Data Sheet—Why WeWork Has to Pay Up for Rapid Growth

Real estate machinations have been a regular feature of a career in media over the past decade. Aaron in for Adam today, thinking about my current base of operations in a Boston WeWork.

The appeal of my WeWork space is fairly obvious: Someone else maintains the free coffee, waters the plants, and tidies up the sun dappled work spaces. Plenty of add-ons are on offer, too. Pay extra for use of a big conference room, printing, VoIP phone service, or snacks. (Unlike working at a tech giant, the food isn’t free.) And in Boston, the five locations are spread throughout all the hottest neighborhoods.

The hip office sharing startup is back in the news today as it seeks to borrow at least $500 million in the junk bond market. Interest rates have been ticking up this year, you may have noticed, but for WeWork they are especially high. Netflix just borrowed $1.9 billion for 10 years at a rate below 6%, and Uber’s $1.25 billion seven-year loan was reported last month to be below 5%. WeWork is also burning through cash to fuel rapid growth just like those two, but the less established startup will have to pay around 8% on its bonds.

So far it’s all working quite nicely to spur strong growth at WeWork. Revenue doubled last year to $822 million, according to the bond offering documents—but so did the net loss to an impressive $933 million. Of course, WeWork, like many startups before it, has its own special metric, dubbed “Adjusted EBITDA before Growth Investments,” which takes out all those niggly expenses like taxes, interest, depreciation, and amortization plus vast amounts of other stuff like almost all of its sales and marketing costs. On that basis, it generated $49 million.

But there’s an even deeper concern about WeWork’s basic business model, and it’s reminiscent of several banking crises of the past. WeWork itself has to enter into long-term leases on its office space, typically for 10- or 20-year terms. At the same time, its startup and gig economy fueled clientele are renting month to month. Banks have gotten into trouble because they relied on funding from savings and checking account depositors that could be yanked daily, while the loans they made with that money didn’t have to be paid back for years. In bad times, depositors wanted their money back all on one day, but the banks didn’t have it, creating the classic run on the bank disaster scenario.

The timing mismatch feels equally dangerous for WeWork. When the economy finally hits a recession, it will still need to pay back billions: $5 billion through 2022, and $13 billion more in 2023 and later on its existing lease commitments, to be precise. The company has structured the leases through subsidiaries that could be closed independently, but customers could be canceling their monthly leases in droves. Even at a juicy 8% yield, it may not be a risk worth taking.

NEWSWORTHY

Iterative improvements. Various tweaks and changes are afoot in some of the world's most popular apps. Snapchat is undoing some of its unpopular redesign with a redesigned redesign. Facebook's WhatsApp is raising its minimum user age to 16 from 13 as part of its move to comply with Europe's new privacy law, the General Data Protection Regulation. Google is rolling out a huge overhaul of Gmail that makes the email app friendlier looking and easier to navigate. And Instagram is allowing users to upload multiple photos and videos at once, making it faster to share and post stories.

Social surprise. Twitter reported better revenue and earnings per share than Wall Street expected, while monthly active users continued a growth trend. Revenue of $655 million was up 21% from last year and better than the $608 million average analysts forecast. Active users hit 336 million, 3% more than a year ago. Shares of Twitter, already up 27% this year, gained 4% in premarket trading on Wednesday.

Like taking candy from a baby. More than 1 million children were victims of identity theft last year, according to Javelin Strategy & Research. Crooks like stealing kids identities because there are no existing records and parents are unlikely to spot the phony credit reports. "The child and parent won’t know it happened until the child becomes of adult age—and by that time, they have an awful credit score and don’t know what’s going on," says Hemu Nigam, founder of cybersecurity firm SSP Blue.

Oval office showdown. With growing trade tensions threatening Apple's lucrative iPhone business, CEO Tim Cook will meet with President Donald Trump today to express his concerns, Bloomberg reports. Cook and Apple vice president Lisa Jackson also attended Tuesday night's state dinner at the White House honoring French President Emmanuel Macron.

Tech turnover. Speaking of growing tensions, with privacy regulation looking more possible in the United States, Facebook replaced its top lobbyist. Longtime D.C. lawyer Erin Egan will be replaced as head of policy in the United States by Kevin Martin, who worked in George W. Bush's White House and was Bush's appointee to head the Federal Communications Commission. Egan remains Facebook's chief privacy officer.

Cancel that patent. The Supreme Court upheld the authority of the Patent and Trademark Office to rescind patents without needing a court ruling. In a 7-2 decision written by Justice Clarence Thomas, the high court said Congress could grant the power to the agency. That was a win for big tech companies, including Apple, Google, Facebook, and Twitter, which backed the current patent review process because they are frequently sued over questionable patents.

FOOD FOR THOUGHT

The stereotypical tech company founder is a teenage kid dropping out of an Ivy League college to create the next big thing. But a new study by MIT professor Pierre Azoulay and PhD student Daniel Kim found something rather different. The pair crunched data from the Census Bureau about business development and combined it with Internal Revenue Service data on business owners from Schedule K-1 filings. They found 2.7 million people who started businesses between 2007 and 2014 that hired at least one employee. The average age of founders was 42 years old. Founders of startups with the highest growth rate averaged 45 years old. Prior experience was also important:

Kim and Azoulay also found that entrepreneurs were 125% more successful if they were previously employed in a particular sector in which they are starting a business.

While that might come as a shock—at least to the 20-somethings looking to start companies and the venture capitalists looking fund them—Kim said for economists, that idea shouldn’t be much of a stretch.

“In theory, we know that with age a lot of benefits accumulate,” Kim said. “For instance you get a lot of human capital from experience, you also get more financial resources as you age, as well as social connections, all of which will likely boost your odds of success as an entrepreneur.”

IN CASE YOU MISSED IT

Microsoft Becomes Second Most Valuable Company for First Time Since 2015 By Lucinda Shen and Scott Decarlo

Spotify's Free Mobile App Is Getting a Major Upgrade By Lisa Marie Segarra

Yahoo's Remnants Will Pay $35 Million to SEC Over Massive Data Breach By Jonathan Vanian

Verizon Isn't Planning to Buy a Major Entertainment Producer 'At This Time' By Aaron Pressman

Apple Will Start Paying Billions in Back Taxes to Ireland By Don Reisinger

Nvidia Uses AI to Reconstruct Damaged Images By Kacy Burdette

Why a Top VC Would Buy Facebook Stock—But Not Tesla By Jen Wieczner

BEFORE YOU GO

You may have read about the giant floating collection of refuse twice the size of Texas known as the Great Pacific Garbage Patch. Well, Boyan Slat, the founder of nonprofit The Ocean Cleanup, is doing something about it. He's designed a massive garbage collector that's being tested in San Francisco Bay. The plan is to send it out to the patch within a year and cut the garbage pile in half within five years. It's a worthwhile cause, for sure.