The Wall Street Journal revealed that the coworking giant has moved up the date of their IPO in an effort to access much needed investment from the general public as the private investment markets are now largely closed to the company. According to the Wall Street Journal the company now plans to release their S1 by August and hold their public offering in September. Observers of the company are now suggesting that the IPO may be the company’s only lifeline.
Earlier this year it was widely reported that Softbank had planned to invest $20B into WeWork, but shortly after the company changed its name to ‘The We Company’ SoftBank’s Masayoshi Son announced that they were cutting their investment back to just $2B. Media followers of the company joked that, “WeWork Changes Name In Obvious Attempt To Confuse SoftBank Into Giving It More Money.” It clearly didn’t work. It was reported that Masa had explained that the $2B was minimum he could invest in order to protect his prior $4B investment. Masa’s executive team was reportedly confounded by the company’s new direction and new mission statement;
The We Company’s guiding mission will be to elevate the world’s consciousness. Living a conscious life means choosing to live proactively and with purpose. It means being a student of life, for life, where we accept that we are always growing and in a constant state of self-discovery, self-growth, and change.
Even more alarming to observers is the fact that the company is now planning to raise up-to $6B in an asset-backed loan. Prior to the announcement of the IPO acceleration the company was expected to raise less than $2B in secured debt. The Wall Street Journal is reporting that while the terms of the expected $6B asset-backed loans aren’t favorable to the company, the loans will significantly lessen the risk that the IPO will fail to raise enough capital to cover “ballooning losses” the company is experiencing. The reality is that the company’s most recent backers invested at a $47B valuation and there will be VERY limited demand for the IPO at that price — in fact TechCrunch is reporting that investors are VERY nervous about the prospect of the company’s IPO being a “down round”.
WeWork has been chided in the press for their New Age accounting methods like “community adjusted Ebitda” but the numbers speak for themselves:
- WeWork’s 2017 revenue: $886 million
- WeWork’s 2017 net loss: $933 million
- WeWorks 2018 revenue: $1.82 billion (+105.4%)
- WeWork’s 2018 net loss: $1.9 billion (+103.6%)
Ironically, the company is on the cusp of massive success, but one can’t help but think they’re rushing things. WeWork has some runway and they’re posting good occupancy numbers (90% in 2018) and has grown their total membership to over 400,000. Perhaps the problem is at the top. It was revealed that the CEO, Adam Neumann, recently cashed out over $700M from the company and has bought at least five multi-million dollar homes. Just last week I wrote about how startup founders might study Neumann’s actions in context with their own companies (excerpt below).
Neumann has been reducing his position in WeWork since 2014 and I would argue that startup founders could learn a lot from his diversification efforts. Investors like Benchmark’s Bill Gurley are critical of such sales, but given the binary nature of the startup game these early sales are prudent. While Neumann provides a good example for diversification his conspicuous consumption can give founders a good idea of what not to do as well.
When Adam Neumann co-founded WeWork almost a decade ago he was advised to diversify his holdings during each funding event. Following that advice, beginning five years ago, he began selling his shares each time the company raised capital. To date Neumann has personally raised more than $700M from these diversification efforts. Typically, investors are critical of pre-IPO sales by founders, but they are more common than you might think.
- Zynga Founder Mark Pincus — Sold $100M Prior to IPO
- Groupon Founder Eric Lefkofsky — Sold $300M Prior to IPO
- Snap Founder Evan Spiegel — Sold/Borrowed $28M Prior to IPO
- Slack Founder Stewart Butterfield — Sold $4M Prior to IPO
- Secret Founder David Byttow — Sold $6M Prior to IPO (Chapter 11)
- Buffer Founder Joel Gascoigne — Sold $2.5M Prior to IPO
While Bill Gurley’s fund is an early investor in WeWork he made it clear that his criticism of founders who cashout prior to a company’s IPO were not directed at Neumann specifically. The truth of the matter is if a company has a successful IPO no one will remember early sales by founders. On the other hand if a company fails founders risk scorn (or worse) from the investment community. For example, when Secret blew-up shortly after co-founder David Byttow sold more than $6M of his shares, Bill Maris from Google Ventures suggested that they had been robbed and demanded that Secret’s founders return the money. For most founders the answer is simple: take the money when you can get it.
While it makes a lot of sense to diversify, founders should be VERY careful about how they spend their new found wealth. Neumann is perhaps the perfect example of what not to do. With his $700M pre-IPO warchest, the WeWork founder, has spent more than $80M on at least five homes including $10.5M Greenwich Village townhouse, $15M Westchester farm, $1.7M Hamptons house, and $21M Bay Area house (including a guitar-shaped room). He also is leasing a condo on Gramercy Park for $46K per month while his townhouse is being renovated. While these purchases are examples of the sort of conspicuous consumption founders should avoid prior to their company’s IPOs — Neumann’s greatest sin may be his real estate purchases that have created unnecessary conflicts of interest for the founder.
According to the Wall Street Journal, Neumann worked with JPMorgan Chase to borrow against his stock to facilitate loans to purchase office properties in New York and San Jose — four of which he leased to WeWork who in turn pays Neumann millions in rent. Investors pointed out that JPMorgan could have easily arranged those same loans for WeWork directly. After inquires from the media WeWork announced that they were going to buy the properties at cost from Neumann to eliminate the conflict. This is just the sort of unforced error that founders who cash out early need to avoid at all costs.
Founders should take away two things from Neumann’s example — sell early and often but avoid conspicuous consumption (i.e. no houses, planes, boats, or cars). Of course, as with most of my advice I haven’t followed it — for example when I was in my 20s, just a few days after I raised $15M for my first startup I bought a convertible Porsche — a move that created terrible optics on so many levels.
About The Author
Alexander Muse is a serial entrepreneur, author of the StartupMuse, contributor to Forbes and managing partner of Sumo. Check out his podcast on iTunes. You can connect with him on Twitter, Facebook, LinkedIn and Instagram.