What happened to the WeWork IPO?
It had a $47 billion valuation, then a $12 billion valuation, then no IPO at all. What went so wrong for WeWork?
It was gearing up to be one of the biggest flotations of 2019. But now, after suffering blowback from an astronomical valuation and scrutiny over its structure, the WeWork IPO is being postponed indefinitely.
The New York-based company had turned heads for offering an innovative, dynamic service for small start-ups and fledgling entrepreneurs: co-working spaces. WeWork has opened, or is planning to launch, 837 locations in 125 cities — delivering an office environment for economy workers and young companies at a lower cost. With the internet transforming the way the world does business, WeWork has been heralded as the future of commercial real estate. Indeed, the plush interiors, boutique coffee counters and beer bars have even attracted multibillion-dollar tenants such as Facebook, Microsoft and Spotify.
WeWork IPO: what went wrong?
Such a forward-thinking approach and the modernity of its buildings would surely make it attractive for prospective investors. But in January 2019, the finance world spluttered on its coffee when the WeWork valuation was estimated at $47 billion — a sign of largesse that precipitated the dot-com boom. The WeWork valuation was subsequently slashed dramatically in September, to a much more modest range between $10bn and $12bn. This has been especially disastrous for WeWork investors such as SoftBank, which has already pumped $10bn into the business.
Concerns have been raised over the WeWork business model. Office occupants often benefit from short-term rental agreements, giving them flexibility, while WeWork is locked into long-term leases on the office spaces themselves. This has led analysts to worry about what would happen in the event of an economic downturn, when businesses fold and activities slow.
WeWork has also been hemorrhaging money. Billions of dollars have been spent on its global expansion and, although revenues quadrupled to $1.82bn between 2016 and 2018, it lost $700m in the first six months of 2019 in addition to $1.6bn the previous year. The company had even warned would-be investors in its IPO that profitability may not be achieved for the foreseeable future.
It isn’t uncommon for aggressively growing start-ups to burn cash. But how WeWork is spending its capital has prompted many investors to raise their eyebrows. One particularly unusual incident had seen the company pay $5.9m to an investment vehicle belonging to its own CEO for the right to use the word “we” in its trademarks.
The Adam Neumann problem
Adam Neumann, the billionaire who co-founded the company, has often been at the centre of the WeWork scandal. Alarm bells began sounding when the Wall Street Journal reported that he had actually taken $700m out of the business in the run-up to the now-delayed initial public offering. WeWork’s corporate structure was another headache as Neumann had so-called supervoting shares that gave him 20 times the power of ordinary shareholders. His wife, fellow co-founder Rebekah, was also set to be intricately involved in succession planning should Adam pass away.
All of this, when coupled with reports of eccentric behaviour, wasn’t really compatible with the prospect of a blockbuster flotation. There were claims that Neumann had smoked marijuana on a private jet, planned to live for ever and wanted to become the world’s first trillionaire. A damning insight into his management style emerged when a Wall Street Journal article alleged that shots of tequila were served to staff in 2016 — moments after they were told that 7 per cent of WeWork’s staff were going to be laid off. A performance by Run-DMC’s Darryl McDaniels had followed. Reports had also suggested that Rebekah Neumann ordered the firing of staff she didn’t like, minutes after meeting them for the first time.
To be fair, WeWork has grasped the nettle — making difficult decisions that are designed to assuage the fears of investors and smooth over a future IPO attempt. Adam Neumann has stepped down as CEO after admitting scrutiny towards him has become a “significant distraction” and he will now serve as a non-executive chairman. His supervoting powers have been diluted and any successor will be decided by the board of directors — meaning that responsibility now lies out of the Neumanns’ control. The $5.9m paid for the rights to use the word “we” have also been reimbursed.
All of these decisions are likely to inject greater levels of confidence into the WeWork IPO but disabuse yourself of the notion that concerns about its business model do not linger. It doesn’t help that investors have been bruised by the somewhat disappointing performance of Uber since its IPO earlier this year — another company that floated despite having no clear path to profitability. Uber share prices have tanked by more than 35 per cent since May, with a $5.2bn loss in the second quarter going down like a lead balloon among investors.
The markets are much wiser to unicorn flotations now, meaning WeWork will have its work cut out if it wishes to make a stock market debut. As things stand right now, plenty of turbulence lies ahead. The company recently announced plans to cut 2,000 jobs as it comes to terms with massive losses following its failed IPO — but it doesn’t even have enough funds to pay their severance packages.
It has also been reported that WeWork has accepted a $10bn (£7.7bn, €9bn) offer from SoftBank — a deal that would almost certainly mean farewell to chairman and co-founder Adam Neumann.