WeWork, the coworking space giant, is raising eyebrows with their debt-equity fundraising. They are flipping the script on how to bring a startup public because of increased investor wariness about “growth at any cost”. Only time will tell if it’s a successful risk. This bold move underscores a larger trend at hand – how the new class of unicorn startups is disrupting age-old industries. The Unicorn Class of 2019, according to Fortune Magazine, is led by New York-based startups Casper, Lemonade, and Glossier, which are disrupting e-commerce, finance, and media respectively. Here are our projections for the Unicorn Class of 2020 and what this means for the New York startup scene.
Valued at $4.15 billion, with sales exceeding 400,000 and revenue exceeding $700 million in 2018, Peleton had a hard time raising money in 2012. Investors were wary that the saturated fitness industry could use a new product. Undeterred by investor wariness, Peleton founder John Foley moved fundraising for his integrated exercise bike to Kickstarter, acquiring 297 backers and great PR. Behind the scenes, he was running on determination and trial and error. Foley innately understood the value of bringing experiential fitness to the home. As a busy parent himself, he understood that his demographic enjoyed the energy of fitness classes, but simply no longer had time for them. “He thought about the arcades of the 1980s that had all but disappeared because consumers soon found better video game experiences at home. In the same way, he hoped to bring a boutique fitness class experience into basements and living rooms everywhere.” (Sports Business Daily) Foley’s goal was to create a ground-breaking product that could provide an exceptional user experience, similar to that of Apple or Netflix.
The first Peleton bike was built from their 4–person headquarters near Penn Station, a neighborhood now deemed the tech hub for mature startups (Amazon’s new 200,000 HQ will open here). After a few iterations of building an integrated bike, Foley finally had the stamp of approval when fitness influencer Robin Arzon signed on.
There are three essential features that make Peleton’s $1,995 integrated bike and $39 per month subscription stand-out: 1. The convenience of a high-tech bike integrated with a video streaming tablet. Monthly updates are pushed through to the tablet so the user experience is always current. 2. Motivational expert instructors with large social media followings. The instructors create instant PR for Peleton and a high-energy, engaging experience for the users. 3.The social aspect of a studio class. Video streaming creates interactive energy, competition, and comradery. Currently, Peleton has 26 instructors and a user-base of one-million.
Peleton has already expanded its offering to include entry-level subscriptions ($19 per month for the Peleton app and $26 studio classes) and new verticals (interactive treadmill and meditation classes). In 2019 Foley filed confidentially for an initial public offering but is staying coy about the number of shares being offered. We’ll have to wait until 2020 to find out. In the meantime, Peleton has twice been named Crain’s fastest-growing company, posting a compound growth rate of 250% per year. Industry experts are confident that Peleton has changed gym and exercise manufacturing forever, already taking 7.3% of the market share and spurring copycat products. In 2020 Peleton will also take over its fair share of New York City, opening a 312,000 square foot office in the Penn Station neighborhood where it all began.
Founded in 2015, Away launched with a $250 four-roller hard-shell bag that comes in ten different colors. By 2017 Away was profitable with almost $50 million in sales. In 2019 they doubled their profit and valuation. Away is valued at $1.4 billion and is projected to achieve $700 million in revenue for 2019.
Their almost immediate success stems from a business model similar to Warber Parker and Casper: strong unit economics to ensure a profit on every order. It’s a welcome departure from loss-leading startups. Daniel Gulati, partner at Comcast Ventures, which contributed to Away’s recent $50 million Series C funding round explains “Away’s business model is, by definition, viable and sustainable. I can’t think of one high-profile VC failure where the startup was actually turning a profit.” Achieving such an efficient business model entails a shortened supply chain and direct-to-consumer sales. On the marketing end, founders Steph Korey and Jen Rubio use influencer marketing to target their millennial peer group. Statistics show that the millennial demographic values experience more than things, which Away’s founders inherently understood equates to more travel. The purchasing power and habits of the millennial demographic had largely been ignored (or misunderstood) by prominent travel companies.
In 2020, Away will expand its product categories and distribution globally; the U.S. market is only 20% of the $35 billion global travel industry. Their ultimate goal is to become a global travel platform, offering all the things one needs for traveling – they are calling it the Away “travel uniform”. Enhanced product offerings already include garment bags and larger suitcases for $450. In the travel “things” category, they rolled out a travel podcast (Airplane Mode) and magazine (Here). Category roll-outs for 2020 will include wellness, skincare, and travel apparel. By offering a complete travel uniform Away is solving the age-old conundrum of customer retention and new customer acquisition.
Away will need to increase its company size in order to support these expansion plans. Through Albany’s Excelsior Jobs Program, Governor Cuomo awarded Away with a $4 million tax break to support the growth plans. This puts Away in good company, former recipients include heavy-hitters Morgan Stanely, Vice, Buzzfeed, Business Insider, Macy’s and Etsy. The economic incentive underwrites that Away will remain headquartered in New York City and will add 249 jobs over the next five years. In 2020 Away will be taking over the travel industry from their new 56,000 headquarters, 0.7 miles down the street from their current one.
Valued at $47 billion, WeWork is no stranger to making headlines. Their core business is signing long-term leases with landlords, dividing the space into smaller offices, and sub-leasing to freelancers and startups for short-term leases. In less than ten years, WeWork has expanded from one location in New York City to 450 locations across 10 cities. They are the largest office tenant in New York City, Washington D.C. and London.
WeWork’s growth as the giant coworking space provider is astounding. They already amassed over 2.9 million square foot in New York alone. Adam Neumann, the larger than life founder of WeWork, however, does not view the company as a real estate disruptor. Neumann focuses on the community-based aspect of WeWork, defining it as a “physical social network”. The WeWork portfolio includes apartments (WeLive), schools (WeGrow) and wellness (Rise by We), all of which are heavily branded with the WeWork ethos.
Rapid expansion with rapid expenditure has yielded skepticism. In 2018 WeWork lost $1.9 billion on revenue of $1.8 billion. Skeptics wonder how this business model can be sustainable, especially if there is an economic downturn. Investors are wary that WeWork is based on short-term revenue agreements and long-term loan liabilities but does not own any property. To offset skepticism (and liability) WeWork is rapidly expanding the coworking vertical, introducing new product lines to the market. The hustle and grind startup demographic is still their core, but with the advent of HQ by WeWork and Powered by We, now they are also courting corporations, including 30% of Fortune 500 companies. Microsoft was an early adaptor, signing on to use Powerd by We for their Times Square headquarters.
Dave Fano, WeWork’s chief growth officer, believes that “in the long-term, companies won’t own and operate their own headquarters. Big firms will still want a splashy office in the urban core with a sign on top of the building. But why would you deal with the hassle of management and set-up, when WeWork and its competitors can achieve economies of scale and deliver a better experience for less money?”
It’s a risky move to mix the startups with the legacy companies; one is the antithesis to the other. WeWork though is not adverse to taking risks. Next up, the company plans to establish neighborhoods. The results of WeWork’s portfolio expansion and risky $4 billion debt-equity ahead of IPO will play out largely in 2020. All eyes will be on WeWork to see if they successfully flip the script for how to take a loss-leading startup public.
Workville’s boutique coworking space located in Midtown Manhattan is partners with the landlords. To learn more email email@example.com.