WeWork became known for its rapid growth and exponentially appreciating valuation, and its equally fast race to the bottom, following the failed WeWork IPO in 2019.
WeWork does not meet any of the qualifications that enable a modern tech company to achieve exponential growth as well as winner-take-all profits – which they labeled themselves as during their IPO attempt – and it certainly doesn’t warrant a tech-type valuation.
WeWork is in reality a commercial real estate company that rents floor space from buildings for longer terms (an average of 15 years) then breaks these down and converts into shared office spaces, that they lease out to other smaller companies, or entrepreneurs, for shorter terms at higher rents (an average of 15 months).
Despite past experience, there have been claims by the CEO that the company will attempt another IPO again in the future. What will be different the next time around?
The Previous Attempt at a WeWork IPO:
In June 2019 WeWork was valued as high as $47 billion. Then on 14 August 2019 when WeWork publicly filed documents in preparation for the IPO, following issues became apparent:
- WeWork was burning very large sums of cash while its obscene valuation continued to decline. WeWork reported a net loss from operations of $429,690,000 for 2016, which increased to a whooping $1,610,792,000 in 2018.
- Its projections of the size of its market for shared office space was greatly overvalued. Faulty reasoning in estimating the market share was part of the overvaluation. For example, they defined anyone who worked at a desk in a US city as a potential member of the market, but in non-US cities, the estimate included anyone with an office job.
- The company presented itself as a Tech Company, instead of acknowledging what they really were: A commercial real estate company. The word ‘technology’ appeared 110 times in their S-1 prospectus, in their attempt to impose and justify a tech-company EBIDTA multiple.
- Cofounder and CEO Adam Neumann employing corporate governance practices that were questionable. For example, alongside excessive use of corporate funds he was paid $5.9 million by WeWork for the company’s “We” trademark.
Six weeks after the filing, WeWork was nearly bankrupt, the IPO had been called off entirely, Neumann was sacked giving up his majority controlling, and Forbes had named WeWork as the most ridiculous IPO of 2019.
Current Standing and Implications for Another WeWork IPO
Following the disastrous attempt to IPO and public ridicule, WeWork was nearly insolvent. It had to accept a rescue package (of approximately $10 billion) from Softbank its lead investor and single largest investor – increasing SoftBank’s holdings of WeWork up to 80%.
Both the CEO, Masayoshi Son, and the executive chairman of SoftBank, Marcelo Claure, admitted that WeWork can be viewed as a “foolish” investment. Ironically they are both still hopeful for a bright future, led by a ‘new’ management team.
On the 18th of February 2020, Sandeep Mathrani was chosen as the new CEO.
Mathrani has a history of turning around companies dealing with bad debt, so it seems more likely that WeWork will be steered towards a financially safe position under his leadership – not to mention he is an experienced real estate executive, making him well equipped to deal with the company’s main line of business: Commercial real estate.
To his credit, his immediate goal is to achieve positive free cash flow (actually becoming profitable) before attempting any funky gimmicks, like going public. It is only when the company is looking financially stable that a WeWork IPO can be taken seriously.
Marcelo Claure optimistically outlines:
“In order for WeWork to be profitable, we need to exceed 67% to 68% occupancy, and pre-pandemic we were at 80% to 85% occupancy, so all we need to do is come back to similar levels of occupancy.”
It also seems likely that WeWork will have a stronger chance of completing a (perhaps successful) IPO during an economic recovery that we will experience in the following years.
In sum, WeWork could have better luck in its next attempt at an IPO, as it is now run by seemingly more experienced leadership, instead of cowboys – and is actually focusing on profits, instead of dubiously mimicking Silicon Valley buzz word as “disruption” and “growth-hacking”.
However, if a company’s business model is only doing well half of the time (during economic upswings), is it then a good business at all?
Surely there will be a market for a WeWork IPO, but we simply believe there are many more fish out there.