In January 2018, The We Company (which has a really sick website) raised money at a $47 billion valuation. Then reality struck. Institutional investors responsible for purchasing shares before the IPO have balked at such a high figure. This has forced the company to consider an initial public offering as low as $15 billion representing a massive write-down for SoftBank.
SoftBank has poured over $10 billion into The We Company since 2017. These investments have come through the Saudi-backed $100 billion Vision Fund, which 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. Interestingly, the Vision Fund touts impressive gains on paper by conducting internal reevaluations on private technology investments. In this way, their investments increase in value on paper without receiving open market feedback.
Talk about a soft bank… It has not been a fun 2019.
WeWorks. Our Business Model Does Not.
The sharply lower valuation for WeWork reflects concerns around the sustainability of their “innovative” business model. This model has thrived in a 10-year economic expansion. Investors are worried that the company 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. 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. They then offer short-term leases to startups and individuals. WeWork basically makes a profit on the spread between the two, after providing amenities.
That’s all great when WeWorks are full. They collect the difference in rent, providing staffing to WeWork tenants. WeWork also offers unparalleled networking opportunities. But:
- What happens in an economic downturn?
- Would the company stay afloat if people start canceling their subscriptions?
- How will WeWork compete with the dozen competitor co-working spaces that have emerged? Here’s what happens.
WeWork can’t cancel their long-term leases. In an economic downturn, they would lose clients. WeWork would be forced to take huge losses on largely-vacant, high-value properties. So while WeWork’s client list continues to grow, their potential losses are climbing in lockstep. This has investors concerned. What happens when the economy hits a downturn?
Call The Accountants (and Investor Relations)
No one knows WeWork’s fate. Few at SoftBank are eager to push forward with the IPO and take the write-down. They would prefer to delay the IPO for a later period: a period when Adam Neumann, the company’s CEO, can present a more sustainable path to profitability. Investors will be particularly interested how WeWork will fare in 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. That’s after burning $2.4 billion in cash in the first half of this year. Maybe the markets 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). At their current valuation, however, many investors will lose money. They’ll also experience severe dilution. Unfortunately, WeWork needs money.
In order to get money, WeWork would need to convince SoftBank to dive deeper down the rabbit hole. One catch: SoftBank may be souring on the investment.
BOTTOM LINE: There’s blood in the water for the We Company’s IPO. Their $669 billion junk bond fell below par last Tuesday. Yields surged to the highest levels since mid-August 2018. SoftBank’s eagerness to include investors in WeWork may have driven the valuation too high. Now they’re at an impasse.
The choice appears simple. 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. Unfortunately, reality isn’t that simple.
In case you missed it, check out our recent post about Starbucks investing in more than just a coffee shop
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