’t give up their cars until Uber and Lyft can guarantee the same availability as the Honda in their driveway. The companies aren’t anywhere near that yet, particularly outside of dense urban cores. And the only way they could achieve that kind of reliability would be to add back a lot of the overcapacity we were hoping they’d eliminate.
A similar sort of caution applies to WeWork. Fundamentally, the company is in the business of lowering risk. Small and fledgling companies don’t need to take on the major capital expense of an office build-out, or the onerous obligation of a long-term lease; landlords don’t need to hassle with risky smaller tenants. The problem is, WeWork doesn’t actually eliminate all that risk and expense and hassle; the company just takes them on itself. Unless it gets paid a lot for its trouble — and right now, WeWork is losing boats of money — it could be flirting with insolvency as soon as investor capital runs out or the United States enters a recession.
Venture capital prefers revolutionary to evolutionary investment stories because when they succeed, business revolutions throw off a lot of cash. Google and Facebook, Apple and Amazon really have changed the world, and they also made early investors fabulously rich.
But there have always been more would-be revolutionaries than actual revolutions. And over the long run, in both politics and economics, evolutionary change has generally proved more rewarding, and enduring, than radical upheaval. Even unicorns aren’t magical enough to buck those truths, which may be why the unicorns that offered us a better veggie burger or a clearer teleconference are making more money for investors than the firms that promised to revolutionize our whole way of life.