BY ROBERT CYRAN

WeWork Companies is into “co-creation.” Along with SoftBank, the hip shared-office provider is co-creating a rocketing valuation. The Japanese firm’s giant Vision Fund may inject more cash into the loss-making WeWork at nearly double its previous $20 billion worth. One test of the reality of the new figure – floated by Vision Fund boss Rajeev Misra this week – is how much money SoftBank puts where its mouth is.

WeWork is already sitting on $3 billion of cash and commitments, after a junk-bond offering in April raised over $700 million. That’s useful for renovating offices, hiring salespeople and subsidizing beer. The company is expanding at a breakneck pace, having more than doubled first-quarter revenue to $342 million, according to the Financial Times.

Yet rapid growth was already factored in. While WeWork’s ongoing operations should be highly profitable, with operating margins around 30 percent, expansion is costly. The company lost more than $900 million last year.

Upping WeWork’s headline value to $35 billion or more would suggest backers think it can grow faster and for longer than expected, or that its underlying business is even more profitable, or both. That’s asking a lot of a firm whose secret sauce is adding trendy touches to the mundane business of fixing up and renting out office space. The chance of a recession, or competition, don’t appear to be inputs in the WeWork spreadsheet.

It’s also a tactic among venture capitalist to ratchet up headline valuations based on the slimmest of new investments. The practice can reflect genuine improvements in the outlook, but it also creates financial buzz and averages up the paper value of prior bets. Success stories still pay off for everyone, but stumbles may create problems.

It’s harder to keep employees, for example, if equity grants are suddenly under water. And going public at a reduced valuation can kill momentum. It’s worth watching how much more SoftBank will inject into WeWork. If the company is changing the world – and this isn’t merely an exercise in valuation spin that will help both WeWork and the Vision Fund look good – the fund should inject as much capital as it can.

First published June 14, 2018

(Image: REUTERS/Kim Kyung-Hoon)