Wework isn’t a tech company – it just dresses like one

The flotation prospectus that office space provider Wework submitted to the New York Stock Exchange last week contained an impressive display of linguistic acrobatics in making the company sound like a spiritual movement, and not a business that leases desks.

But perhaps the most telling in the 220-page document was Wework’s claim to be selling “space as a service”. The phrase is used 40 times in the stock market document, and is central to justifying the $47bn (£39bn) it has been privately valued at.

“X as a service”, describing a trend towards something being rented rather than sold, is one of Silicon Valley’s favourite phrases. Companies like Adobe and Microsoft once sold us Cd-roms containing a computer program; today they sell “software as a service”: charging us a monthly fee to access those same programs over the internet.

Businesses used to buy expensive computer servers to store and process their data; now “infrastructure as a service” lets them rent out server space from an enormous Amazon data centre hundreds of miles away.

The business model is one of the tech industry’s most successful: revenue comes in monthly, and customers pay more as they grow.

So it is unsurprising that Wework might want to piggyback off the phrase. “Space as a service” certainly has a better ring to it than “Renting out offices and subleasing them to start-ups at a slight markup”, which is how one might describe what the company does in layman’s terms.

Wework is hardly unique in succumbing to the lure of thinking it’s

a tech company. Beyond Meat, the vegan meat substitute company that has been one of the year’s hottest flotations, talks about its “plant-based beef, pork and poultry platforms”.

The founders of Sweetgreen, a San Francisco-based salad chain, said in an interview last year that it will be “more than just a restaurant … evolving into a food platform”. Others such as Blue Apron (meal kit delivery) and Stitch Fix (clothes shopping) have also been valued, at times, like tech companies.

Being perceived as a tech company has clear benefits: tech stocks tend to command significantly higher earnings multiples than those in other industries, and investors are more willing to put up with continuing losses and an absence of dividends. So it is unsurprising companies that are not traditional tech firms might want to position themselves in this way.

In a sense, the question of what is and isn’t a tech company is meaningless. No company is immune from the changes brought by the internet, the smartphone and automation. Major oil companies, supermarkets and banks all have thousands of people working on software. As does Wework.

But in another way it does matter. Tech companies command the valuations they do because of their enormous profit potential. Typically, they are characterised by high fixed costs, largely research and development costs, but low variable ones: the iphone might be expensive to design, but it is cheap to manufacture. Thus, each additional gadget Apple sells is extremely profitable. This is even more true of companies such as Google, which spends billions on developing its search algorithm, but little on actually delivering search results to each additional user.

It is hard to see the same being true of Wework. As the company’s listing document details, by far its biggest cost is renting and operating the office space that its tenants occupy. And unlike a piece of software, which costs the same to its creator whether it sells one copy or a million, Wework’s costs grow as its revenue does. Despite its revenue roughly doubling in the first half of this year, its “contribution margin” – a measure of the profit from each additional tenant, fell from 12pc to 10pc. The tech companies that Wework is trying to rub shoulders with tend to enjoy margins several times higher than that.

Add in all of Wework’s other costs, and the company made a $900m loss in the last six months. It is an eyecatching figure, but losses on their own should not trouble investors: many companies grow out of them. Wework may do the same, but it seems unlikely to ever do so with Silicon Valley-style margins.

If its float is a success, more companies may try to convince investors that they are tech companies, rather than merely dressing like one. It is not a tactic that should be rewarded.

‘By far its biggest cost is renting and operating the office space that tenants occupy’