WeWork IPO did not work
Almost a month ago, WeWork published the long-awaited prospectus. Since then, the whole market is discussing how unlikely the IPO would be. Apart from the financial burden the company has, ownership and voting structure are highly controversial. Last week, common sense prevailed, which is rare in the financial industry, and WeWork postponed its IPO. It had a domino effect that Airbnb put off its IPO to the next year. Given the investor appetite and IPO calendar, it is likely that we won’t see a decacorn will go public in 2019.
No sector is safe for technological disruption, and real estate is not less vulnerable. Founded in 2010, WeWork provides shared workspaces and accompanied services for other enterprises. It has a story of growth. Started with 2 locations and 450 members in 2010, WeWork reached 528 locations and 527,000 members by 2019. The valuation went up to 47bn USD thanks to generous investments from SoftBank, and the decacorn targeted an IPO this year.
Prospectus even paints a rosier picture of growth, indicating 1.9 million workstations is on the pipeline. Therefore, it is easy to conclude that for growth, WeWork needs money, and therefore IPO is a viable option. However, it should be noted that WeWork had 6bn USD from investors for the last 12 months. Considering this vast amount, investors were expecting to get proper answers for uses of cash in prospectus, however it was not the case. Prospectuses are, in general, good sources of information, but they are known for bending the reality. Nevertheless, it is the only source of information about WeWork in a formatted manner.
The prospectus was a massive shock to investors. The company financially has enormous financial liabilities, and it is a big cash-burning machine. WeWork produced 1.9bn USD loss compared to 1.9 bn revenues in 2018. Those figures were more than double the loss and income of 900mn USD in 2017. To put in this simpler terms, for every dollar it generates in revenue, the company loses one. To put in this more simpler terms, the company is burning investors’ money consistently. Investors love growth, but public companies also love profitability, which is not coming soon. Searching a viable explanation about how the company will be profitable in the short or long term in its 383-page IPO prospectus is unfruitful.
Instead, the first line says, “We are a community company committed to maximum global impact. Our mission is to elevate the world’s consciousness.”
I doubt that investors share the same philanthropic goal. Instead, they generally look for more earthly purposes like profitability.
For the ones who look for detailed financials, I should warn that there are 29 pages of risk factors before you see balance sheet information. Even if you are lucky to find balance sheets, it has incomplete information, and you need to go very end of the prospectus to see the full picture. The liabilities are huge. The company has around $18 billion of long term operating lease obligations, although it was calculated with a relatively high discount rate around 8%. The company needed to find 10 billion dollars in 5 years to meet contractual obligations that is only possible via external financing, given the loss the company generates. Still, it is tricky to find investors who are willing to lend/invest a company that has 18 billion USD debt. Considering the total assets of USD 27bn, WeWork could be the most leveraged unicorn that is going public. Nevertheless, madness in financial markets is not rare. Investors believing in growth stories and having a substantial dry powder with a bit FOMO can do crazy things.
For WeWork case, other things disturbed investors more than financials: Controlling rights and conflict of interest. WeWork’s business model revolves around leasing properties from landlords. How would investors feel that the CEO company is one of the landlords? This potential conflict of interest brings shadow to how effectively WeWork chooses properties. Over the past years, SEC filing reveals that WeWork made a total of USD 21m in lease payments to properties that Adam Neumann owns. Besides, additional USD 237m should be paid over the life of the leases. Mr Neumann has also borrowed $380m out of a $500m line of credit secured against some of his stock. Given that founders cannot distribute their equity without designated funding rounds, he converts his equity to money without the consent of directors.
Despite all these conflicts, the IPO filing endorses that Adam Neumann will continue to control a majority of the voting rights via class B and C shares. This complex governing mechanism allows the CEO to control the company without being the largest common stock owner. Besides, the company doubled the voting rights of those class B and C shares ahead of the IPO, cementing Mr Neumann’s authority. However, during pre-roadshow talks, investor hostility forced the company to reverse. SoftBank has lost faith in Adam Neumann’s ability to lead WeWork and is expected to call for a board meeting to demote him. With or without Neumann, it is safe to say no investors invest in a company in a management whirlwind.
These two conflicts attracted too much criticism. Pre-road show conversations revealed that investors would not want him to be CEO. A coalition of WeWork directors is planning to urge Adam Neumann to step down as CEO. Adam Neumann wouldn’t be the first startup founder forced out by controversy. Uber’s Travis Kalanick was pushed out by his board in 2017 after the ride-hailing company. But backing with his voting rights, it is not easy to do so without his consent.
Despite the positive expectation, WeWork’s IPO filing revealed massive losses and an unusually complex governing structure that concentrated power in Neumann’s hands. Bankers from JPMorgan Chase and Goldman Sachs received a lacklustre response from investors. Advisers were expecting the IPO to give WeWork a valuation as low as $15bn, less than a third of the $47bn valuation the company set in a SoftBank funding round this year. As a result, the company decided to put off the IPO.
After the decision, Adam Neumann told employees he had been “humbled” by the aborted IPO, admitting he needed to learn lessons about running a public company.
The time will tell us how he will utilize those lessons to make the company profitable.
