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Mumbai: The delayed listing plans and lacklustre demand for American co-working unicorn WeWork’s initial public offering (IPO) is expected to have a negative impact on the valuations of Indian co-working companies and their fundraising plans, investors and industry insiders said.
The We Co, as it is formally known, said last week that it was postponing its IPO to the year-end due to lack of demand from investors. The company expects a revised valuation of $15 billion, or two-thirds less than the $47 billion it was valued at earlier this year. Co-working has been one of the large themes in the last couple of years.
According to a note by real estate consulting firm Anarock, at the end of 2018, more than 400 co-working spaces were operating in India, and Anarock expects the number to grow three-fold in two years. Indian co-working firms such as CoWrks, Awfis, Smartworks and Oyo-owned Innov8, have generated strong investor interest.
For instance, while Awfis raised $30 million from private equity firm ChrysCapital and Sequoia Capital in August, CoWrks, backed by property developer RMZ Corp., is looking to raise $350 million, Mint had reported in March.
However, the valuations and fund-raising plans of co-working companies could be impacted, given the sharp fall in the valuation for US-based WeWork, which is seen as the pioneer and face of the co-working sector. WeWork has 23 co-working centres and 39,000 desks in India.
“If the largest global player in the sector takes a hit, it will definitely have an impact on valuations and how the sector is perceived,” said Ankur Pahwa, national leader, consumer internet, EY India.
According to the founder and CEO of a co-working company, who spoke on the condition of anonymity, in the past, startups in the co-working space had raised funding at valuations which were driven by an aggressively growing WeWork.
“The issue is that WeWork has driven and spearheaded the co-working model. Every business got valuations at the revenue multiples that WeWork got, but the IPO failure and valuation drop will let sanity prevail in the Indian market.”
While the valuation for these firms should be 2-3 times their revenue, these firms, led by WeWork, had raised money at valuations that were 15-20 times their revenue, a very steep multiple, he added.
To be sure, while the WeWork episode will have a negative impact on the sector in the short term, industry experts expect that over the long term, it will encourage companies to tighten their operations and focus on economics.
“There will be negative sentiment on the overall sector and that is unavoidable. Investors may be a little wiser now in terms of asking the right questions,” said Abhishek Goenka, CEO, CoWrks. However, he added that a lot of issues that have come up since WeWork filed for its IPO were very WeWork-specific, and does not reflect an industry-wide concern.
“The factors that have been discussed in the context of WeWork are very specific to WeWork’s business and governance. So, the way we read it is, no one is questioning the basic business model of co-working. That said, there will be short-term impact because WeWork is seen as pioneer and leader in the sector. However, the robustness of the business model is quite clear.
Many of the Indian co-working operators are profitable at the centre level,” he said. Industry experts also feel the WeWork episode could lead to tightening of capital supply for co-working startups, leading to more consolidation in the sector.
“Consolidation is happening... I feel there is a shortage of funds all across the startup environment. And with all the recent press around WeWork, good money is going to tighten up more,” said Harsh Lambah, country head (India), International Workplace Group (IWG), which operates co-working under the Regus and Spaces brands.
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