In social terms, WeWork — recently renamed the We Company — is one of the modern world’s least controversial high-flying private startups.

Centered on the idea of providing flexible workspaces to individuals and small groups, the company has none of the myriad regulatory issues afflicting an Uber or an Airbnb. But purely considered as an investment case, WeWork is arguably the most controversial player in the world today.

The Wall Street Journal dubbed it “A $20 Billion Startup Fueled By Silicon Valley Pixie Dust” in 2017, outlining the thesis that a boring, unprofitable real estate company has managed to achieve the pricey valuation of a tech company. About a year later, the Financial Times took another stab at the story, concluding “WeWork Does Not Deserve a $20 Billion Price Tag.”

But rather than listen to the best minds in mainstream journalism, SoftBank, the controversial Japanese company that’s transforming Silicon Valley with its big Saudi-backed checkbook, poured in more money and lifted WeWork to a staggering $47 billion valuation.

In late April, WeWork filed papers stating its intention to be the latest in a string of big, money-losing companies to go public.

Several recent IPOs, meanwhile, have turned disappointing, with Lyft, Uber, and Pinterest all seeing share prices drop in the immediate aftermath of IPOs. To supporters, the fact that We has kept growing rapidly in the face of years’ worth of media disdain is just another sign that the media is paranoid about bubbles and dismissive of the extent to which huge swaths of the economy remain open for disruption. To critics, We is just the biggest sign that the current state of startup valuations is driven by shady accounting gimmicks and hype over substance.

Why customers like WeWork

A critical theme about WeWork is that it’s not “really” a technology company, which is mostly true, but it’s certainly a company whose business is boosted by big technological trends.

In particular, the relentless advance of information technology has made remote work and dispersed teams more viable than ever. But most people still enjoy having an office to work from and office facilities to use. And here’s where WeWork comes in. It started as primarily a “coworking” company that would lease out desk space and office facilities to individual freelancers or remote workers who wanted an alternative to working from home. But WeWork can also quickly spin up a whole satellite office for a company that decides it wants to open a branch office in Nashville or Columbus or Denver or wherever.

Historically, a midsize Chicago-based company that decided it wanted to hire a seven-person team to work in Washington, DC, would be looking at a laborious and annoying process of scouting potential office spaces. Thanks to WeWork, the company can quickly scout available spaces online and have its team set up with a little office inside one of WeWork’s locations within weeks.

What’s more, because each WeWork building features a bunch of shared amenities — printers, event spaces, coffee and water, facilities for nursing parents — the aggregate square feet per employee is lower than you’d have in a traditional office setting. WeWork has a strong national and even international brand for featuring hip, modern offices so stakeholders can feel reasonably confident about what they’ll be buying without doing an extensive search.

Best of all, WeWork is low-commitment. When you’re launching your seven-person DC office, you might expect it to grow to a 15-person team relatively quickly and hope it will grow to a 50-person team in the not-too-distant future. So do you bet on needing to lease space for 50 people knowing you’ll be wasting money while you grow into the space? Or do you lease space for 15, knowing that you’ll probably have to start the whole process over again? WeWork leases are short-term, so if you only need a small amount of space, you can lease a small amount of space, and if you need more space eventually, you can get it quickly.

This is all extremely convenient for customers and helps explain why The We Company has grown quickly — leasing more and more office space in more and more markets, renovating it, and then sub-leasing it to individuals, small businesses, and increasing big ones too. But just because something is good for customers doesn’t mean it’s a good business idea.

WeWork repeats a classic failed business idea

The basic concept of signing long-term leases on office space and then re-leasing them on shorter-term deals makes a certain amount of sense.

It works because in virtually all cases, the per-day cost of a short-term rental of just about anything is higher than the per-day cost of a long-term rental. Spending 365 days in hotel rooms would cost you a lot more money than a year-long rental of a comparably nice apartment. A three-year car lease is cheaper than hiring a rental car every day for three years. People who are renting things out like the certainty that comes with a long-term lockup — Airbnb rentals frequently offer a discount for stays that last longer than a week — while, on the flip side, renters value the flexibility that comes with short-term commitments.

For this same reason, the interest rate that a bank pays on a checking account (a zero-commitment loan made by the depositor to the bank) is always lower than the interest rate a bank charges on a mortgage (a fixed, long-term loan made by the bank to the homeowner). And obviously, it’s perfectly possible to make money off this kind of duration mismatch. Indeed, that’s what commercial banking is all about — profit is the gap between the interest the bank charges on short-term loans and the interest the bank pays on long-term loans.

But historically, the banking industry is associated with periodic “panics” and catastrophes because the business of borrowing short and lending long is inherently prone to collapsing whenever sentiment turns negative. That led to the modern world of deposit insurance and stringent regulation. Yet over and over again through history, whenever regulation has lightened up, smart finance guys invent new, less regulated ways of doing the same thing, periodically leading to new waves of blowups (savings and loans in the 1980s, subprime mortgages in the aughts), followed by new regulations.

This is essentially what WeWork’s core business amounts to. It signs relatively cheap long-term leases and then resells them as relatively expensive short-term leases. It’s true that WeWork offers some added-value services — design, meeting spaces, staffing, kombucha on tap — on top of that. But fundamentally, the profitability comes from that duration mismatch. But if there’s ever a downturn in the commercial real estate market (and sooner or later, there is always a downturn in the commercial real estate market), the shoe will be on the other foot. The price customers are willing to pay for short-term leases will fall (it’s a downturn, after all) but WeWork is going to be stuck paying the old long-term lease price.

Lots of businesses lose money in recessions, of course. But WeWork isn’t making any discernible provision for this eventuality. Real landlords try to lock up tenants with long-term leases precisely to maximize their ability to ride out recessions. WeWork, instead of doing that, is exploiting landlords’ desire to lock things down by leasing properties at affordable prices and then subleasing them in the short-term for higher prices. That effect transfers recession risk from the owners of office buildings to the owners of WeWork stock. But WeWork isn’t building up cash reserves that can help it ride out a recession — it’s borrowing money on bond markets. Instead, it’s losing money chasing growth — suggesting that the whole company would just go bust in a downturn. And some of the company’s new ideas may be an implicit acknowledgment that the underlying concept is unsound.

The We Company is moving into more conventional landlording

The We Company’s latest idea is to launch a $2.9 billion investment fund that’s going to purchase office buildings outright.

Buying and owning office buildings is, of course, a perfectly viable business to be in, though there’s nothing particularly innovative about it. The building investment vehicle, to be called ARK, is supposed to focus specifically on buildings in which WeWork is a tenant. Rephrased in the language of an exuberant press release, “ARK will focus on acquiring, developing, and managing real estate assets in global gateway cities and high-growth secondary markets that will benefit from WeWork’s occupancy.”

What’s more, ARK will “immediately stabilize assets by executing a proven pre-packaged business plan and will apply The We Company’s holistic solutions for real estate owners, based on The We Company’s established capabilities in sourcing, building, filling, and operating properties.”

That’s a mouthful, but the idea is kind of simple. Indeed, in some ways it’s simpler to explain than the original WeWork business model. Under the new plan, the We Company will both own office buildings (as ARK) and manage them (as WeWork) while making a profit, based on the theory that the company has expertise in understanding a unique commercial real estate segment.

This is a perfectly reasonable business plan, which has a healthy mix of being conventional enough to make sense (lots of companies own and lease office buildings) and unconventional enough to be a real opportunity (few companies offer WeWork’s exact mix of services). At the same time, owning and leasing office space is a pretty well-understood business, and it doesn’t seem to support the kind of super-aggressive valuation that the We Company has been given by investors.

Commercial real estate valuations are modest

Skepticism about the We Company’s lofty valuation is driven by skepticism not that the business model can work, but that even a successful version of WeWork would be a $47 billion company. Scott Galloway of NYU’s Stern School of Business famously called it “the most overvalued company in the world.”

Consider the not-very-famous European company IWG, which owns Regus, Spaces, and a handful of other flexible workspace brands. IWG has a solid business that is making money, a bunch of clients, and locations in many world cities. It’s also publicly traded, so its financial details are transparent and the value of the company is set by people buying and selling in the public stock market. That market has concluded that it’s worth almost $4 billion. That’s a lot of money, but it’s also a lot less than $47 billion.

A detailed analysis by Elaine Moore and Eric Platt for the Financial Times suggests that if you value the We Company by the same metrics as its better-established competitor, it should be worth something like $3 billion.

The difference, of course, is supposed to be growth. But while the We Company partakes of a lot of tech industry hype and cultural cachet, the reality is that to lease out office space, you need to acquire office space — and WeWork has upward of 10 million square feet under lease, making it the largest single tenant in several major markets. The tech growth ideal is to hit upon a business model like the ones enjoyed by Facebook or Google, where incrementally adding new customers costs you almost nothing — enabling you to convert losses into high profit margins. The core WeWork business does not appear to have this property. The company likes to cite a bespoke financial metric it calls “community-adjusted EBITDA.”

The way this works is they strip out all the expenses associated with the pursuit of growth and with the general cost of operating the central company — interest, taxes, depreciation and amortization, marketing, general administrative costs, executive compensation, development, and design — to try to show that if you just look at the ongoing cost of running a single WeWork office versus the revenue it generates, the company is making money.

This appears to be true. But it’s not entirely clear what it proves. Part of the attraction of WeWork to its customers, for example, is that leasing from them spares you the time and expense of the design and buildout process. For WeWork to then turn around and say that their sub-leasing business is highly profitable (if you ignore the design and building costs) seems to sweep aside the fact that incurring those costs is central to the business model. We Company executives urge journalists to distinguish between losing money and investing money in future growth. And that’s a fair point. But to assess it, you’d want to know what kind of return they are earning on their longer-standing investments — information that their financial metric obscures rather than illuminating.

But more fundamentally, while the principle of incurring financial losses for the sake of growth is sound, the reality is that to justify We’s lofty valuation, it would need to grow to somehow be about 10 times IWG’s size. And since office space is not exactly a brand new invention, it’s not clear why that would happen — something that We appears to be acknowledging with a grab bag of miscellaneous loosely related ventures.

The We Company is getting into a lot of stuff

Last year, We acquired a search engine optimization and marketing company called Conductor under the theory that Conductor’s services could be bundled with WeWork’s enterprise clients to provide a fuller set of business services. Earlier, WeWork acquired the longer-standing tech company MeetUp, an online platform people use to organize “in real life” get-togethers of people with similar interests. The theory here is that there’s a natural synergy between organizing groups of people who’d like to meet in a physical space and operating physical spaces where people can meet up.

We has also launched the WeLive brand, essentially a residential version of the WeWork concept.

The theory here is that WeWork’s expertise in real estate acquisition and management can transfer to short-term residential real estate and that the brand equity — essentially its image as a cool, premium brand — can also benefit WeLive.

The company is also launching a school for pre-K through fourth grade called WeGrow and runs a “learn to code” operation called the Flatiron School.

None of these ideas seems obviously ridiculous (well, except the preschool), but the sheer proliferation of ventures seems to suggest that the company’s executives share the skeptics’ sense that the core business proposition at WeWork is unsound. Viewed in one light, what you have is a wildly overvalued real estate leasing company that is flailing around, trying to take advantage of private markets’ excessive enthusiasm for anything tech-related in desperate hope of hitting on something that works.

The bull case for WeWork would, at the same time, need to point to these ventures not as flailing but as evidence that the skeptics are fundamentally misunderstanding the company. One could imagine running the numbers on Amazon as a fast-growing but money-losing internet bookstore and concluding that even if you bought the company’s pitch about a path to profitability, the valuation simply didn’t make sense compared to other successful book chains. The ultimate success of Amazon came not from “disrupting” the bookstore industry (though that did happen) but from fundamentally transcending it — becoming a much broader sort of conglomerate even without really becoming vertically integrated.

Even in retrospect, however, it’s hard to know how an observer 20 years ago should have distinguished Jeff Bezos’s aspiration to become an “everything store” from any number of other hyped-up dot-coms with charismatic founders and big dreams. And, indeed, Amazon nearly went bankrupt in 2000 and was only saved by a well-timed European bond sale that gave the company a valuable injection of cash just a couple of weeks before a stock market crash made it essentially impossible for startups to sell bonds like that.

Of course, just because Amazon became a huge success despite an initial business plan that didn’t seem to make sense doesn’t mean that every other high-flying startup with a business plan that doesn’t make sense will become an enormous success story. But it is true that the line between “overhyped startup nonsense” and “killer investment opportunity” is thinner than one might like. Most startups fail, most VC investments lose money, and there’s a reason for all that. At the same time, there’s a reason skeptical, cold-eyed business journalists never seem to strike it rich.