Nine Four Insights

WeWork IPO Will Be A Learning Experience For PropTech

This week felt a bit more of the same – WeWork is still planning to go public amid massive losses (Uber is probably pretty happy about that) and it feels like everyone has opinions on anything and everything associated with the company: Is the WeWork business model sustainable? How are their investors ok with the losses? What does this mean for Softbank? Is WeWork a tech company? The list can go on, and time will eventually tell, but I believe many of the questions WeWork is facing can also be asked of many PropTech companies.

Anytime scaling depends on the deployment of and use across a physical space, with the integration across different groups of people (tenants, operators, maintenance, 3rd party vendors, etc.) and the built environment, pace of growth is typically slower than the SaaS companies most PropTech companies try to pitch themselves as. As a result, it’s been interesting to see how companies that face structural growth challenges and business model questions are priced and what their margin profiles look like. WeWork is an example of a company that’s spent a ton of money on technology and acquisitions yet is still challenged daily on whether it’s actually a tech company. I actually don’t think the classification really matters, but what I think does matter is how technology unlocks revenue streams, improves margins across the board, and how comparable business models can and will be priced relative to it. I expect there are going to be many more of these hybrid-type businesses and business models that don’t fit nicely into a traditional definition. Is WeWork a tech company? Yes, but in many ways, no. If sales cycles are longer for a business model like WeWork versus a traditional B2B SaaS company, how much of a discount should be applied? Does the pace of growth and size of the market opportunity wash any discount away? Could it actually imply a huge premium? The market is going to tell us, but in the early days I expect things to be a bit hairy. Coworking will have a public comp to stare at (there are others that can work too), and it will be interesting to see how companies that are fundraising take WeWork into account.

If it performs well, I suspect we’ll hear about it frequently in pitch decks, but from what we’re seeing on the ground, many valuations aren’t necessarily grounded in comps or business fundamentals, rather on ownership/dilution targets and competitive round dynamics (it’s a bit of an aside, but PropTech continues to heat up and the venture space is sitting on a lot of dry powder, so I think that is likely to continue).

At the end of the day, I’m excited for the WeWork IPO. We’ll start to get answers, and I hope that more challenging business models like WeWork differentiate themselves enough to have a “PropTech” category we can leverage. Time will tell!

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