Is WeWork Becoming Past Tense?

October 21, 2019

The Future of WeWork After the IPO Announcement

In the summer of 2019, WeWork announced it’s IPO…what do recent events mean for the company’s investors?

When a company announces its IPO, it is often a time for jubilant celebration. It often means opportunity for company growth, stock options for employees, which can provide a greater vested interest in the company, and the potential for increased financial gain for board members. Not to mention an ROI for any early investors.

WeWork was surely no exception to this idea, when, as the We Company, an IPO was announced on August 14th, 2019. However, in less than six weeks, on September 17th, the company announced it was delaying the IPO.

So, what happened to the company that was seen as an innovative disruptor? WeWork was the company that was transforming how and where start-ups, entrepreneurs, sole proprietors and small businesses actually do business?

Private Problems Made Public on Heels of Public Announcement

Almost immediately, before the ticker tape even hits the floor, a company that has announced an IPO comes under intense scrutiny. From the press, potential investors, what happened in the dark is about to come to light, as the inner-workings of a business are now available to the public.

In the case of WeWork, this attention resulted in concerns of the leadership style and abilities of co-founder and CEO Adam Neumann, as well as how profitable the company really was and could be. While none of Neumann’s antics were illegal, for a company wanting to go public, such behaviors as discussing layoffs to then turnaround and serve employees tequila shots, may raise eyebrows. Even more eyebrows were certainly raised after his actions resulted in the We Company having to shell out nearly $6 million to trademark, “We”. That kind of expense being one that gives investors, particularly those awaiting their return on investment, pause.

On September 24th, not even two weeks after postponing the IPO, WeWork’s Boar of Directors announced that Neumann would be resigning his post as CEO of the co-working space empire. The job of righting the ship is now being led by Artie Minson and Sebastian Gunningham, who are serving as co-CEOs.

Neumann’s antics are not the sole reason for the concern over WeWork’s future upon the IPO announcement, however.

Not Valuing the Value

While WeWork claimed a $47 billion in the IPO announcement, the scrutiny into its actual value was beginning prior to August. It was reported by the Financial Times that the amount of money WeWork was losing was equal to $219,000 per hour, every day for a year. So, in 2018, even though the company’s revenue had doubled, so had its losses ($1.8 billion and $1.9 billion, respectively), making the company barely solvent. As more attention was paid to the financial realities of the company after the IPO announcement, WeWork considered restating its value at 50% less than the $47 billion initially stated, before ultimately deciding to postpone the IPO. There were also a number of financial irregularities in the information provided at the time of the August announcement, including:
• Incorrect data as to the number of working desks it had set-up in the first half of the year
• Unreported information regarding the company’s governance, including the then-CEO having seat on the board’s compensation committee

Additionally, the New York City real estate market is notoriously volatile and the Big Apple is home to the largest number of WeWork spaces, leaving the company vulnerable to the ever-changing market. Add to that the increasing concerns regarding the possibility of another recession, WeWork’s business model (leasing office space to startups and small businesses) may not be a smart bet in the eyes of many investors.

The culture at WeWork’s corporate offices, may be another factor as to why some investors are getting cold feet. While serving beer on tap during work hours and over-caffeinated coffee may seem like a great fringe benefit to the younger employees, more seasoned employees find the work-life balance to be more on life and less on work. Not only does it not bode well for employee retention, long-term, more old school investors may not like the idea of investing in what could be perceived as a frat house, something reminiscent of dot.com era before that bubble burst.

Questionable leadership, a shaky business model in equally shaky financial times and an immature corporate culture are all brining WeWork’s value into question.

What this Means for the Early Investors

While some of WeWork’s early investors have already seen their return on investment and gotten their money out, prior to the recent problems, plenty of investors still have a financial stake in the company.

Generally, an IPO means an opportunity to raise even more money as you can draw in new investors with the sale of stocks. The mismanagement and public image of WeWork is turning off potential investors, which may not bode well for the current investors who are still waiting to see their return on investment. An ROI that may now take even longer than expected, given the bad press that WeWork has been receiving in recent months.

The postponement of the IPO may even end up doing more harm than good, as well; should WeWork (as the company states it intends to) make another IPO announcement in the future, simple geography may work against it, as the SEC is now keeping a close eye on the New York City-based company, given it’s incomplete and questionable finances the first time around.

So, how are WeWork’s investors going to fare? Goldman Sachs CEO David Solomon insists he is not worried and that his firm is going to remain a loyal investor of the company, despite recent speculation that WeWork may be in need of a bailout, with J.P. Morgan and SoftBank in talks to provide a financing package. Depending upon the nature of the agreement, some investors (for example, SoftBank) may be okay. They may not turn a profit, but they probably won’t take a hit, either, due to protections known as ratchets.

A ratchet essentially guarantees an investor hundreds of millions of shares, should a company’s IPO value be lower than it was as a private company. Of course, this seems like a good deal, but the more shares you are giving to existing investors, the less you have to sell to new investors, and raising money is often the goal of an IPO.

Generally, these ratchets only result in a few million dollars worth of extra shares, which normally would not seem like much to a company that had been previously valued at nearly $50 billion. However, due to the size of SoftBank’s latest investment and the possibility of WeWork cutting their valuation in half, it would have made this ratchet the largest in history. Additionally, it dilutes the shares of the board members and employees. This not only creates a financial sting to those individuals, but it doesn’t do much for corporate morale, either.

Ideally, the new leadership at WeWork will learn some hard lessons in the aftermath of the failed IPO and the PR problems that have risen. Some areas to address include:
• Growing up; taking a look at the corporate culture
• Honesty; being more forthcoming with information
• Accuracy; ensuring that the data being provided is accurate
• Looking inwards; perhaps it is less about co-working spaces and more about flexible leases for startups, entrepreneurs and small businesses

If that happens, in time, WeWork may very well experience a resurgence; although, it may take time…given the recent backlash, many building owners and entrepreneurs alike, are not interested in doing business with WeWork. In that time, a possible re-brand may be in the best interest of WeWork, which could also position the company for a comeback down the road.

While Goldman Sachs and SoftBank seem confident in their belief that all will end well (the latter of course, will make it out okay, either way) other investors may need to take a good, hard look at what is going to be best for them: weather the storm, keeping their money where it is and hope they can recoup it a few years down the road, or cut their losses to ensure they are no longer tied to what is now perceived as a floundering business.

For those investors who are choosing to stay all-in, however, demanding greater transparency will have to be on the agenda.

Update:

On October 24, 2019, the Wall Street Journal reported that, despite the SoftBank bailout, Adam Neumann is being granted a four-year consulting deal. The aforementioned deal is worth $185M, and he can additionally sell up to $970M is his current shares to SoftBank.

Prior to his founding of WeWork, Neumann’s unsuccessful business ventures includes a collapsable high heel and a line of baby clothes.