WeWork’s plunging valuation could spell concern for other real estate startups

Since the start of 2019, WeWork’s lofty $47 billion has been a fixture of fascination — how could an unprofitable startup be worth more than 15 times its revenue?

Believers of that stratospheric valuation got a reality check this week when reports emerged that WeWork’s parent company was considering halving its valuation to around $20 billion for its impending public offering.

For other real estate tech startups that are yet to turn a profit but have generated hype by achieving valuations linked traditionally to pure-play tech companies, WeWork’s valuation chop could spell trouble.

“We’ve learned this lesson several times through 2019 IPOs, and it looks like we are learning it again: The public markets don’t have appetite for companies that lose a lot of money,” said Brad Hargreaves, the CEO of co-living startup Common.

WeWork’s unprecedented valuation, driven by gargantuan investments from Japanese conglomerate SoftBank, has created a schism in the proptech sector, where some reject the premise that the startup is a tech company at all, and therefore should not be valued like one. (IWG, a publicly-traded company formerly known as Regus, has a similar number of desks as WeWork, but has a market capitalization at $4.6 billion.)

“At its core, [WeWork] is a property company, not a tech company,” said Jeff Berman, a general partner at Camber Creek, a venture capital firm that has invested in more than two dozen real estate tech startups. “And it should be valued accordingly.”

When considering if a startup is a tech company, Berman said companies are split into two categories: those that use tech to enable a service (a tech company), and those that use tech to complement a service (not a tech company.)

By this metric, some observers have questioned if other real estate startups are deserving of their valuations. For example, Knotel, which also provides office and meeting space, claimed last month it was valued more than $1 billion following a $400 million funding round. Reached for comment, its chief executive Amol Sarva wrote in a statement that Knotel has “100-500x growth potential in the coming decades,” and added that “at the right time we too will be public.” He did not address questions about whether the firm’s valuation would be affected by WeWork’s.

Industrious, an office-space firm that enters management agreements with landlords, last month raised $80 million and is also valued at multiples of its revenue. Its CEO, Jamie Hodari, viewed WeWork’s prospective valuation cut as a major plus for the industry.

“There are a small number of WeWork investors to whom a valuation of low $20 billion would be upsetting,” Hodari said. “But for the industry and adjacent industries, that’s north of 6 or 7 times revenue — that is a tech multiple… a healthy multiple.”

He added that WeWork’s valuation would not have “an affect on our valuation in a positive or negative way.”

The co-living sector has also seen the rise of real estate startups valued like tech companies. Like co-working, co-living firms lease space, and sublease it at a premium.

Common’s Hargreaves dismissed the notion that a drop in WeWork’s valuation would affect his company’s value. His New York-based company, which is valued somewhere below $500 million, has raised $63 million in venture capital funding. In pitch decks, Hargreaves said he compared Common to other hospitality companies, like hotel chains, rather than WeWork.

There are plenty of reasons for investors to be wary of tech startups with high valuations. A study from the National Bureau of Economic Research found that more than 100 unicorn startups — those valued at more than $1 billion — were overvalued by 50 percent on average in 2017.

SoftBank and its fabled Vision Fund has played an integral role in ballooning the valuations of real estate and construction startups, including brokerage Compass, construction company Katerra and home-flipping startup OpenDoor. Each have valuations akin to tech companies, which typically achieve high valuations due to a combination of limited costs and the prospect of mass-adoption.

Katerra, a SoftBank-backed construction company that uses technology to streamline the design and production process, has raised more than $1 billion in funding and is said to be valued at more than $4 billion. The company, which this week announced two new acquisitions, declined to answer questions about whether changes to WeWork’s valuation would affect its own.

Compass, a New York-based firm that has disrupted the brokerage industry, uses technology to provide services and arm agents with better back-end tools. After raising $370 million in its latest funding round, the brokerage said it was valued at $6.4 billion. Compass has also said it doesn’t plan to turn a profit for the foreseeable future. The firm, led by Robert Reffkin, declined to provide commentary on its valuation, and if WeWork’s move would affect it.

According to Clelia Warburg Peters, co-founder of startup accelerator MetaProp, WeWork’s plunging valuation came down to company-specific issues.

“People that aren’t looking below the surface could take this as a sign signifying something related to proptech,” she said. “Primarily, this is commentary about WeWork, not proptech generally.”

But, she added: “It’s never good for any venture-backed company that’s received a ton of funding when venture-backed IPOs are not popping in the way they’d hoped.”