JPMorgan is backing WeWork because of ‘Coase’s Law’
WeWork is tapping into a reversal of Coase’s Law that means companies today are plugging into open networks instead of keeping functions in-house. "Now we've got the interweb. Connectivity is so cheap and you can go out and externalise so many more corporate functions”, a JPMorgan analyst said. That "means a vastly different type of real estate. Big firms are opening up their networks because it's now cheaper to use the market and small firms don't need to grow."
One of WeWork's trendy flexible offices in Paddington, London. WeWork

The New York-based firm has attracted over $4.75 billion of funding to date and is worth over $20 billion .

A theory described by Nobel Prize-winning economist Ronald Coase explains why WeWork-style offerings hold so much appeal for the start-ups and growing firms.



LONDON — The rise of co-working start-up WeWork has been spectacular.

Founded in 2010, the New York-based firm has attracted billions of pounds worth of funding to date with its millennial-friendly offering of short-term leases, trendy spaces. The company is currently valued at over $20 billion, and there's also widely-rumoured IPO in the pipeline.

Reversing Coase's Law

One of WeWork's most prominent backers is JP Morgan, which led an early $150 million funding round in 2014 which saw the firm valued at $1.5 billion.

Speaking at a panel discussion hosted by commercial property agents CBRE in London on Tuesday, a JP Morgan analyst explained why WeWork-style offerings hold so much appeal for the start-ups and growing firms.

JP Morgan carried out research into the growing propensity for flexible workspace, and settled upon a law of economics called Coase's Law cited by Eric Schmidt, executive chairman of Google's parent company Alphabet, in his book "How Google Works."

Coase's Law, expressed by Nobel Prize-winning economist Ronald Coase, attempts to explain why big firms emerge, and it goes like this: Large firms emerged in the twentieth century because, after taking transaction costs into account, it was often more efficient to get things done within a firm, rather than contracting out on the open market.

"It was expensive to use the external market for transactions, whether it was getting pencils or accounting," the analyst said. "You had to go out and find a vendor, you had to search for reputation and price and negotiate. So you would internalise a lot as many functions as you could until the cost of doing it internally matched the external cost."

That environment meant the twentieth century was dominated by corporations that were big hierarchies or closed networks, which only worked with a tightly-controlled group of partners.

"What you do is you put that behind a big marble and glass lobby that basically says 'F off' to the world," he said. "You're not sharing. And if you look at big corporate office space, that's basically what it looks like."

That changed when the internet arrived.

"Now we've got the interweb. Connectivity is so cheap and you can go out and externalise so many more corporate functions. And there's people competing in each of those spaces, trying to improve and do it at a lower cost, so what firms are now doing is organising themselves for an open network."

That "means a vastly different type of real estate. Big firms are opening up their networks because it's now cheaper to use the market and small firms don't need to grow."

Analysts still have serious questions about WeWork's business model: when it launched in the UK, it ran at a loss, taking less in rent than it paid out for its leases, but its appeal is permanent.

"It's the reverse of Coase's law and I think it's a very powerful model for explaining why perhaps the demand side is permanent," he said.