All posts by amanda.gomez@thomsonreuters.com

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