WeWork, a loss-making company, was valued at an incredible $47 billion ahead of their initial public offering, which backers had hoped would rise to $100 billion. In the weeks leading up to their IPO, the inevitable implosion struck and the company has most recently been valued at $8 billion, making it one of the largest valuation comedowns in IPO history. What went wrong with WeWork, and more importantly, where do they go from here?
What is WeWork?
WeWork is an American commercial real estate company founded in 2010 by Adam Neumann. WeWork, a subsidiary to their parent company We Company, primarily deals with taking out long-term real estate leases and renting the space out to companies or individuals, whether it be an established business looking to expand or a start up company looking for a cheap place to set up shop. WeWork will lease full buildings or even just a floor or two in an existing office, converting it into small offices and workplaces, then rents to those looking for a place to work for cheaper than it would be for them to go on their own, all while having the resources available to run an office.
What is a loss-making company, and why would they file an IPO?
Often, a company will issue an IPO in order to raise capital to fund expansion, to help cover their losses or a host of other reason’s companies need capital. In this case, WeWork needs to find a way to fund their expenses and long-term liabilities, while maintaining sustainable growth. While this seems reasonable for them to do, the unreasonable thing is that they valued themselves at an exuberant $47bn despite burning through $150m-200m cash per year while showing no signs of recovering from their losses, ultimately running out of cash sooner than later. Since the release of their S-1 filing, investors have grown more concerned than ever, about whether WeWork is a growing, prosperous company, or a disillusioned loss-making company on the brink of bankruptcy.
Where did things go south for Neumann and Co.?
Only a few months ago, WeWork was dubbed as one of the top dogs in commercial real estate and the US’s most valuable “tech” start-up. Upon filing their IPO S-1, those dreams of being the face of the new age of real estate and leasing began to fade when the S-1 revealed many underlying risks of the company. Investors had many reasons to be skeptical of WeWork. To name a few, they’ve been in business for 9 years, and despite raising more than $12 billion since its founding, it has never turned a profit. The S-1 filing also states “Our business has grown rapidly, and we may fail to manage our growth effectively” and “We have a history of losses and especially if we continue to grow at an accelerated rate, we may be unable to achieve profitability at a company level for the foreseeable future”. These are just a few points among the many pages of risk factors in the S-1 filing. Not only does the company present issues, the founder and CEO Neumann is also proving to be quite the character himself. Neumann has been seen smoking weed on his private jet, serving tequila shots to employees after discussing layoffs, and forcing WeWork to buy the “We” trademark from him for $5.9m. These are a few of his personal bad habits that certainly don’t help the image of the company to investors. Neumann also cashed out of $700m worth of shares in the weeks leading up to his resignation and the scheduled IPO, raising concerns that he does not think the company will live up to the hype they’ve generated. On September 9th, WeWork’s largest key shareholder SoftBank, asked to put the IPO on hold, which was granted, and moved to October, but has since been delayed indefinitely.
Despite almost doubling their revenue since the year prior, it appears that as revenues grow, expenses follow suit. This is to be expected with any growing business, but maybe not quite to this scale. WeWork released that they have lost almost $900m in the first half of 2019, this is of course worrisome, but the fact that in the year 2018, WeWork reported that they accumulated a net loss of $1.9 billion which is up from the previous years net loss of $933.5m, indicates that WeWork is on a steady path to running out of cash. What could be causing these extreme losses? Expensive lease agreements are a major factor in causing WeWork to lose so much money. WeWork purchases long term lease agreements with landlords that can last for up to 15 years, which requires hundreds of millions of dollars to be paid up front for future rent. Along with these long-term lease agreements, WeWork also allows members to rent short-term for an average of two years to provide flexibility. What happens if these members decide to leave? Kathleen Smith of Renaissance Capital says, “The mismatch can be deadly in a recession. It means the company has got to be able to pay the lease costs. If for some reason there is price pressure, lack of renewals, cancellations, and they have a time where they’re not leasing out their space, that could be a very huge risk in a recession”. As we can see based of these findings, WeWork is running a massive risk of going bankrupt if they continue this trend of burning $150-200m cash per year.
WeWork has managed to change the way people see flexible office leasing and co-working offices, but now the pipe dream may be coming to an end, or is it? Despite the failure that is WeWork, and the slow but graceful decent of Adam Neumann with his $1.7bn golden parachute, Softbank still believes the dream can be salvaged. Softbank has taken majority control of WeWork following the buyout from Neumann and they plan to restructure the business, hoping to bring it back up to what they had previously envisioned. WeWork is a prime example of why investors should always be wary when it comes to new “tech” companies that do not produce new technology and to be mindful of herd mentality when it comes to exciting start-ups. Always do your research before jumping on the new and exciting bandwagon!