Office-sharing startup WeWork, owned by The We Company and in partnership with major backer, SoftBank Group, is pressing ahead with plans to go public in spite of lukewarm interest for shares which many claim are overvalued.
In January 2018, The We Company (which has a really sick website) raised money at a $47 billion valuation, however, institutional investors responsible for purchasing shares before the IPO have balked at such a high figure, forcing the company to consider an initial public offering as low as $15 billion.
That means that major investor, SoftBank, which has poured over $10 billion into The We Company since 2017 through a Saudi-backed $100 billion Vision Fund, would have to write down the entire investment as a major loss.
This is the same Vision Fund that saw negative returns on both the Uber and Slack IPOs, which was interesting since the Vision Fund touts impressive gains on paper by conducting internal reevaluations on private technology investments they’ve made. Basically, they get to say their investments increase in value without receiving feedback from the open market.
Talk about a soft bank… It has not been a fun 2019.
WeWork. Our Business Model Does Not.
The sharply lower valuation for WeWork reflects concerns around the sustainability of their “innovative” business model, which has thrived in a 10-year economic expansion, but may find itself on the wrong end of a mismatching of long-term liabilities and short-term revenue if the economy falters.
When WeWork launched, it was lauded as a brilliant idea to create swanky, yet affordable co-working spaces. And for many, the business side was also brilliant. The company signs long-term leases for underutilized real-estate, rehabilitates and partitions the space into communal and private offices, and then leases this space to startups and individuals. Because they sign long-term leases, they are able to lock in favorable rent that smaller companies couldn’t afford and could then charge a spread to make a profit.
That’s all great when WeWorks are full. They collect the difference in rent, providing staffing to WeWork tenants, and offer unparalleled networking opportunities, but:
- What about in an economic downturn?
- What about when people start canceling their WeWork subscriptions?
- What about UpWork, Novel, or the dozen competitor co-working spaces that have emerged?
WeWork can’t cancel their long-term leases and would be forced to take huge losses on largely-vacant, high-value properties. So while WeWork’s client list continues to grow, their losses are climbing in lockstep and everyone is concerned: what happens when the economy hits a downturn?
Call The Accountants (and Investor Relations)
So now? No one actually knows. Few at SoftBank are eager to push forward with the IPO and take the write-down, versus delaying the IPO for a later period when We Company CEO Adam Neumann can find a more sustainable path to profitability during an economic downturn or in a high-interest rate environment (if there’s ever going to be one of those again).
WeWork wants to raise between $3 to $4 billion in an IPO after burning $2.4 billion in cash in the first half of this year. Maybe we need to teach them a thing or do about successful budgeting?
Unfortunately, when you spend $2.5 billion every 6 months, you don’t have many choices. WeWork can choose to sell shares through an initial-public-offering (IPO), but at their current valuation, many investors will lose money and experience severe dilution. WeWork could also wait, but they need money.
In order to get money, WeWork would need to convince SoftBank that it’s worth diving deeper down the rabbit hole, and insiders at the firm say that many are souring on the investment.
BOTTOM LINE: There’s blood in the water for the We Company’s IPO as their $669 billion junk bond fell below par last Tuesday with yields surging to the highest levels since mid-August 2018. SoftBank’s eagerness to include investors in WeWork may have driven the valuation too high and now they’re at an impasse.
IPO, get the money, but sell a huge portion of the company on the open market; or wait, negotiate additional capital from SoftBank, firm up the business model to make it more palatable to Wall Street.