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I'm seeing a lot of people in this thread balking at the $2B in losses. The thing is that aggregate profit is a terrible metric for measuring companies that hav

I'm seeing a lot of people in this thread balking at the $2B in losses. The thing is that aggregate profit is a terrible metric for measuring companies that have a recurring revenue model with high upfront costs (as WeWork, Uber, and many other tech startups do). The reason for this is profit doesn't factor in investments. Let's say I invest $1200 to acquire one customer who pays me $100/month. If you look at month 0, I have -$1200 in profit. At first glance, this looks really bad. Alternatively, you can see it as I am now making $100/month. Because of the $100/month, after one year I'll have made my original investment back and still be making $100/month. After two years, I'll have made a profit of $1200. This is probably exactly what's happening here with WeWork. If you look at things in aggregate, WeWork is spending a ton of money investing in opening new offices while they make a much smaller amount of money from their old offices. This makes them look like they are lighting money on fire. In reality they are investing their money in new offices and expect each office to make a return on investment over a few years. As long as they are spending more money investing in new offices than they are making from the old ones, they will appear unprofitable. For a typical software business, a pair of metrics that are much better than profit are CAC (cost of acquiring a customer) and LTV (the life time value of a customer). As long as a product's LTV is sufficiently greater than CAC (a successful SaaS company typically has LTV > 3 * CAC), it makes sense to invest more money into the business. This For Entrepreneurs post goes in great depth about good ways to measure a SaaS business and gives you a few models you can play with: https://www.forentrepreneurs.com/saas-metrics-2-definitions-2/ https://www.forentrepreneurs.com/saas-metrics-2-definitions-... Now all of this doesn't mean that WeWork is a healthy business. All it means is that we can't tell based on how much money they are losing alone.

taude 8y ago
How does it factor in that they are leasing their buildings? Won't their rents eventually go up, and won't they have to remodel all the time to keep up their hip/modern work spaces? It seems like funky math that I'm not understanding. Also, when a recession hits, it seems like the first offices a company closes has are the ones on a short-term lease at a co-working space.... [Edit] My second comment is because I work for a large company who opened an office in a WeWork space to be more hip and relevant....and I see a lot of other "big" companies with offices in the building.
- runako 8y ago
  Definitely not a WeWork booster, but I think I can see the other side of these questions. > How does it factor in that they are leasing their buildings? Won't their rents eventually go up, and won't they have to remodel all the time to keep up their hip/modern work spaces? All of this does matter, but per the OP may matter less than CAC + initial push into a market (brand-building etc.). Think of the cost to develop e.g. MS Word vs. the incremental cost to retain users (programmer salaries go up over time, they have to remodel the app ~annually, etc). If the WeWork model works in a market, they can buy buildings later (perhaps during a recession). > when a recession hits, it seems like the first offices a company closes has are the ones on a short-term lease at a co-working space I'm sure the other side of this argument goes something like the arguments against car ownership. Many companies won't have any long-term leases anywhere, will be more remote-friendly, etc. In fact some companies will choose to not re-up on long-term leases in favor of more flexible options like WeWork specifically because who wants to sign a long-term lease during a recession when visibility is poor?
  - taude 8y ago
    Good points. I do think car ownership might be different because it's a depreciating asset with a limited lifetime of use. I think real estate and buildings, that lifetime can be significantly longer... It'll be interesting to see how this all works out for a lot of this generation "tech" companies.
- koboll 8y ago
  >Also, when a recession hits, it seems like the first offices a company closes has are the ones on a short-term lease at a co-working space.... Apartment rents spiked during the last financial crisis because people downsizing increased demand for them. It's entirely possible that downsizing companies might want to retreat from leases to smaller WeWork offices during the next one.
  - sk5t 8y ago
    Aren't commercial leases typically of much longer terms than residential leases and less convertible than homeownership?
GoodJokes 8y ago
So what you are saying is that this company is just a real estate speculation company. Capitalism runs on future speculative/fictitious values.
GoodJokes 8y ago
That was a lot of words to describe what speculation is. Enron was really good at booking future values as fact. Capitalism runs on fictitious future values.
bachback 8y ago
Great post. In a recent interview this is exactly what Masa Son is talking about: https://www.youtube.com/watch?v=eDpdcWz_F_0 https://www.youtube.com/watch?v=eDpdcWz_F_0 What I don't fully understand - isn't this covered by GAAP accounting in some way?
- acchow 8y ago
  GAAP does cover this. Your "high upfront costs" would be capitalized. It wouldn't appear as a loss.
  - kgwgk 8y ago
    It depends on what kind of costs are we talking about. If it was something like "I give one year for free to get the client, and I will make money from them in the years to come because of course there is no reason to think they may switch providers later" I don't think it will be capitalized.
- thisisit 8y ago
  Usage of GAAP is entirely up to the company. It might choose to not use GAAP policies on revenue recognition and expenses. Many non-public companies chose to do that if it means they can show their revenues growing faster than it actually is. One of the example of this was Groupon. When they filed for IPO they were using gross sales as their revenue. And then deducting money paid to their partners as expense. SEC had to step-in and ask Groupon to restate their P&L statement so that the top line was net revenue instead of gross.
jelling 8y ago
Conflating WeWork, Uber, and SaaS businesses is inaccurate. With a SaaS business - most of which are b2b - there are tremendous costs to switching providers and going without is typically not an option. For example, if company uses Salesforce, they must have a CRM and it will likely save them little to no money to switch to a competitor (ex. Hubspot) but it will create enormous organizational disruption as people and processes are built around the existing platform. So customer life-cycle is likely 10 years or more for the customers that generate the majority of their revenue. And if we do have a recession and they bleed customers, Salesforce can always reduce costs by cutting sales and support staff. The existing capital investments in the software are already paid-off. In comparison, WeWork's model is predicated on being easier to join and leave than a typical office space. As a result, they attract businesses with shallower capital reservoirs. Meanwhile, WeWork is holding inventory risk in that they hold the long-term lease or the property itself. So in the event of a recession their customer base will be the first to die out or cut costs via less desks and/or working from home. (WeWork may or may not be off-setting this risk via financial engineering but the question is at what cost as someone has to take the other side of the bet and the downside risk here is pretty obvious. And, oh look, the yield curve just inverted.) Finally, 10 years in, Uber is still a commodity business. I generally think Uber is better than Lyft and worse than Via, but none of their advantages are anywhere near as durable as a SaaS business. Don't like Ubers new prices? Don't like the the CEOs new haircut? You can use one of their other competitors starting tomorrow. Even if you use Uber today there is zero reason you can't switch to Waymo/Apple/whatever in the future. And in the worst case scenario, Uber paid CAC to educate consumers who will use something else in the future.
- jameslevy 8y ago
  Uber has network effects. It's definitely possible and inevitable even that they won't be on top anymore at some point, but what they are doing is not exactly a commodity if it relies on a dense two-sided marketplace.
  - jhwang5 8y ago
    While it does have network effects, I'd argue it's not recession proof (mildly cyclical, even), and there's low switching costs to using other forms of transport (for example, I haven't used Uber in lieu of Lyft / driving my own car and had no issues)
cstejerean 8y ago
I’m not an accountant so I’m not sure if there are specific rules that would make this not applicable to SaaS, but the thing you describe is precisely what proper accounting is designed to solve. If you buy a factory this month and then use it to make widgets for the next 10 years you don’t show a huge loss when you buy the factory, but rather capitalize the cost and then depreciate it over the useful life of the factory so that in every period you can match the revenue with the associated costs. Shouldn’t customer acquisition costs be similarly capitalized over the expected life? If the company is actually profitable then it should show a profit not a loss. Any reason why this isn’t more common among SaaS businesses?
- toasterlovin 8y ago
  The big difference between a factory and customer acquisition costs is that the factory is an asset. It has enduring value. Customer acquisition costs do not. When you pay the customer acquisition costs, the money you spent is gone and non-recoverable. But you can recover some of the value of a factory by selling it.
  - cstejerean 8y ago
    Plenty of things you can’t sell get capitalized, recoverability isn’t a particularly important aspect for capitalizing something.
    - jsmith99 8y ago
      At least under international GAAP, assets can only be capitalised if they are expected to deliver future economic benefits. This doesn't mean that they have to be sold directly - they can be internal benefits such as a building or a factory machine that makes it cheaper to produce goods.
      - cstejerean 8y ago
        Indeed, that’s what I was trying to say as well. The asset needs to have value to the firm in terms of future benefits but doesn’t need to be sellable on its own.
gamblor956 8y ago
A more succint way of explaining it is that WeWork is just a real estate company, and real estate is about achieving positive cash flow (rental income > lease or mortgage expenses), not "profits" since a lot of the profit comes from selling the appreciated properties down the line.
- toasterlovin 8y ago
  I believe WeWork leases their properties, which would make near-term profitability important.
Areading314 8y ago
Investments are not part of your operating income. Your income only consists of flows that accrue over time. If you make a $1200 investment, the expense associated with the investment is accounted for by spreading that expense over the lifetime of the asset. For a 20 year asset, this would become a $60 expense per year. It's not like it's a new thing that businesses need to invest to to acquire customers. The entire science/discipline of accounting exists to provide accurate metrics of business performance. Its ridiculous to say that "profits are a bad metric" because of this. Also, WeWork is not a software business, since they do not sell software. Why would those metrics apply here when all their money is made through leasing office space?
- tfehring 8y ago
  That’s the purpose of accounting in principle, but in practice GAAP financials are an incomplete measure of financial performance. In the instant that WeWork acquires a new customer, it realizes no additional income and no change in shareholders’ equity. But assuming its marginal revenue is higher than its marginal cost, the expected present value of its future profits is certainly higher than it was the instant before it acquired that customer.
  - metalchianti 8y ago
    I may be wrong but I don't think that last statement is true if the lifetime of the customer/asset is short--especially shorter than expected. The business model seems too new and for me it hasn't proven itself viable.
    - tfehring 8y ago
      You’re right. Replace “marginal revenue/cost” with “marginal expected present value of lifetime revenue/cost” and that statement holds.
  - Tyrek 8y ago
    In the immediate instance, no, WeWork does not recognize anything. But in its first month, rental income should exceed the month's depreciation for the same real estate. The fact that income has not kept up implies that occupancy is low. WeWork is fundamentally a real estate/leasing company, not a tech company.
acchow 8y ago
Why do you think Uber has a high customer acquisition cost?
ignoramous 8y ago
> For a typical software business, a pair of metrics that are much better than profit are CAC (cost of acquiring a customer) and LTV (the life time value of a customer) Andrew Chen, ex VP Growth at Uber, had a blog up on just this: https://andrewchen.co/how-to-actually-calculate-cac/ https://andrewchen.co/how-to-actually-calculate-cac/
thisisit 8y ago
Without looking at the actual accounting rules (GAAP or otherwise) used by WeWork it is difficult to say how the line costs are treated. In your example, you have treated $1200 as an expense. Lot of companies tend to capitalize these expenses (for example "deferred commissions" on Salesforce B/S). So, they will create a reserve on the Balance sheet of $1200, then decide on the useful life of the said expense and depreciate it on the P&L. Let's say WeWork thinks the useful life of the $1200 expense is 24 months. The calculation will work like this: P&L Month 0: Depreciation Expense 0, Revenue 0 and Profit 0 Month 1: Depreciation Expense $50, Revenue $100 and Profit $50 Month 2: Depreciation Expense $50, Revenue $100 and Profit $50 so and so forth BS Month 0 - Asset $1200 Month 1 - Asset $1150 (Depreciation $50) Month 2 - Asset $1100 (Depreciation of another $50)
mrweasel 8y ago
The issue I have with WeWork, aside from the fact that they're somehow a tech company, is that they have competitors that does the exact same thing... but who are profitable. You have a company like Regus, that's not a tech company, they have a MUCH low evaluation, but makes a profit and having more offices.
- mgadams3 8y ago
  My understanding is that they make some bullshit claim about how they have instrumented everything and that helps them to apply machine learning to their community and app, blah blah. It's def not a tech company but I could see them going that way eventually. BTW - the concept is "valuation", not "evaluation" :)
  - mrweasel 8y ago
    > BTW - the concept is "valuation", not "evaluation" :) Oooh... thanks. This is one of those cases where I suddenly realise that I've been using the wrong word for year :-|
  - deleted 8y ago
    [deleted]

taude 8y ago

How does it factor in that they are leasing their buildings? Won't their rents eventually go up, and won't they have to remodel all the time to keep up their hip/modern work spaces? It seems like funky math that I'm not understanding. Also, when a recession hits, it seems like the first offices a company closes has are the ones on a short-term lease at a co-working space.... [Edit] My second comment is because I work for a large company who opened an office in a WeWork space to be more hip and relevant....and I see a lot of other "big" companies with offices in the building.

runako 8y ago
Definitely not a WeWork booster, but I think I can see the other side of these questions. > How does it factor in that they are leasing their buildings? Won't their rents eventually go up, and won't they have to remodel all the time to keep up their hip/modern work spaces? All of this does matter, but per the OP may matter less than CAC + initial push into a market (brand-building etc.). Think of the cost to develop e.g. MS Word vs. the incremental cost to retain users (programmer salaries go up over time, they have to remodel the app ~annually, etc). If the WeWork model works in a market, they can buy buildings later (perhaps during a recession). > when a recession hits, it seems like the first offices a company closes has are the ones on a short-term lease at a co-working space I'm sure the other side of this argument goes something like the arguments against car ownership. Many companies won't have any long-term leases anywhere, will be more remote-friendly, etc. In fact some companies will choose to not re-up on long-term leases in favor of more flexible options like WeWork specifically because who wants to sign a long-term lease during a recession when visibility is poor?
- taude 8y ago
  Good points. I do think car ownership might be different because it's a depreciating asset with a limited lifetime of use. I think real estate and buildings, that lifetime can be significantly longer... It'll be interesting to see how this all works out for a lot of this generation "tech" companies.
koboll 8y ago
>Also, when a recession hits, it seems like the first offices a company closes has are the ones on a short-term lease at a co-working space.... Apartment rents spiked during the last financial crisis because people downsizing increased demand for them. It's entirely possible that downsizing companies might want to retreat from leases to smaller WeWork offices during the next one.
- sk5t 8y ago
  Aren't commercial leases typically of much longer terms than residential leases and less convertible than homeownership?

GoodJokes 8y ago

So what you are saying is that this company is just a real estate speculation company. Capitalism runs on future speculative/fictitious values.

GoodJokes 8y ago

That was a lot of words to describe what speculation is. Enron was really good at booking future values as fact. Capitalism runs on fictitious future values.

bachback 8y ago

Great post. In a recent interview this is exactly what Masa Son is talking about: https://www.youtube.com/watch?v=eDpdcWz_F_0 https://www.youtube.com/watch?v=eDpdcWz_F_0 What I don't fully understand - isn't this covered by GAAP accounting in some way?

acchow 8y ago
GAAP does cover this. Your "high upfront costs" would be capitalized. It wouldn't appear as a loss.
- kgwgk 8y ago
  It depends on what kind of costs are we talking about. If it was something like "I give one year for free to get the client, and I will make money from them in the years to come because of course there is no reason to think they may switch providers later" I don't think it will be capitalized.
thisisit 8y ago
Usage of GAAP is entirely up to the company. It might choose to not use GAAP policies on revenue recognition and expenses. Many non-public companies chose to do that if it means they can show their revenues growing faster than it actually is. One of the example of this was Groupon. When they filed for IPO they were using gross sales as their revenue. And then deducting money paid to their partners as expense. SEC had to step-in and ask Groupon to restate their P&L statement so that the top line was net revenue instead of gross.

jelling 8y ago

Conflating WeWork, Uber, and SaaS businesses is inaccurate. With a SaaS business - most of which are b2b - there are tremendous costs to switching providers and going without is typically not an option. For example, if company uses Salesforce, they must have a CRM and it will likely save them little to no money to switch to a competitor (ex. Hubspot) but it will create enormous organizational disruption as people and processes are built around the existing platform. So customer life-cycle is likely 10 years or more for the customers that generate the majority of their revenue. And if we do have a recession and they bleed customers, Salesforce can always reduce costs by cutting sales and support staff. The existing capital investments in the software are already paid-off. In comparison, WeWork's model is predicated on being easier to join and leave than a typical office space. As a result, they attract businesses with shallower capital reservoirs. Meanwhile, WeWork is holding inventory risk in that they hold the long-term lease or the property itself. So in the event of a recession their customer base will be the first to die out or cut costs via less desks and/or working from home. (WeWork may or may not be off-setting this risk via financial engineering but the question is at what cost as someone has to take the other side of the bet and the downside risk here is pretty obvious. And, oh look, the yield curve just inverted.) Finally, 10 years in, Uber is still a commodity business. I generally think Uber is better than Lyft and worse than Via, but none of their advantages are anywhere near as durable as a SaaS business. Don't like Ubers new prices? Don't like the the CEOs new haircut? You can use one of their other competitors starting tomorrow. Even if you use Uber today there is zero reason you can't switch to Waymo/Apple/whatever in the future. And in the worst case scenario, Uber paid CAC to educate consumers who will use something else in the future.

jameslevy 8y ago
Uber has network effects. It's definitely possible and inevitable even that they won't be on top anymore at some point, but what they are doing is not exactly a commodity if it relies on a dense two-sided marketplace.
- jhwang5 8y ago
  While it does have network effects, I'd argue it's not recession proof (mildly cyclical, even), and there's low switching costs to using other forms of transport (for example, I haven't used Uber in lieu of Lyft / driving my own car and had no issues)

cstejerean 8y ago

I’m not an accountant so I’m not sure if there are specific rules that would make this not applicable to SaaS, but the thing you describe is precisely what proper accounting is designed to solve. If you buy a factory this month and then use it to make widgets for the next 10 years you don’t show a huge loss when you buy the factory, but rather capitalize the cost and then depreciate it over the useful life of the factory so that in every period you can match the revenue with the associated costs. Shouldn’t customer acquisition costs be similarly capitalized over the expected life? If the company is actually profitable then it should show a profit not a loss. Any reason why this isn’t more common among SaaS businesses?

toasterlovin 8y ago
The big difference between a factory and customer acquisition costs is that the factory is an asset. It has enduring value. Customer acquisition costs do not. When you pay the customer acquisition costs, the money you spent is gone and non-recoverable. But you can recover some of the value of a factory by selling it.
- cstejerean 8y ago
  Plenty of things you can’t sell get capitalized, recoverability isn’t a particularly important aspect for capitalizing something.
  - jsmith99 8y ago
    At least under international GAAP, assets can only be capitalised if they are expected to deliver future economic benefits. This doesn't mean that they have to be sold directly - they can be internal benefits such as a building or a factory machine that makes it cheaper to produce goods.
    - cstejerean 8y ago
      Indeed, that’s what I was trying to say as well. The asset needs to have value to the firm in terms of future benefits but doesn’t need to be sellable on its own.

gamblor956 8y ago

A more succint way of explaining it is that WeWork is just a real estate company, and real estate is about achieving positive cash flow (rental income > lease or mortgage expenses), not "profits" since a lot of the profit comes from selling the appreciated properties down the line.

toasterlovin 8y ago
I believe WeWork leases their properties, which would make near-term profitability important.

Areading314 8y ago

Investments are not part of your operating income. Your income only consists of flows that accrue over time. If you make a $1200 investment, the expense associated with the investment is accounted for by spreading that expense over the lifetime of the asset. For a 20 year asset, this would become a $60 expense per year. It's not like it's a new thing that businesses need to invest to to acquire customers. The entire science/discipline of accounting exists to provide accurate metrics of business performance. Its ridiculous to say that "profits are a bad metric" because of this. Also, WeWork is not a software business, since they do not sell software. Why would those metrics apply here when all their money is made through leasing office space?

tfehring 8y ago
That’s the purpose of accounting in principle, but in practice GAAP financials are an incomplete measure of financial performance. In the instant that WeWork acquires a new customer, it realizes no additional income and no change in shareholders’ equity. But assuming its marginal revenue is higher than its marginal cost, the expected present value of its future profits is certainly higher than it was the instant before it acquired that customer.
- metalchianti 8y ago
  I may be wrong but I don't think that last statement is true if the lifetime of the customer/asset is short--especially shorter than expected. The business model seems too new and for me it hasn't proven itself viable.
  - tfehring 8y ago
    You’re right. Replace “marginal revenue/cost” with “marginal expected present value of lifetime revenue/cost” and that statement holds.
- Tyrek 8y ago
  In the immediate instance, no, WeWork does not recognize anything. But in its first month, rental income should exceed the month's depreciation for the same real estate. The fact that income has not kept up implies that occupancy is low. WeWork is fundamentally a real estate/leasing company, not a tech company.

acchow 8y ago

Why do you think Uber has a high customer acquisition cost?

ignoramous 8y ago

> For a typical software business, a pair of metrics that are much better than profit are CAC (cost of acquiring a customer) and LTV (the life time value of a customer) Andrew Chen, ex VP Growth at Uber, had a blog up on just this: https://andrewchen.co/how-to-actually-calculate-cac/ https://andrewchen.co/how-to-actually-calculate-cac/

thisisit 8y ago

Without looking at the actual accounting rules (GAAP or otherwise) used by WeWork it is difficult to say how the line costs are treated. In your example, you have treated $1200 as an expense. Lot of companies tend to capitalize these expenses (for example "deferred commissions" on Salesforce B/S). So, they will create a reserve on the Balance sheet of $1200, then decide on the useful life of the said expense and depreciate it on the P&L. Let's say WeWork thinks the useful life of the $1200 expense is 24 months. The calculation will work like this: P&L Month 0: Depreciation Expense 0, Revenue 0 and Profit 0 Month 1: Depreciation Expense $50, Revenue $100 and Profit $50 Month 2: Depreciation Expense $50, Revenue $100 and Profit $50 so and so forth BS Month 0 - Asset $1200 Month 1 - Asset $1150 (Depreciation $50) Month 2 - Asset $1100 (Depreciation of another $50)

mrweasel 8y ago

The issue I have with WeWork, aside from the fact that they're somehow a tech company, is that they have competitors that does the exact same thing... but who are profitable. You have a company like Regus, that's not a tech company, they have a MUCH low evaluation, but makes a profit and having more offices.

mgadams3 8y ago
My understanding is that they make some bullshit claim about how they have instrumented everything and that helps them to apply machine learning to their community and app, blah blah. It's def not a tech company but I could see them going that way eventually. BTW - the concept is "valuation", not "evaluation" :)
- mrweasel 8y ago
  > BTW - the concept is "valuation", not "evaluation" :) Oooh... thanks. This is one of those cases where I suddenly realise that I've been using the wrong word for year :-|
- deleted 8y ago
  [deleted]