WeWork is betting on network effects in networking

WeWork has created network effects in a traditional real estate leasing business model that has allowed it to scale bigger and faster than its competitors.

The core product of WeWork is real estate space for small businesses, entrepreneurs and freelancers. For a monthly fee ranging from $45 to $450, WeWork provides office space, furniture, conference rooms, and various workplace amenities. Enter any of its 44 locations in the US and it’s pretty clear which type of tenant they are focused on acquiring. Amenities provided include large, open common areas with a variety of sitting options and cappuccino machines; arcade machines and ping pong tables; and outdoor patios and showers. Members can opt for a “traditional” cubicle office or a work station on an open floor with other tenants. With over 25K members across eight cities and three countries, WeWork is the hottest coworking space for the tech generation.

But as hip as its work space and furniture may be, a company with a typical office leasing model would be hard pressed to raise over $1 billion and get a valuation of $10 billion, which WeWork did in June 2015. At such a high valuation, WeWork and its investors are clearly betting on the existence of strong network effects in coworking and on the company’s ability to effectively harness those network effects.

A WeWork office in New York City. Source: WeWork

Direct network effects

The more tenants that rent space in a WeWork location, the greater the opportunities become for networking and meeting like-minded people. Small and medium-sized businesses are strapped for relationships, information and time. WeWork by the very nature of coworking provides a centralized pool of talent to alleviate these resource shortfalls, but it also works hard to increase the likelihood of their tenants harvesting this value by hosting frequent happy hours, inviting investors and tech professionals to hold informational talks, and providing members with an app with a directory and communication tool to facilitate interaction between tenants. Every location has a community manager to ensure interaction between its tenants, and a tenancy at WeWork is framed as a “membership”. Aside from the exclusive nature that in itself may of some worth to its tenants, the value of the mental and emotional support that can be derived from the community cannot be overlooked given the prevalence of mental health issues in entrepreneurs. WeWork’s dedication to community-building (and, thus, brand-building for itself) is best seen in its annual Summer Camp, a three-day music and networking conference in upstate New York.

Indirect network effects

WeWork has partnered with over 150 businesses, including Amazon Web Services, Zipcar, AT&T, etc. to provide benefits and discounts for its members. In May, WeWork announced a partnership with Chase to offer members discounted rates and premium services. Access to discounted health care and HR solutions are likely the most beneficial to small businesses. In such a way, WeWork has fashioned itself into a business services platform, and the more partners and benefits the company can negotiate for its members, the more valuable the company becomes for its members. Cross-platform network effects also exist in that the more users WeWork attracts due to the strength of its services, the more valuable WeWork becomes to its partners, thereby increasing its bargaining power over them. WeWork also operates an online blog called Creator featuring WeWork companies and members, as well as covering entrepreneurship-related topics. The larger the WeWork community, the larger the content pool grows for Creator and presumably, the more valuable the posts. In turn, growth of Creator could become more meaningful for the WeWork members as a marketing tool.

Will WeWork make this work?

On one hand, WeWork is well-positioned to take advantage of the new employment and job environment of today. Freelancing is more popular than ever before, with freelancers comprising over a third of the American workforce. According to the U.S. Small Business Administration, “the number of small businesses in the United States has increased 49% since 1982.” With factors that lend favorably to coworking, WeWork may succeed in building upon and creating inherent network effects to become a winner.

The challenge for WeWork is that unlike companies like AirBNB and Uber that leverages the fixed assets of individuals and enjoys greater indirect network effects, WeWork is on the hook for providing the buildings and maintenance services to its users. Moreover, a downturn in the economy is likely to hit WeWork harder given its small business tenancy.

Nonetheless, it is clear that WeWork believes in the power of the platform, shoring up a ton of capital and opening buildings across the globe at lightning speed.

Previous:

CoachUp: Developing Athletes of Tomorrow

Next:

TripAdvisor: A Network for Vacation Bliss

Student comments on WeWork is betting on network effects in networking

  1. This is a super interesting concept! Having never been an entrepreneur, I’ve always wondered what the dynamic between start-ups is like in terms of sharing resources — especially those vital to the success of your business like funding and mentorship/knowledge transfers. As you’ve outlined, the direct network effects that WeWork seems to be based on is that start-ups/freelancers are generally open to collaboration and the sharing of resources. I wonder how these social and professional dynamics play out in reality, and if competitive forces may eventually drive out more successful companies from this model in order to protect their own resources and assets.

    Regarding the indirect network effects, I agree this sounds like a pretty compelling platform for service providers hoping to capitalize on a large group of previously untapped customers. I wonder how WeWork prevents against these providers like Amazon, etc. poaching or building other types of direct relationships with the entrepreneurs/start-ups once they reach scale and may be able to tap affordable pricing outside of WeWork’s existing partner relationships.

  2. I didn’t know that WeWork had started offering other value-added services to its members, but that makes a ton of sense — there are pretty low barriers to entry to just providing a physical space (judging by the number of people on laptops in various coffee shops, I would stay that’s still the preferred free alternative), but making their platform more ‘sticky’ by adding other complementers is an interesting business move. You’ve identified fixed real estate expense as the largest business risk; could WeWork take on less of this risk somehow, and modularize the spaces it leases?

  3. I interned at a startup that worked in a WeWork location in NY over the summer. From my experience, I actually think that WeWork’s indirect network effects are stronger than the direct network effects. Even though the value proposition is that the co-working experience will foster collaboration between startups and a sense of community, in practice, startups strike me as a bit more insular. I found that startup founders and teams were a lot more preoccupied with getting their own businesses off the ground. Therefore, even though WeWork members are cordial with each other, the actual interactions, be it at mixers or on the app, are far more transactional i.e. “How can you help me with this one part of my startup I’m struggling with.” This is exacerbated by the turnover of startups located in a WeWork location and so investing in the relationships between different startups in a WeWork space may not yield the value that WeWork may be banking on. This part of the value proposition is weaker than WeWork’s provision of value-added services. The indirect network effects may be where WeWork should focus its energy in the hopes that in the medium to long run, these effects prove strong enough to weather some of the cyclicality described in the post. Great choice of company though! It will be super interesting to see where WeWork takes this.

  4. Interesting post! I have some concerns about the direct network effects of WeWork’s approach because it is inherently limited by physical space to the number of tenants they can fit in a location and the local talent in the area (in terms of startups and mentors/guest speakers). Introducing an online forum and member database, if they have not already, could create an exclusive social network that would help them grow the direct network effects of being a WeWork member. The indirect network effects of this model are fascinating and WeWork will likely attract more companies to their platform as they further their reputation as a start-up hub with the launch of its accelerator.

Leave a comment