Concerns on Recent Business Models and Investment Strategies

WeWork has been in the news a lot recently. While the mantra “all press is good press” maintains some significance, the WeWork news has certainly defied this logic.

As a refresher, WeWork’s last fundraising round valued the new-age landlord company at $47 billion. This valuation came despite countless regulatory concerns, steepening losses, and no sight of profitability.

As WeWork has prepped its upcoming IPO over the past few weeks, early indication has signaled that the company will file to go public at under half of their previous valuation (targeting $20 billion at time of writing). Issues about the company’s business model and co-founder have emerged along with the struggles of other recently-turned-public companies with similar financial mindsets (think Uber and Lyft). A down round of this magnitude will burn those that got in late, and Softbank, WeWork’s majority shareholder, is projected to lose billions just months after seeing the same fate with their Uber investment. As Softbank looks to raise its second fund, they have already run into hurdles as their LP base has grown concerned over their investment strategy.

Softbank has led the paradigm shift of some VCs to continually chase deals out of FOMO. Given their enormous fund size, they have been granted the ability to pursue deals regardless of price and the illiquidity of private equity markets has protected their fund from realizing the effects of this strategy. If this year has been any indicator, this strategy has proven wrong.

Investing in unprofitable companies based on potential has historically been a bad move. Sure there are a few instances (like Amazon) that have returned huge amounts of shareholder value after decades of bleeding money. For the most part, however, public markets will eat up companies long before they can turn things around.

Pursuing unsustainable business models based on FOMO should not be an investing strategy, but it has developed into one over the past decade. Rather than making investments based on traditional metrics and beliefs, many VCs have gotten greedy and altered their approaches. The consequences of their bets are coming.