Should co-working businesses be valued using similar metrics to as-a-service technology companies?
Shared office spaces in the UK and worldwide play host to many rapidly growing technology businesses built on the as-a-service business model. This model sees customers paying to use products and services in the cloud, rather than acquiring them outright. But should co-working itself be considered an as-a-service business, even though it’s a service model rooted in a physical location, and valued accordingly?
There is in fact a good case for thinking of flexible workspace in exactly that way. Tenants renting co-working space effectively “plug-and-play” their accommodation, hiring only the space they need when they need it, rather than committing to an extended lease for a fixed number of desks. That’s broadly analogous to the customer that buys, say, software-as-a-service (SaaS), paying only for a cloud-based tool as and when it is required.
Indeed, you might even think of the co-working space itself as the equivalent of the cloud. It’s a shared space in a central location, accessible by all those prepared to pay fees to do so and offering a broad range of tools and services that customers can choose to pay extra for, or not, as they see fit. And just like the cloud, flexible workspace offers a scalable and economically efficient proposition that enables customers to take more or less space as their needs fluctuate.
Thinking of co-working in this way isn’t simply an intellectual exercise – it also has fundamental implications for how investors value businesses in the sector. In the technology sector, SaaS businesses and similar ventures tend to be valued on the basis of their sales, rather than their earnings. One major attraction for investors in such businesses is the visibility provided by the recurring nature of these revenues, as customers pay regular license fees for the software that they’re consuming each month. Tenants that make equivalent recurring payments for their co-working space provide similar visibility in this industry, so perhaps investors should adopt similar valuation models.
In fact, that’s exactly what many investors do. Recent analysis from CB Insights majored on the $20bn valuation of WeWork, which has attracted some scepticism, though it’s based on the US workspace giant’s most recent fund-raising. It put the business on a price-to-sales multiple of 20 times, which is high compared to rivals but certainly not off the chart. By contrast, while providing a comparable price-to-earnings multiple is difficult since WeWork hasn’t published comprehensive up-to-date statistics on its profitability, it’s safe to assume the figure would be many times higher – and very high compared to conventionally-valued businesses.
Why should SaaS businesses or flexible workspace operators be given the luxury of a valuation based on revenue rather than profitability? Well, partly because of the visibility of sales their subscription-style business models offer to investors. But also because these are companies at an early stage in their development but growing rapidly – so measures of profitability give a misleading impression of their value given their fast-accelerating sales. CB Insights reckons WeWork’s revenues have risen by 88 per cent over the past year, for example.
This isn’t to say investors should only look at sales when valuing co-working ventures – simply that the SaaS valuation model provides a means for analysing these enterprises. And seen through this prism, valuations in the sector, seen as outlandish by some, start to look less fanciful.