ALL THE WE COMPANY NEEDS NOW IS ENLIGHTENMENT

StickyIntroduction

BY RICHARD BEALES

The We Company’s prospectus for its flotation said its mission was “to elevate the world’s consciousness.” Having now abandoned its stock offering and its shamanic leader, the parent of shared-office provider WeWork has at least understood that self-realization is integral to that calling. But it needs more than greater awareness to ensure its survival.

The New York-based outfit’s investors, including Japan’s SoftBank and its Saudi Arabia-funded Vision Fund, have also cut loose the once revered chief executive, Adam Neumann. His barefoot, weed- and tequila-fueled charisma made him the kind of figure venture-capital investors love to back – until they don’t. In private funding rounds, WeWork’s value ballooned to $47 billion.

Some investment banks involved in the initial public offering pitched possible valuations that were much higher. It wasn’t to be: Investors balked at the company’s private-market worth, half of that figure, and half again, before the operation was formally aborted just this week.

Aside from the increasing frequency of reports about Neumann’s weird behavior and self-dealing, they may have taken the unimaginative but realistic view that WeWork was a heavily money-losing real-estate company – a trendier version of IWG, the profitable but mundane Regus operator – rather than a consciousness-elevating technology play.

Newly named Co-CEOs Artie Minson, the former finance chief, and Sebastian Gunningham, previously vice-chairman, have already decided to offload some sideline businesses, dramatically slow WeWork’s previously headlong growth, and get rid of Neumann’s top acolytes. Their challenge will be to show that the company can, in time, turn a profit.

That’s more than a nice-to-have. A Breakingviews calculator showed that even using generous assumptions, WeWork could burn through another $15 billion within a few years. The IPO was supposed to raise at least $3 billion, and that would have unlocked another $6 billion in debt. Minson and Gunningham will still need to raise billions, even on a less aggressive trajectory.

A new Breakingviews e-book recaps how they got here – and some of the consequences. Only future chapters will conclude whether The We Company really managed to change the future of work or became the poster child for the private-market boom and bust.

First published Oct. 2, 2019

(Image: REUTERS/Kate Munsch)

Table of contents

WeGrow: The pre-IPO trajectory
WeHype: Silicon Valley’s inflated valuations
WeInvest: SoftBank’s vision
WeCompete: Profit, not promises
WeFlop: The IPO debacle
WeRegret: The aftermath

WEWORK STRETCHES SHARING-ECONOMY VALUATIONS

WeGrow: The pre-IPO trajectory

BY ANTONY CURRIE

WeWork is stretching valuations for the sharing economy. The American provider of groovy office space to millennial workers is now worth $10 billion after its latest private funding round, doubling in just six months. The company is growing fast, but would have to boost earnings 15-fold to justify its worth, using more established rivals’ metrics. That’s wishful-thinking growth.

The business model is pretty internet 1.0. More self-employed people want an office besides Starbucks to work in. And more companies want the flexibility of housing smaller satellite offices in what may be temporary locations. Others just want an alternative to what WeWork executive Miguel McKelvey described at a recent conference, reported by Bloomberg Business, as offices “full of these soul-crushing acoustic ceilings, and crappy gray carpets, and draining environments with fluorescent lights.”

Throw in free beer in the commons space and the social and business networking opportunities of sharing an office, and the appeal is easy to understand for the new generation of millennials, who are set to become the largest cohort of American workers. It fits in with their belief that in a few years’ time, co-sharers will jump into driverless, Tesla-built Uber-engineered pod-cabs to get to work.

But WeWork remains, despite all the millennial fairy dust, a real-estate company that makes money on the difference between what it pays for its leases and what it charges for rent. The most obvious business-model rival is Luxembourg-based Regus, which currently trades at around 13 times estimated 2016 operating income, according to Thomson Reuters data. Applying that to WeWork’s valuation suggests it would need $764 million of operating earnings, 15 times what it made last year, according to figures in the Wall Street Journal.

That drops to just under a 10-fold increase in earnings using Boston Properties numbers. But this, the largest of the more traditional commercial real-estate firms, sports an estimated 36 percent operating margin for 2016 compared to Regus’s 8.5 percent. That reflects the economies of scale its size affords, as well as the more stable revenue it garners from larger, longer-term leases on property it owns.

WeWork – even Regus – are unlikely to match that. There’s clearly demand for the service they provide, but for all the talk of the sharing economy and free beers on tap, there’s not much going on but the rent.

First published June 26, 2015

(Image: REUTERS/Mark Makela)

WEWORK LABORS TO KEEP ITSELF LOOKING DIFFERENT

WeGrow: The pre-IPO trajectory

BY ROBERT CYRAN

WeWork’s constant labor is to keep itself looking different. The shared-office provider’s latest purchase is Meetup. The social network’s real-world get-togethers might fill WeWork’s hip office space at slow times. But like investing in a wave-pool firm, starting a school and opening a gym, the consistent theme is doing pretty much anything to avoid looking like a real-estate firm.

Meetup helps hobbyists and other groups organize online and then get together in real life. Since meetings usually happen outside business hours, establishing WeWork as a default location is a potentially clever way to use space more intensively, increasing profit. Yet a joint venture – or several – might have offered similar benefits for less money.

This points to the broader motive. WeWork said earlier this year it is running at about breakeven in EBITDA terms and hopes monthly sales will reach an annualized rate of $1 billion by the end of 2017. That’s admirable for a fast-growing firm, but rival IWG, which runs Regus, is valued at about five times estimated EBITDA. WeWork’s valuation – roughly $20 billion after its latest funding round – depends on being something more than a traditional real-estate player.

To that end, WeWork heavily promotes its image as a purveyor of an ambitious, hip and tech-savvy lifestyle. Stylish décor and microbrew beer on tap are just the start. The firm has also established flexible apartment-rental buildings (WeLive), a gym with a spiritual bent (Rise by We), an apps and services store (WeWork Services), and even a school for budding entrepreneurs aged three to nine (WeGrow).

An investment in a wave-generating equipment maker and a recent deal to buy the classic Lord & Taylor building in Manhattan for $850 million are in the same vein, although perhaps more perplexing business decisions. Perhaps some of these, like Meetup, can bring to WeWork’s offices both services and a quality that’s hard to measure with mere financial calculations. That’s the trick the company has to pull off if it wants to be a New York tech upstart, not just another Big Apple-headquartered property play.

First published Nov. 28, 2017

SOFTBANK AND WEWORK CO-CREATE ROCKETING VALUATION

WeGrow: The pre-IPO trajectory

BY ROBERT CYRAN

WeWork Companies is into “co-creation.” Along with SoftBank, the hip shared-office provider is co-creating a rocketing valuation. The Japanese firm’s giant Vision Fund may inject more cash into the loss-making WeWork at nearly double its previous $20 billion worth. One test of the reality of the new figure – floated by Vision Fund boss Rajeev Misra this week – is how much money SoftBank puts where its mouth is.

WeWork is already sitting on $3 billion of cash and commitments, after a junk-bond offering in April raised over $700 million. That’s useful for renovating offices, hiring salespeople and subsidizing beer. The company is expanding at a breakneck pace, having more than doubled first-quarter revenue to $342 million, according to the Financial Times.

Yet rapid growth was already factored in. While WeWork’s ongoing operations should be highly profitable, with operating margins around 30 percent, expansion is costly. The company lost more than $900 million last year.

Upping WeWork’s headline value to $35 billion or more would suggest backers think it can grow faster and for longer than expected, or that its underlying business is even more profitable, or both. That’s asking a lot of a firm whose secret sauce is adding trendy touches to the mundane business of fixing up and renting out office space. The chance of a recession, or competition, don’t appear to be inputs in the WeWork spreadsheet.

It’s also a tactic among venture capitalist to ratchet up headline valuations based on the slimmest of new investments. The practice can reflect genuine improvements in the outlook, but it also creates financial buzz and averages up the paper value of prior bets. Success stories still pay off for everyone, but stumbles may create problems.

It’s harder to keep employees, for example, if equity grants are suddenly under water. And going public at a reduced valuation can kill momentum. It’s worth watching how much more SoftBank will inject into WeWork. If the company is changing the world – and this isn’t merely an exercise in valuation spin that will help both WeWork and the Vision Fund look good – the fund should inject as much capital as it can.

First published June 14, 2018

(Image: REUTERS/Kim Kyung-Hoon)

WEWORK NEEDS PATH TO PROFIT, NOT ENLIGHTENMENT

WeGrow: The pre-IPO trajectory

BY ROBERT CYRAN

WeWork seems to be on a path to enlightenment, when what it needs is one toward profit. The cash-burning office-share outfit – dubbed “The We Company” as of Tuesday – wants to “elevate the world’s consciousness.” SoftBank is investing $2 billion more in the company, some at an eye-watering valuation. But that’s far less than an injection of up to $16 billion, on the table last year according to the Financial Times. WeWork broadening its ambitions as its backers shrink theirs is risky.

It’s one thing for Alphabet to pursue quixotic goals such as providing broadband via balloon or fighting biological aging. Shareholders can forgive a $727 million loss on the company’s many wacky bets in the third quarter of 2018 because the Google advertising juggernaut provided about $9.5 billion of profit in the period. WeWork doesn’t have this luxury. It lost $1.2 billion on $1.5 billion of revenue over the first nine months of 2018.

Most of the revenue and losses come from renting out office space. While the company could stanch much of its bleeding by stopping expansion – it pegs operating margins at about 30 percent in established buildings – that would make it very hard to justify the $47 billion valuation attached to part of SoftBank’s new investment. Hence WeWork’s breakneck expansion in new offices, and into new fields.

The We Company’s separation of offices (WeWork) and residential units (WeLive) is sensible enough. A third bucket, called WeGrow, is a convenient place to put everything else, including a lifestyle business, an elementary school, a coding academy and an online meetup service. It does introduce greater clarity, perhaps allowing potential partners to pick and choose more easily.

But that advantage is undone by the goals laid out by co-founder Adam Neumann. “WeWork’s mission is to create a world where people work to make a life, not just a living; WeLive’s mission is to build a world where no one feels alone; and WeGrow’s mission is to unleash every human’s superpowers.” Skeptics can be forgiven for interpreting this as throwing pretty much any spaghetti at the wall to see what sticks – when WeWork could instead be planning for when there are no more SoftBank dollars to burn.

First published Jan. 8, 2019

WEWORK OFFERS GLIMPSE OF CONFLICTS TO COME

WeGrow: The pre-IPO trajectory

BY ROBERT CYRAN

WeWork offers a glimpse of conflicts to come. The shared-office upstart and potential initial public offering candidate rents buildings part-owned by co-founder and Chief Executive Adam Neumann. Private-company trends arguably encourage such blurred lines, but public investors tend to distrust them. It’s another reason to doubt WeWork’s high-rise valuation of $47 billion.

Such conflicts exist at public companies, of course. A decade ago, Chesapeake Energy founder Aubrey McClendon neglected to tell investors he ran a hedge fund from company offices and had borrowed over $1 billion using well stakes the company granted him as collateral. Blurred lines with charismatic founders live on. Oracle spent $1.3 million last year at tennis tournaments owned by Larry Ellison. So imagine how bad potential conflicts could become as private companies grow bigger and stay private for longer, with founders in even tighter control?

The underlying dynamics are similar. Founders with big stakes can pack or influence the board. Outsiders can be reluctant to second-guess creators of such wealth. Friendship can erode independence.

Private ownership fosters conflicts in other ways too. The standards of disclosure are lower, allowing more to slip under the radar. And private investors, especially venture capital, can be nonchalant or worse about blurred lines. It’s not uncommon, for example, for VC firms to invest in firms founded by employees. As the joke goes when evaluating prospective startups, “no conflict, no interest.”

WeWork is rather typical. While the board and an independent committee okayed the transactions, Neumann has fueled the outfit’s fast growth and controls about two-thirds of the vote. He’s one distinguishing factor of a company with an easily copied business model. As Neumann put it in an interview with Forbes, “Our valuation and size today are much more based on our energy and spirituality than it is on a multiple of revenue.” This may be a ridiculous way to value a company, but there is something about Neumann’s charisma that attracts investors and pumps up WeWork to such heights.

In theory, impending IPOs should bring greater transparency and controls, and minimize such tensions at WeWork and its brethren. But the proliferation of supervoting stock to entrench charismatic founders means less accountability – and more conflicts.

First published Jan. 23, 2019

(Image: REUTERS/Brendan McDermid)

WEWORK DEBT PLAN VEERS INTO CIRCULARITY

WeGrow: The pre-IPO trajectory

BY RICHARD BEALES

WeWork’s financial arrangements are becoming like one of its crowded shared-office spaces. The provider of hot desks and the like may borrow up to $4 billion before its planned initial public offering. Maybe adding to its pot of cash will make the money-losing firm’s path to profitability more credible, and so attract yet more cash. But that logic has big flaws.

The company, backed by Japan’s SoftBank and valued at $47 billion in its last private funding round, is working with Goldman Sachs, JPMorgan and others on a potential debt facility, according to news reports. The structure would be funded with payments from buildings that make money, effectively securitizing future cash flows – and it could increase to $10 billion over time as more sites are added.

The interest rate would probably be less than the 7.9% WeWork pays on the roughly $700 million of traditional junk bonds it sold last year. The idea behind the new facility is that the company, which lost $1.9 billion last year, will have extra cash to fund its rapid growth. Some potential IPO investors may take comfort in a higher level of available and committed cash, a tally that stood at just under $6 billion at the end of March.

Yet sharp, broad-based real-estate downturns do happen even if WeWork, founded in 2010, hasn’t lived through one yet. Any potential investor in the company’s stock should worry that the best of its assets might already be in hock to lenders like Goldman Sachs and JPMorgan.

Moreover, there’s a Panglossian circularity to the funding argument: WeWork loses money because it’s investing in growth; that requires cash; so the company borrows money to boost its pile of greenbacks; as a consequence, investors should be happier giving it still more. The disconnect is that profitability may only come – if at all – when growth slows dramatically. And providing extra funding to expand is at least as likely to defer breaking even as to achieve it.

A big, expandable debt facility gives WeWork breathing room to delay its IPO until the market timing seems right. That flexibility is valuable to the company. The benefit for potential new shareholders is less obvious.

First published July 8, 2019

WEWORK GETS COMPLEX, BUT ITS PROBLEM IS SIMPLE

WeGrow: The pre-IPO trajectory

BY ROBERT CYRAN

WeWork is getting more complex as it readies for an initial public offering, but its central problem remains simple. The shared-office firm has set up a unit to buy buildings it can then let out to its customers. It’s a way to hedge against rising lease costs and cash in on WeWork’s supposed halo effect. If tenants prove fickle or demand subsidies, though, the benefit of owning property only goes so far.

Right now WeWork is in a state of high growth, and high cash-burn. Its revenue rose 106% last year to $1.8 billion, as its net loss more than doubled to $1.9 billion. The idea is that while it’s costly to renovate space and find tenants to start with, buildings then generate substantial operating profit – with a margin of perhaps up to 30%.

Its new unit, called ARK, will roll up existing investments in real estate, including those by private-equity firm Rhone and WeWork co-founder Adam Neumann, and add an injection of $1 billion from a unit of Canadian investment firm Caisse de depot et placement du Quebec. The structure is intricate, with separate funds and special purpose vehicles, according to a person familiar with the situation. There’s obvious room for conflict: If real estate rates fall in a city, WeWork will want to reduce leases, but ARK may have other ideas.

There are advantages too. WeWork can buy buildings it likes rather than offering only spaces that were available for long-term leases. If its hip offices lure other tenants into the building then it can reap the benefit of higher rents paid by occupiers who aren’t direct customers. And the ability to sell a building may be useful if WeWork needs money.

Would-be investors also have a new form of spin to watch out for in the IPO. Previously the company’s “total addressable market” was office rental. Now it includes owning and managing buildings. The risk of being distracted by unhelpfully large numbers just increased.

The main challenge for WeWork hasn’t changed, though. Many of its expenses are locked in for the long term, but much of its revenue isn’t. And tenants benefit from goodies like rent discounts, which could get used more liberally if the market becomes more competitive. If renters demand better terms, decamp or go broke, then WeWork will face problems, whether it part-owns its properties or not.

First published May 15, 2019

UBER AND LYFT RACE TO GET THROUGH OPEN IPO WINDOW

WeHype: Silicon Valley’s inflated valuations

BY ROBERT CYRAN

Uber and Lyft are jockeying for pole position to get through the window for initial public offerings while it’s open. The ride-hailing companies have made confidential filings for deals that could value the former at up to $120 billion and the later at more than $15 billion. Yet the frightful experience of Moderna, which plunged nearly 20 percent in its first day of trading last week after the biggest float ever in the biotech sector, shows demand for cash-burning firms is limited.

Uber has grown absurdly fast thanks to plentiful private capital. It had nearly $13 billion in gross bookings in the third quarter, about a third larger than the same period a year ago. Yet it lost $1.1 billion in that period. It is locked in a fierce competition with Lyft in a bid to prove that heft in the disruptive young business will eventually produce outsized profits. Until then, Uber and rivals in various markets worldwide are burning oodles of cash to subsidize growth, and buy their way into new ventures like scooters, meal delivery and autonomous driving.

The novelty of the public offerings could attract investor interest to Lyft if it manages to get to market first, while Uber’s domination of the United States and other markets is a potentially strong selling point.

But these firms won’t be alone. There are nearly 300 private startups valued at $1 billion or more, according to CB Insights. The likes of Airbnb, Slack and WeWork are expected to try to go public in 2019, but only the first manages to turn a profit.

New issues have already raised $49 billion so far this year, more than all of last year, according to Refinitiv data. An offering by Uber, which was valued at $76 billion in its last private fundraising, would probably be the largest IPO since Alibaba’s record $25 billion deal four years ago. But risk appetite is drying up. The broad market has entered a correction while existing semiconductors and biotechnology stocks are flirting with bear territory. Given that it takes an emerging growth company about four months after a filing to float, the rush for the IPO window may only get worse. In this climate, the duel between Uber and Lyft risks a nasty collision with reality.

First published Dec. 10, 2018

(Image: REUTERS/Lucy Nicholson)

LYFT MAKES FLATTERING “CONTRIBUTION” TO ACCOUNTING

WeHype: Silicon Valley’s inflated valuations

BY RICHARD BEALES

Lyft is making an optimistic tweak to the accounting lexicon. The ride-hailing firm has inserted the concept of “contribution” into its initial public offering prospectus. It’s a metric that’s supposed to represent a steady-state level of profitability, excluding the costs associated with growth. Lyft’s take on it, though, is for a world that doesn’t exist.

The problem for Lyft, its larger rival Uber Technologies and the likes of trendy office-space provider WeWork is that profit by any standard measure is absent. That makes valuation a crapshoot and deters some investors. Even adjusted EBITDA, which involves usually flattering tweaks, is deep in the red, to the tune of $944 million for Lyft last year on revenue of $2.2 billion.

All these companies spend heavily to increase market share and enter new areas. Investors know growth costs money. Yet it makes sense to try to understand what the mature economics of a business might be. That’s what Lyft’s contribution is trying to get at. WeWork came up with what it called community-adjusted EBITDA to express something similar: This is how profitable we would be if we stopped trying to grow and let our business cruise.

Lyft’s contribution has some problems, though. First, the usual definition is revenue less all variable costs – it’s a measure of marginal operating profitability. The Lyft version starts with ride revenue – which already removes the drivers’ take – and backs out insurance, payment-processing fees, other direct costs of rides, but essentially nothing more.

It excludes sales and marketing expenses, for instance, the company’s second-largest cost line and surely necessary in competitive markets where customer churn is inevitable. Little wonder the company pegged its 2018 contribution margin at a healthy 43 percent.

Second, there’s a philosophical problem when it comes to valuation. Lyft may target a public market capitalization of perhaps $25 billion, according to Reuters sources. That’s the kind of eye-watering multiple of sales that only rapidly expanding companies attract. Switching off growth in the foreseeable future, even in return for profit, would knock that down sharply.

Monitoring contribution may help Lyft’s bosses maintain cost discipline, up to a point. They should, however, recognize that the metric is overly generous, even compared to WeWork’s community-adjusted EBITDA. IPO investors should probably ignore both of these numbers altogether.

First published March 14, 2019

UBER’S DULL THUD MAY STARTLE UNICORN HERD

WeHype: Silicon Valley’s inflated valuations

BY ROBERT CYRAN

Uber Technologies’ lackluster stock-market debut is a warning for other tech unicorns. The ride-sharing service’s shares opened below the initial public offering price – valuing the company at around $70 billion, based on outstanding shares, soon after they started trading on Friday. The lack of positive excitement for the biggest listing of a U.S. technology company since Facebook in 2012 suggests investors are becoming more choosy.

Even the IPO price set on Thursday was a disappointment compared to some expectations. At $45 per share, it valued Uber at around $75 billion, or more than $82 billion counting dilution from outstanding options and such. Like many other recent tech IPOs – but unlike Facebook, which was profitable – Uber relies on investors’ belief that it will one day grow enough to escape its current ocean of red ink. The firm lost approximately $1 billion in the first quarter.

The listing gives Uber another roughly $8 billion to fund investment in its expansion, adding to the nearly $25 billion raised in 23 private funding rounds, according to Crunchbase. The company’s losses may have played on some investors’ minds, along with the poor performance of smaller rival Lyft whose shares are down around a quarter since its IPO at the end of March.

To be fair stock markets had a rocky week thanks to an escalating trade war between China and America. And Uber’s shares traded back towards the IPO price later in the day on Friday. But when investors feel the need for increased safety, it’s surely harder to find buyers for the stock of a cash-burning company with a history of run-ins with regulators and employees.

Facebook’s stock didn’t do well in the weeks after its own listing. But given the absence of a clear path to profit, Uber’s debut will raise suspicions that the public is being used as a convenient exit for earlier investors in private funding rounds. Profitable firms may not have to worry too much about finding a market for their stock. Firms that need constant capital infusions to grow, such as office-sharing IPO candidate WeWork, could receive a chillier reception.

First published May 10, 2019

(Image: REUTERS/Heinz-Peter Bader)

GROWTH IPOS EXPLOIT TOTAL ADDRESSABLE CREDULITY

WeHype: Silicon Valley’s inflated valuations

BY RICHARD BEALES

Snagging even 1% of a multi-trillion-dollar market is an alluring goal for a startup. It’s also the sort of ambition that makes an attractive case for all kinds of fast-growing but loss-making companies, including those going public, like Uber Technologies, Lyft and WeWork. But investors faced with inflated estimates for just how much custom these newbies can rustle up should don their skeptical hats.

Uber, which fell nearly 9% in early trading on Monday after making a weak New York Stock Exchange trading debut on Friday, says its ride-hailing “total addressable market” is $5.7 trillion. That’s essentially the value of all journeys taken by everyone in 175 countries, whether by private or public transport. Add TAM estimates for food delivery and Uber’s unit that connects freight customers and shippers, and the company’s overall estimate of business it can target rises to $12.3 trillion.

That’s laudable enthusiasm from Chief Executive Dara Khosrowshahi and his crew. But it’s ludicrous if it’s understood as annual revenue that’s up for grabs. It’s the equivalent of roughly 50 times Apple’s annual sales. The silliness becomes clear looking at the Uber Eats food-delivery unit. The company’s proposed TAM, at $2.8 trillion a year, is mostly made up of estimated spending by customers in eat-in restaurants, involving no delivery whatsoever.

Lyft is somewhat less exuberant, claiming only that it addresses “a substantial majority” of a $1.2 trillion consumer transportation market in the United States, its main focus along with Canada.

Shared-office provider WeWork, meanwhile, has been associated with a far larger target on the distant horizon: a worldwide stock of real estate worth over $200 trillion, according to a Wired article citing a Savills study. That’s an asset valuation, not even a far-fetched revenue figure. Yet it clearly underlines the tendency towards hype when it comes to quantifying the outer reaches of a startup’s potential.

It’s serviceable…

Analysts at Morningstar point out Uber can’t actually address most of its TAM. In a positive report on the company’s stock published just before the initial public offering last week, they put a more realistic addressable market at $740 billion by 2023 for the company as a whole. That’s because not everyone will give up all public transport or private cars, for example.

To be fair, Uber also calculates what it calls a “serviceable addressable market” or SAM, a measure of the market it currently operates in, rather than its aspirational universe. For ride-hailing, that excludes journeys of more than 30 miles and trips on public transport. It limits the countries counted to 57, and totals a mere $2.5 trillion.

Uber’s growth in this line of business is slowing, despite snagging only around 2% of that amount in gross bookings last year. Total revenue and ride-sharing bookings both increased around 20% in the first quarter from a year earlier, according to the company’s estimates. By contrast, both surged more than 40% in 2018 from 2017.

One interpretation is that in real life there’s far less headroom for Uber to grow than even the SAM would suggest. Moreover, Uber’s actual revenue is only a portion of its total bookings, because drivers take a hefty slice.

…But is it obtainable?

As well as TAM and SAM, there’s a third set of initials available. “Serviceable obtainable market,” or SOM, also considers real-life annoyances like the presence of alternative options for consumers and direct competitors.

Analyst Alex Graham, writing on the Toptal website, lays out his version of the TAM, SAM and SOM for WeWork. For TAM, he counted office workers in Organisation for Economic Co-operation and Development countries who could conceivably share space and attached an assumed seat cost to each. In his 2017 analysis, that produced $1.4 trillion as a theoretical annual revenue opportunity.

That’s huge as a potential market goes. But the contrast with $200 trillion of real-estate asset value – or even the $10 trillion or so of annual rents that might represent, assuming a 5% global yield, or cap rate as it’s known – is stark.

Knocking out types of customers WeWork doesn’t target in any way, Graham’s SAM comes to around $170 billion – a little over a tenth of the TAM figure. That’s supposed to be the market if everyone who realistically could use WeWork’s services did so. The company did a similar analysis itself in an investor presentation published by BuzzFeed in 2015, coming up with what amounts to a U.S.-only SAM of some $93 billion.

Then Graham makes assumptions about workers actually available to WeWork, bearing in mind there are big companies who will always run their own offices, people who will always work in local coffee shops, and direct office-sharing competitors. His figure for WeWork’s obtainable market, the SOM, is $35 billion.

WeWork’s revenue last year more than doubled to $1.8 billion. Somewhat like Uber and Lyft, though, the growth comes at a huge cost: the company lost $1.9 billion in the same period.

The company led by Adam Neumann is growing fast and providing a service people want, and it boasts a $47 billion private-market valuation. Graham’s analysis, even the SOM, suggests there’s lots of room to grow, but only to a fraction of the biggest numbers on its slide deck. As IPO investors consider what WeWork is worth to them, they should make sure they don’t exhibit total addressable credulity.

First published May 13, 2019

MASAYOSHI SON COULD MAKE EASY WORK OF $100 BLN JOB

WeInvest: SoftBank’s vision

BY ROB COX

SoftBank is providing a good reminder about how it can be easier to invest other people’s money. The Japanese tech and telecom group may plunk as much as $4 billion into WeWork, the shared office-space upstart, according to CNBC. Masayoshi Son blanched at earlier opportunities to invest in the firm, but he is now looking at opportunities through the prism of a $100 billion fund.

There are many sound reasons SoftBank could be reconsidering its decisions not to back WeWork when founder Adam Neumann was passing the hat a few years ago. The most obvious is that the Manhattan-based endeavor is a more proven concept. The company has 125 physical locations in 38 cities and 10 countries, with 90,000 paying members, including 700 business customers.

Moreover, there is demonstrable growth and results. Last year, WeWork doubled its buildings, cities, countries, members and revenue run-rate and tripled gross profit at offices open a year-and-a-half or more. It plans to double its real-estate footprint this year, opening in Buenos Aires, Sao Paulo, Beijing, Mumbai, Paris and more.

It’s also true, though, that motivations on SoftBank’s end may have changed since it sat out a $150 million Series C round in 2013, and a $355 million Series D fundraising the following year, which valued WeWork at $5 billion, or a quarter of the $20 billion going rate now. The biggest difference is the mega-fund burning a hole in Son’s pocket, though it’s not yet clear how SoftBank will finance a WeWork investment.

In October, SoftBank launched its Vision Fund to make investments in technology globally, with at least three-quarters of the capital from external investors, led by the Kingdom of Saudi Arabia, as well as Apple and Oracle founder Larry Ellison. As part of the initiative, SoftBank has recruited many bankers and acquired even more of them with the recently announced $3.3 billion takeover of private-equity and hedge-fund firm Fortress Investment.

SoftBank has long put money into early-stage creations like Yahoo Japan and Jack Ma’s Alibaba. Bigger companies, such as U.S. cellphone operator Sprint, have been less satisfying. The Vision Fund, by dint of its size and the source of its capital, risks distorting SoftBank’s perspective.

First published Feb. 27, 2017

(Image: REUTERS/Kim Kyung-Hoon)

SOFTBANK WRITEDOWN WILL CLOUD SON’S WAY FORWARD

WeInvest: SoftBank’s vision

BY LIAM PROUD AND KAREN KWOK

SoftBank’s Vision Fund is due a writedown. The Saudi Arabia-backed tech investor, with $97 billion at its disposal, reported a 27 percent gain on $28 billion of investments as of September. That success will reverse in 2019.

Since its inception in 2017, the fund has invested at optimistic-looking valuations. Take WeWork, the money-losing office sublessor. The Vision Fund and SoftBank’s investment in 2017 valued it at $20 billion, according to the Wall Street Journal, or 13 times 2018 sales using Moody’s Investors Service estimates. SoftBank bought chip designer ARM in 2016 for around $31 billion and transferred a stake to the fund.

Those prices might make sense to Chief Executive Masayoshi Son, who touts his 300-year investment vision. But they look toppy through the lens of traditional venture-capital and private-equity methods, which SoftBank says it uses. The enterprise value of IWG, WeWork’s listed competitor, is just below one times its 2019 sales, using Refinitiv estimates, making WeWork’s multiple look stratospheric.

ARM’s valuation is set to suffer from a recent tech selloff and a slowdown in sales of Apple’s iPhones, which contain its chip designs. Shares in semiconductor rival Nvidia, in which the Vision Fund also owns a stake, fell more than 40 percent in the two months to Nov. 30. That has left Nvidia’s enterprise value at about seven times estimated 2019 sales, using Refinitiv data. Even at a generous 50 percent premium, debt-free ARM would be worth about $24 billion using Bernstein’s 2019 sales estimate, one-fifth less than SoftBank’s acquisition price.

Venture funds take writedowns all the time. Yet SoftBank is unusually vulnerable. Its size means marking down holdings could create a domino effect. The Vision Fund is also using debt, which totalled about $5.6 billion in September, to help fund its activities. Its capital structure unusually also includes preferred instruments, amplifying losses for other investors and requiring it to make cash distributions.

Moreover, Son’s partners, including Saudi and Emirati sovereign-wealth funds, might take fright at writedowns. Any losses risk undermining Son’s investing logic, which includes the notion that huge investments in emerging tech stars in and of themselves improve the chances those companies become winners. Both providers and recipients of funds, as well as investment staff, could lose faith. That would slow Son’s momentum and force him to think about the shorter term for a change.

First published Dec. 17, 2018

SOFTBANK-WEWORK MESS EXPOSES CRACKS IN VISION FUND

WeInvest: SoftBank’s vision

BY LIAM PROUD AND KAREN KWOK

Cracks are showing in the $97 billion Vision Fund. That undermines the idea of SoftBank boss Masayoshi Son as a tech sage, and makes life harder for his dealmakers.

SoftBank was last year mulling a $16 billion investment in WeWork, which was supposed to include cash from the Vision Fund. That has now shrunk to a solo $2 billion investment by the Japanese parent, Reuters reported on Jan. 7. Vision Fund backers including sovereign wealth funds from Saudi Arabia and Abu Dhabi balked at pouring so much cash into the loss-making provider of office space, according to reports by the Financial Times and Wall Street Journal.

The hiccup is mostly a function of the Vision Fund’s unusual structure. Typical venture-capital investors secure a “blind” commitment from their backers, who are known as limited partners or LPs; those putting up the cash only find out where it’s gone after the fact. Masa’s Saudi and Emirati LPs, however, are involved in the deal review process, according to a person familiar with the matter. At least one LP employee has even been seconded to the fund.

That’s fair enough, since together the Saudi and Emirati backers are providing more than half the Vision Fund’s firepower – a far greater proportion that most venture or private-equity LPs. But the apparent power to veto decisions undermines the whole premise of the fund: that Son is a tech visionary capable of spotting the next Alibaba. If that’s true, why doubt him on one of the fund’s biggest investment proposals?

The divisions also augur poorly for the fund’s future. First, it makes life harder for Son’s dealmakers working under Rajeev Misra, head of the London-based company managing the Vision Fund. Startup founders could reasonably ask whether the dealmaker they’re negotiating with has the authority to close the deal given the power of Misra and Son’s LPs. Second, Son’s long-term plan for a second Vision Fund looks more remote. It was already tricky given the Saudi government’s alleged involvement in the murder of journalist Jamal Khashoggi. Add to that an apparent squabble over tech investment ideas, and for Son siding with the Saudis again might look less appealing.

First published Jan. 8, 2019

(Image: REUTERS/Toru Hanai)

WEWORK SHOWS BENEFIT, AND COST, OF SOFTBANK VISION

WeInvest: SoftBank’s vision

BY RICHARD BEALES

WeWork’s revenue more than doubled in 2018 from a year earlier, to $1.8 billion. Yet its net loss widened marginally faster – and to an even larger $1.9 billion. The shared-office giant, recently rebranded as “The We Company,” is contemplating going public. Investors will have to square those figures with a $47 billion private valuation.

The vision of Masayoshi Son, whose SoftBank is a big backer of WeWork, is basically that throwing cash at market-leading disruptive companies allows them to supercharge their market share gains and therefore become even more valuable.

Though Son in January scaled back his most recent bet from initial expectations, it still involved injecting an extra $2 billion into the company. As a result, WeWork’s financial information, released on Monday, shows it is sitting on nearly $7 billion of committed cash. That will pay for the buildout and marketing of a lot of new locations.

That said, even initial-public-offering candidates in WeWork’s fast-growing, money-losing demographic tend to want to show losses narrowing relative to sales, moving in the general direction of profitability. Ride-hailing app Lyft, for example, due to debut as a public company on Friday, reported a loss equal to 42 percent of its $2.2 billion revenue in 2018 – an improvement on a negative 65 percent net margin in 2017.

WeWork boss Adam Neumann is instead keeping the growth hammer down. In one nod to investor sensitivities, though, he may be de-emphasizing “community-adjusted EBITDA” – a WeWork metric that brought eye-rolls from commentators. The measure, which reflects steady-state gross profit excluding the company’s substantial marketing, overhead and growth-related costs, is now also referred to as “contribution,” a plainer and better understood term.

That alone won’t get investors comfortable with a valuation range starting at more than double the $23 billion top-of-the-range indication so far from Lyft, a company with similar revenue and 2017-18 growth rate – and far smaller losses.

Back in 2017 when WeWork was valued at $20 billion, Neumann told Forbes a co-working company worth that much didn’t exist: “Our valuation and size today are much more based on our energy and spirituality than it is on a multiple of revenue.” WeWork isn’t rushing to list. When it does, though, public-market investors are going to have to feel the spiritual energy, too.

First published March 26, 2019

IWG SUITORS COULD USE SOME WEWORK MAGIC

WeCompete: Profit, not promises

BY AIMEE DONNELLAN

IWG’s suitors could use some WeWork magic. The original shared-office provider has been approached by three private equity bidders. Though the shares are up 30 percent, its market value is just over last year’s revenue. Trendy upstart WeWork is valued at 20 times its sales. Buyers will be hoping some of the sparkle will rub off.

Mark Dixon, IWG chief executive who created the shared-office space industry, may have found an exit. The company in which he holds a 25 percent stake has received undisclosed cash offers from buyout houses Starwood Capital and TDR Capital; Lone Star Funds has also expressed an interest.

Investors seem keen. The share price rally that began on Friday has added about 700 million pounds to the company’s market value. At 2.8 billion pounds, it is valued at 1.2 times last year’s revenue, and 22 times earnings.

That looks pedestrian when compared with main industry rival WeWork. The privately owned group had become a darling among venture capital investors and entrepreneurs for its cool offices which offer beer kegs and freshly ground coffee. Its equity was valued at $20 billion valuation at its most recent private fundraising – a multiple of more than 20 times last year’s revenue of $900 million.

On that basis the larger IWG, which has 3,000 locations in 114 countries, should be worth more than $60 billion. But the London-listed group is growing much more slowly. Revenue inched up 1.9 percent last year and it was forced to issue a profit warning due to waning demand for its London offices. By contrast, the New York startup’s sales doubled.

A takeover is not certain. Canadian private equity firms Onex Corp and Brookfield Asset Management last year made a joint approach which a Bloomberg report suggested valued the company at 300 pence per share. Those talks fell apart in February.

Both IWG and WeWork are in the business of sprucing up offices and offering them to short-term tenants at a markup. That suggests the yawning valuation gap will eventually close. Prospective buyers will be betting IWG can be made to look more like WeWork, rather than the other way round.

First published May 14, 2018

(Image: REUTERS/Kate Munsch)

IWG DIVIDES TO CONQUER WEWORK DISCOUNT

WeCompete: Profit, not promises

BY ED CROPLEY

IWG is showing the value of self-destruction. Shares in the British office-sharing group soared more than 20 percent on Monday morning after it sold its Japanese business for 320 million pounds. Although still in a different building from younger and trendier rival WeWork, the deal gives a glimpse of the riches hidden behind its workstations.

Founder Mark Dixon realised that companies and people wanted short-term, ready-to-use office space when he launched Regus in the late 1980s. But being first hasn’t translated into being the most valuable. After Monday’s bounce, IWG, as the listed parent company is now known, had a market value of 2.9 billion pounds ($3.8 billion), or 1.2 times last year’s sales. Private WeWork’s most recent valuation of $47 billion is an eye-popping 26 times revenue.

Dixon lacks the financial muscle of Masayoshi Son, whose SoftBank Group is a major WeWork backer. Given the Japanese tech group’s clout in its home market, IWG is probably right to avoid direct competition. But selling its Japanese unit to local rival TKP points to some hidden sparkle in the rest of the business.

The price tag works out at more than 15 times the division’s EBITDA last year. That’s more than twice the multiple that investors attached to the whole of IWG, including 451 million pounds of net debt, before the announcement. Apply the same valuation to the entire group and its equity market value would be 5.6 billion pounds.

IWG’s other businesses, which it also plans to sell, are unlikely to fetch the same juicy price. The Japanese business was more profitable than the overall group last year, with an EBITDA margin of almost 22 percent, against 15 percent for the company as a whole.

But investors are clearly treating the sale of 150 Japanese offices as an appetising sushi starter to the rest of IWG’s businesses, which run 3,250 outlets globally. After stripping out last year’s Japanese earnings and including the cash proceeds, the company now trades at just over eight times EBITDA.

Dixon last year twice called off talks to sell IWG because the price was too low. The latest sale suggests dividing may be the key to conquering the company’s discount.

First published April 15, 2019

RIVALS EXPOSE WEWORK’S LOW DEFENSIVE WALLS

WeCompete: Profit, not promises

BY RICHARD BEALES

WeWork has lofty ideas and low defensive walls. Rival flexible-office provider Knotel just raised $400 million for expansion. Coworking upstart Industrious also pulled in more cash. Investors considering the initial public offering of WeWork parent The We Company can add concerns about the durability of its first-mover advantage to worries about its eye-watering $47 billion private valuation.

Beneath branding that emphasizes technology and a mission to “elevate the world’s consciousness,” what WeWork does is take space in office buildings, make it look pretty, and find sublessees. This “space-as-a-service” idea isn’t new – it’s what the $4.5 billion London-listed IWG has done through its Regus business and other units for years.

Knotel is one competitor focused on providing a similar service for corporate clients. WeWork started by offering space to freelancers and the like, but now 40% of what it calls its memberships are associated with enterprises. Knotel claims more sites than its big-name rival in New York, for example, according to a Bloomberg interview with co-founder Amol Sarva. There’s scope for real competition, even if WeWork is far larger overall.

Another challenger, Industrious, said on Thursday it had raised $80 million of fresh money and expects to be profitable in 2020. Both fundraisings suggest backers see the potential for more than one success in the sector. They may also see more sensibly priced investments – and the potential for earlier profit. WeWork’s operating loss in the first half of this year was $1.4 billion, on revenue of $1.5 billion.

Then there are the SoftBank-backed WeWork’s governance shortcomings. The influence of Adam Neumann, the co-founder and chief executive, is entrenched by supervoting shares, and he has had potentially conflicted dealings with the company – including, bizarrely, being paid nearly $6 million in stock for trademarks associated with its rebranding as The We Company.

Neumann also gets an out-of-whack 169 mentions in the IPO prospectus, as Scott Galloway, a professor of marketing at New York University, observed in a recent blog post entitled “WeWTF.” Cutting through the cultish features, investors are being offered a company last valued at a spacey 14 times its annual run-rate revenue as of June with no end to its huge losses in sight and active competitors. Focusing on that could genuinely elevate their consciousness.

First published Aug. 22, 2019

(Image: REUTERS/Kate Munsch)

WEWORK VALUATION SHRINKS EVEN FURTHER WITHOUT AN IPO

WeCompete: Profit, not promises

BY LIAM PROUD

Adam Neumann is in a bind. The WeWork founder needs to raise at least $3 billion through an initial public offering to unlock another $6 billion of bank credit. But The We Company has shelved its float due to weak demand from investors. Without the cash, growth will dip, potentially pushing the office-sharing startup’s value even lower.

Neumann on Monday effectively postponed an IPO scheduled for this month, stating instead that the company was looking forward to joining the stock market “this year”. The We Company’s valuation has dropped dramatically since largest shareholder SoftBank invested at a $47 billion price tag in January. Reuters reported last week that the purveyor of hip office space was considering an offering that would value the business at $10-12 billion. But even if its Japanese backer stumped up another $750 million, Neumann would have fallen well short of his fundraising target.

The entrepreneur desperately needs the extra $9 billion in equity and debt to fund The We Company’s rapid growth. Though revenue more than doubled last year to $1.8 billion, the combination of negative operating cash flow and heavy capital spending meant the company burned through $2.2 billion. Neumann might need $15 billion of extra cash to pay for office refits, free beer and the like up to 2023, according to a Breakingviews calculator that assumes continued growth.

What if The We Company shelves its growth plans and cuts the red ink? It would then look more like IWG, its dull but profitable peer. The company founded by Mark Dixon has an enterprise value of around 1.4 times this year’s expected sales. Generously assume that WeWork’s 2019 sales reach $3.6 billion, or double last year’s total, and on the same multiple as IWG, it would be worth $5.2 billion, including an estimated $100 million of net debt.

Even that may be a stretch, however, since The We Company is a long way from being profitable, let alone matching IWG’s 15% EBITDA margin. The group says its existing offices earn a 25% “contribution margin”, which excludes expansion costs, overheads and many other non-cash expenses. Generously accept that definition, and assume Neumann stops all marketing spending and cuts overheads in half. In that best-case scenario, EBITDA this year would be $391 million, or 11% of revenue. Put that on IWG’s 9.5 times EBITDA multiple, deduct debt, and The We Company’s equity would be worth just $3.6 billion. In other words, Neumann and SoftBank are in big trouble.

First published Sept. 17, 2019

WEWORK OFFERS CONVINCING CASE TO AVOID ITS IPO

WeFlop: The IPO debacle

BY ROBERT CYRAN

WeWork’s parent, The We Company, has provided one of the most convincing cases for avoiding an initial public offering since the debut of Snap two years ago. WeWork’s IPO may even be worse – and this is before considering valuation.

The shared-office provider’s 359-page prospectus has something for everyone to dislike: a convoluted ownership structure, reams of related-party transactions, conflicts of interest, absurdly bespoke estimates of addressable markets and an overlay of inspirational tech gibberish. Easiest to loathe is WeWork’s continued massive cash burn.

Like Snap, whose shares trade below their 2017 IPO price, prospective investors in WeWork are being offered little say in how the company is run, thanks to three classes of stock with insiders holding B and C shares carrying multiple voting rights. Its organizational structure is a Christmas tree of subsidiaries, joint-ventures and an acquisition and management platform.

The muted voice for investors is a problem compounded by potential conflicts of interest laid out in 11 pages explaining related-party transactions. Chief among them: WeWork leases space in buildings owned by co-founder Adam Neumann and other directors. WeWork says it may enter more of these in the future. Underwriters UBS, JPMorgan and Credit Suisse have provided Neumann with a $500 million line of credit, with shares provided as collateral, of which he has tapped about $380 million.

WeWork dangles two shiny lures to new investors. The first is the sort of inspirational language seen on cat posters: “We dedicate this to the energy of we – greater than any one of us but inside each of us.” The second tactic, of estimating a total opportunity in 280 targeted cities worldwide of $3 trillion is probably less believable. To put that in context, it’s equivalent to about 15% of America’s GDP.

What’s inarguable is the juvenile firm’s ability to lose money. Revenue in the first six months of 2019 almost doubled to $1.5 billion from the same period last year. But operating losses grew even faster, from $678 million to $1.4 billion. Easy money and economic growth since its 2010 founding have allowed WeWork to expand this fast while burning through cash. In that sense, WeWork is a poster child of the longest U.S. economic recovery on record, and an era where money is virtually free. Caveat emptor.

First published Aug. 14, 2019

(Image: REUTERS/Brendan McDermid)

WEWORK GOVERNANCE FIXES HIGHLIGHT THE UNFIXABLE

WeFlop: The IPO debacle

BY RICHARD BEALES

WeWork isn’t entirely unconscious when it comes to its own governance. Adam Neumann, co-founder and chief executive of the shared-office group that is readying an initial public offering, has handed back $5.9 million he was paid by the company for trademarks. And the company has finally hired its first woman director, Frances Frei. Yet such easy repairs only underline its harder-to-reach problems.

The fixes are noted in the latest draft prospectus for the IPO of the business also known as The We Company, filed on Wednesday. They’re steps in the right direction. For potential investors, though, there are far larger concerns – especially since Neumann and his backers will presumably set a valuation higher than the last private-market figure of $47 billion once they indicate a target range.

Start with structurally poor governance. Neumann’s control is entrenched by three classes of stock distributed so that insiders have 20 votes per share while IPO investors get just one. That’s fine until WeWork hits a pothole, or Neumann indulges in a bigger version of the egregious and now-reversed trademark deal, at which point regular shareholders will regret their powerlessness.

Then there is the red ink: In the first half of 2019, WeWork reported an operating loss of $1.4 billion on revenue of $1.5 billion. This is coupled with negative operating cash flow and investments in property, equipment and software that soaked up $1.5 billion in liquid funds in the same period. Even several billions of cash, and more billions of possible IPO proceeds, won’t last long at that pace.

Meanwhile, WeWork had $47 billion of undiscounted obligations under signed leases at the end of June. These run 15 years on average, the company says, equivalent to $3.1 billion a year. Yet in June, the enterprise was only making run-rate annual revenue of $3.3 billion, which doesn’t leave much to cover other costs or cushion a downturn.

That’s simplistic of course – and part of the problem is that The We Company isn’t simple. Its numbers remain too complicated to show a path to sustainable profitability. Neumann says his mission is to elevate the world’s consciousness. He could start by elevating understanding of how he’ll eventually make money.

First published Sept. 4, 2019

WEWORK IS WILTING UNDER PUBLIC SCRUTINY

WeFlop: The IPO debacle

BY ROBERT CYRAN

WeWork is wilting under public scrutiny. The office-sharing firm, which is now officially named The We Company, may slash its initial public offering valuation to less than half the $47 billion of its last funding round. That would demolish management credibility, and still be excessive given its conflicts of interest, cash burn and unproven business model.

Valuing a tech-tinged real estate company with rapid growth and massive losses has always been a bit chimerical. Japan’s SoftBank invested $2 billion into WeWork in January, some of which was at a $47 billion valuation. By that standard, seeking an IPO valuation as little as $20 billion is a huge comedown. Yet that would be in line with the $21 billion worth set by a previous funding round in 2017. The trouble is even the new low figure may be too high.

Sure, WeWork is growing quickly, with revenue doubling to $1.5 billion in the first six months of this year from the same period last year. But operating losses grew even faster, to $1.4 billion. Deliberately slowing growth might turn its negative EBITDA positive, and let cash begin to flow, but that’s uncertain. Rival IWG is valued at only 10 times EBITDA over the last 12 months. By that yardstick, even a generous adjustment of WeWork’s negative EBITDA would struggle to justify a valuation of much more than $15 billion.

Other aspects of WeWork are just as unappealing, such as its renting of buildings part-owned by Chief Executive Adam Neumann. The firm’s business model of leasing buildings and subleasing space may suffer in a downturn. And IPO investors will have little say in how the firm is run, given insiders control of supervoting stock.

It’s worth asking why the company is even trying to go public. This is a capital-intensive business. In addition to operating losses, WeWork had over $2 billion in capital expenditure last year. Neumann has already tapped private investors worldwide, and $6 billion in debt financing is contingent on doing an IPO. As if that isn’t enough to give investors pause, slashing the valuation means the company will raise less cash unless insiders surrender more equity.

Until WeWork can show it is managed responsibly and has a path toward profitability, it’s better suited for more forgiving private investors.

First published Sept. 5, 2019

(Image: REUTERS/Mark Makela)

WEWORK FOUNDER’S STRONG HAND GETS RAPIDLY WEAKER

WeFlop: The IPO debacle

BY LIAM PROUD

Supervoting shares don’t create great corporate leaders – and they don’t save weak ones. Consider Adam Neumann’s rapidly eroding grip over The We Company, the office-sharing group he co-founded. When a company is in need of cash, it’s providers of capital that call the shots.

The 40-year-old Neumann’s main financial backer, SoftBank, is exploring ways to oust him as chief executive, Reuters reported on Sunday. The Japanese technology investor and its affiliates including the Vision Fund have poured almost $11 billion into the office sublessor – most recently at a $47 billion valuation. Those investments are underwater, with even a cut-price $10 billion initial public offering failing to entice demand. It might help to remove Neumann, whose tight control over the company and erratic behaviour were a turnoff for investors.

On paper, he has the power to resist. The We Company’s IPO filing shows Neumann owns all of the outstanding Class C shares, which each have 10 votes, and also effectively controls the votes attached to shares held by We Holdings, which also has supervoting shares. SoftBank, along with venture-capital group Benchmark and JPMorgan, owns single-voting Class A shares, according to the filing. Even if they teamed up, the trio would have roughly one-seventh of Neumann’s voting power.

In reality, SoftBank and its boss, Masayoshi Son, hold the whip. The We Company burned through $2.2 billion of cash last year. At that rate, his current $2.5 billion cash pile will need to be replenished by the middle of 2020. Neumann has no obvious alternative to Son, who is one of a few venture capitalists willing to write multibillion-dollar cheques. The We Company’s bankers offered up to $6 billion of bank credit, but made it conditional on it raising $3 billion in an IPO. Its high-yield bonds were trading below their face value on Monday.

The upshot is that Neumann is boxed in: he could fight SoftBank, for example by calling a shareholder vote and dismissing the Japanese group’s appointed director Ron Fisher. Neumann would risk being left at the helm of a company with barely enough resources to last a year. Acquiescing to SoftBank would be humiliating; digging in, if Neumann finds his job is on the line, would be downright counterproductive.

First published Sept. 23, 2019

WEWORK’S NEUMANN MOVES FROM PENTHOUSE TO BASEMENT

WeFlop: The IPO debacle

BY ROBERT CYRAN

WeWork’s goal to occupy the airy penthouse of corporate finance hasn’t gone to plan. The office-sharing startup, led by high-profile co-founder Adam Neumann, had hoped to be valued at more than $47 billion in its initial public offering. Now Neumann is stepping down as chief executive, adopting a non-executive chair position, and giving up voting control. An IPO in the foreseeable future looks highly unlikely. From here the company’s drama will mostly play out in private, which is where it belongs.

Investors like Japan’s SoftBank ought to have realized long ago that Neumann was an inappropriate leader for a listed business. His claims that the firm’s valuation was based in part on spirituality and energy, his variable focus on investing in everything from elementary schools to wave pools and his many related-party conflicts would have been problematic even in a company that wasn’t burning cash. The firm’s valuation has imploded, to about a fifth, or perhaps less, of its last funding round.

Having Neumann step down and relinquish majority control is necessary, but insufficient. The firm needs more capital – perhaps $15 billion by 2023 according to a Breakingviews calculator – and proof its business can be profitable. It also needs to find a new permanent CEO who can work with Neumann as their non-executive chair. Given the turmoil and uncertainties, Neumann’s demotion may be enough to secure more capital from backers. But having caught a glimpse of the penthouse, the metaphorical equivalent of a windowless basement must be even harder to bear.

First published Sept. 24, 2019

(Image: REUTERS/Eduardo Munoz)

CASH INCINERATOR WEWORK COULD STALL WITHOUT AN IPO

WeRegret: The aftermath

BY LIAM PROUD

Breakingviews calculator: How much cash will WeWork burn?

Pity Adam Neumann. Mere months ago the WeWork co-founder’s bankers touted a $65 billion public-market value for the office sublessor’s parent, according to news reports. Now his biggest backer, Japan’s SoftBank, is urging him to scrap an initial public offering that may peg The We Company’s worth at less than $20 billion, according to the Financial Times. The problem is that WeWork may not last long without the proceeds of an IPO.

SoftBank and its affiliated Vision Fund have pumped almost $11 billion into Neumann’s company. It has probably marked up those holdings, having invested most recently at a $47 billion price tag. Writing the shares down by more than half after a cut-price IPO – and perhaps also being heavily diluted by newly issued shares – would be embarrassing for Chief Executive Masayoshi Son while he is raising Vision Fund 2.

For WeWork, however, a non-listing could be disastrous. Neumann’s fast-growing business relies on having a huge pile of cash to spend on office refits, couches, beer taps and the like, as well as on deals to bring in new tenants. Last year sales more than doubled to $1.8 billion. But negative operating cash flow and hefty capital expenditure dragged free cash flow to minus $2.2 billion.

Neumann needs IPO proceeds of at least $3 billion to unlock bank credit of up to $6 billion, according to the company’s IPO filings. He had nearly $2.5 billion of cash on hand at the end of June, but at WeWork’s breakneck pace of investment that won’t last long.

Even with $9 billion more available, he may run out of cash within five years, according to a new Breakingviews calculator. Assume revenue growth declines to 30% by 2023 from just over 100% last year, and that operating cash flow matches profitable peer IWG’s 19% of revenue by the same date. Finally, assume Neumann reduces capital expenditure as a percentage of revenue to IWG’s 17% from WeWork’s 113% in 2018. WeWork will still incinerate $15.4 billion of cash from 2019 to 2023. That leaves a $4 billion shortfall even after allowing for IPO and debt proceeds – and that’s a generous set of assumptions.

Could SoftBank plug the gap if an IPO doesn’t happen? That’s unlikely, since the Vision Fund’s investors vetoed a bigger investment last year, and even Son’s parent company probably can’t cough up more than $10 billion. WeWork looks to be incinerating cash faster than it can be replaced.

First published Sept. 10, 2019

AIRBNB MAY BE EVERYTHING WEWORK ISN’T

WeRegret: The aftermath

BY ROBERT CYRAN

If there’s a company WeWork wishes it were, it could be Airbnb. The office-sharing firm’s initial public offering has been postponed because investors took a look at the underlying business, as well as the company’s governance, and decided they wanted none of it at anything like the company’s $47 billion private-market valuation – or indeed at half that, or less. Although Airbnb is another overgrown upstart in the space-sharing business, its initial public offering, targeted for 2020 according to the company on Thursday, may succeed in many of the ways WeWork’s is failing.

Airbnb, which connects travelers with vacation homes and rooms for rent, was valued at over $30 billion in a private fundraising back in 2017, according to news reports. And as a prelude to confirming its listing plans, it said this week that second-quarter revenue was well over $1 billion. The company said previously it had positive EBITDA in 2017 and 2018.

That statistic is Exhibit A for why the public offering of the company run by Brian Chesky could go far better than WeWork’s. The latter, led by Adam Neumann, has a voracious appetite for cash to spend on leases, fixing up offices, and attracting customers. It lost over $500 million at the EBITDA level last quarter on revenue smaller than Airbnb’s.

Investors have taken fright at the absence of a trajectory towards profitability, partly because WeWork lacks significant economies of scale and faces lots of potential competition. There’s also a surfeit of red flags surrounding governance.

Airbnb simply has a better business model with real benefits of scale. It is genuinely asset light, collecting fees as owners rent out and maintain their own real estate. There are a few online competitors such as Expedia’s VRBO, and hotel chains such as Marriott International are trying to muscle in. But like, say, Facebook, Airbnb benefits from network effects: Travelers want to go where homes are listed, and vice versa.

All this adds up to growth with minimal need for capital. The company has only raised $4.4 billion in total, according to Crunchbase. WeWork has raised over three times as much from backers including SoftBank. That means Airbnb can afford to wait for its IPO – and that’s a much more appealing pitch than WeWork’s overvalued desperation.

First published Sept. 19, 2019

(Image: REUTERS/Gabrielle Lurie)

JPMORGAN SHARES TOO MUCH SPACE WITH WEWORK

WeRegret: The aftermath

BY GINA CHON

Japan’s SoftBank isn’t the only firm with outsized investment connections to WeWork. JPMorgan has helped line up a giant loan for the office sublessor and lent hundreds of millions of dollars to Chief Executive Adam Neumann. Funds advised by the bank are also one of the largest investors in parent The We Company. With the firm’s planned initial public offering increasingly in doubt, that’s looking less and less smart.

Jamie Dimon’s bank has hung jackets on a lot of WeWork’s chairs. Mostly through clients of its asset-management arm, JPMorgan entities collectively have more than a 5% stake in the company, according to its latest draft prospectus. That makes the U.S. lender one of the top non-insider shareholders. It participated in four fundraising rounds, according to WeWork’s filing, with the last effort valuing the company at around $16 billion in 2015.

That may have helped JPMorgan land a lead IPO underwriting role, along with Goldman Sachs, whose affiliates are also WeWork investors. Furthermore, JPMorgan is part of a group of banks that have offered a $6 billion credit facility to WeWork, conditioned on its IPO raising $3 billion. Neumann decided this week to postpone the offering after indications that it would fall short of that target.

Then there’s the colorful, controversial CEO himself. JPMorgan and other banks extended a $500 million personal credit line to Neumann, secured on his shares in The We Company. Dimon’s firm separately provided him with mortgages and other loans totaling almost $100 million.

The company says it still plans to go public in 2019. But investors have already balked at anything like its $47 billion private-market valuation earlier this year, with news reports suggesting possible targets as low as $10 billion.

It’s typical for banks to provide multiple services to a hot new client. JPMorgan was among the lenders that did business with Facebook before landing a lead underwriting role for its 2012 IPO. Not all such bets pay off, though. SoftBank and its Vision Fund are in much deeper. And JPMorgan may still have cushion for both its credit and equity exposures. Even if so, it’s a lot less well stuffed than it seemed just weeks ago.

First published Sept. 19, 2019

SOFTBANK RISKS CHASING ITS LOSSES WITH WEWORK

WeRegret: The aftermath

BY LIAM PROUD AND ROBERT CYRAN

Bad gamblers chase their losses all the way to financial oblivion. SoftBank Chief Executive Masayoshi Son risks making the same mistake with The We Company, the cash-burning shared-office firm into which he’s already poured, or promised, almost $11 billion.

Son’s Japanese tech conglomerate is in talks to increase an agreed investment in the startup more commonly known as WeWork, from $1.5 billion to $2.5 billion, the Financial Times reported. SoftBank would get the right to receive shares in the future at a lower valuation than had been previously agreed.

Since WeWork’s mooted worth has already fallen from $47 billion to one-fifth of that, all this may sound like throwing good money after bad. WeWork burned almost as much cash last year, according to documents filed in conjunction with its failed IPO, as Son is pondering investing. Son perhaps hopes that WeWork will regain its footing with time, and new leadership, after founder Adam Neumann was ousted as chief executive on Tuesday.

There’s some logic to that. An equity injection from SoftBank may unlock another $3 billion to $4 billion of bank loans. And backers can extract favourable terms injecting capital into viable businesses desperate for cash. Venture firm TCV, for example, invested in Netflix in 1999 and led a 2001 recapitalisation of the company after the dot-com crash. Netflix survived, and thrived. The video-streaming firm now has a market capitalisation of $115 billion.

The snag is that SoftBank may have other drivers than financial returns. Walking away from WeWork would dent the reputation on which the Japanese firm depends for attracting new investors and promising firms into its orbit. Other startups might fear SoftBank will back off during hard times.

This is unlikely to be the last difficult decision SoftBank faces over WeWork. The company has shown it can grow, but not that size has any value, or brings profitability in an industry where others already do similar things. Rival IWG is valued at about 3.7 times trailing revenue, and on the same multiple WeWork would be worth a bit more than $8 billion – less than SoftBank has put in. Son, like WeWork’s tenants, has other places he can hang his hat.

First published Sept. 26, 2019

(Image: REUTERS/Thomas Peter)

SOFTBANK WOES GIVE TECH FUNDING RIVALS MORE SPACE

WeRegret: The aftermath

BY GINA CHON

SoftBank’s halo in Silicon Valley is slipping. Masayoshi Son’s firm and its $100 billion Vision Fund have poured billions into startups, sometimes deploying sharp elbows. Trouble at holdings like WeWork may slow it down. That makes more room for rival investors like Sequoia Capital. It’s also good timing for Blackstone’s new growth fund.

SoftBank has changed the game in many ways by investing such large sums. It put about $7.6 billion into ride-hailing firm Uber Technologies and about $11 billion into office sublessor WeWork. Even its smaller investments are still sizable by startup standards, including the $450 million it doled out to real estate firm Compass in 2017.

The money – far more than traditional venture-capital firms were used to providing until Son came along – allows its beneficiaries to spend rapidly to ramp up top-line growth, sometimes sweeping away rivals. Yet there’s a negative side, too. SoftBank has told at least three startups that if they didn’t take its capital it would invest in their competitors, according to people familiar with the discussions.

Now, though, some of SoftBank’s high-profile investments are stumbling. Most notably, WeWork’s planned initial public offering failed to get off the ground, and co-founder Adam Neumann agreed on Tuesday to resign as chief executive. Writedowns or a loss of confidence could end Son’s momentum.

VC firms like Sequoia, Accel Partners and others are in a position to benefit. The Vision Fund’s largesse has inflated valuations and crowded out longer-established players. Now their capital may become more sought-after again.

Newcomer Blackstone is one of few investors that could write a $500 million check, and its broad portfolio and expertise mean it could offer a mix of capital options from equity to debt. Steve Schwarzman’s firm is also the world largest real-estate owner and could offer startups advantages in that realm, among others. Blackstone’s new tech effort is run by Jon Korngold, poached from General Atlantic.

Other private equity firms like Advent International are also getting into tech while some, like TPG, have had a growth fund for years. SoftBank is still a potent factor, but clouds over its portfolio have silver linings for its rivals.

First published Sept. 25, 2019

IPO WANNABES SPLIT INTO CAN’T, SHOULDN’T AND WON’T

WeRegret: The aftermath

BY JENNIFER SABA

When the window for new stocks closes, it closes quickly. Hollywood talent firm Endeavor scrapped its initial public offering on Thursday, and it’s easy enough to see why. Economic signals are worrying, and other new offers have met a frosty reception. Endeavor has unappealing qualities of its own, but at least it has the luxury of being able to wait.

Endeavor was the third company in a short period to test investors’ taste for unprofitable businesses with entrenched founders. WeWork, the office-share company, pulled its own listing after its mooted valuation plunged swiftly, and investors ganged up to oust leader Adam Neumann. Exercise-bike maker Peloton went ahead on Thursday, but its stock is already down around 13% from its IPO price. All three companies have multiple classes of shares, where public investors were being offered the kind with the least votes.

There are differences, however. Endeavor lost $193 million for the six months ended June 30. But the agency run by Ari Emanuel at least has a track record, having subsumed companies with roots dating back to 1898. It may not have fixed assets, like real estate, but it has famous ones – its properties include martial arts brand UFC. That gives it a competitive moat Peloton, for example, lacks. It was raising money to pay down $325 million of debt and make acquisitions, but hardly has the urgency of WeWork, which had lined up bank loans contingent on a successful market listing.

Once fear has set in, it’s likely other IPO wannabes will have second thoughts. The market was already troubled by trade war and political dysfunction. U.S. business investment fell 1% last quarter, while the Conference Board’s regular consumer confidence index plunged in September. Once risk appetite recedes, stock listings end up divided between those that can’t float, those that shouldn’t even be trying, and those with the flexibility to decide it’s better if they don’t. Endeavor can take comfort from being in that third bucket.

First published Sept. 27, 2019