WeWork IPO failure and its Domino Effect on Indonesian Co-Working Startups.
14 January 2020
The WeWork IPO Bust
Valued at $47 Billion on its Peak, with very aggressive marketing initiatives and J-Curve growth, the once mighty We-Work now needs to struggle to avoid bankruptcy. Adam Neumann, its Founder and CEO has officially left the company with a bruised ego and $1.7 B on his pocket. Softbank as its controlling party now is now busy arranging a $9 B bailout to save and recover the company to its past glory.
A lot of articles have discussed and debated on why and how this situation could happen. However, as an Indonesian startup enthusiast and observer, I would like to provide my two cents on the “So-What” insight to fellow local founders, investors and stakeholders, based on my past experience as both a founder and an investor.
The Domino Effect
I personally think that the IPO failure will lead to a greater issue in the Indonesian co-working industry and funding momentum since everybody is making a bet on everyone else in this sector.
1. WeWork is betting on the Real Estate Market.
WeWork is the vanguard in Co-Working industry. To quote Management Study Guide on its business model:
The business model of WeWork is basically based on the bullish sentiment, which is prevalent in the real estate market. WeWork intends to make money by increasing the sublet rates in the future, whereas it will continue to pay the lower rents which were originally agreed upon. The WeWork model is basically a large bet on the real estate rental market. As long as the rentals continue to grow, WeWork will continue to make money.
However, during a recession, theoretically speaking, rent price will go down as unemployment rises and wage decreases. When it happens, WeWork will still need pay the high fixed cost and will only receive a sub-par sublet rates. Up until 2019, WeWork has not made any single profit and its location operation expense plus depreciation are nearly equal to its revenue as reported on its S-1 filing. Just a small real estate downturn would be enough to devastate the whole company projection. WeWork’s bet on the industry is currently hanging by a very fine thread.
2. Venture Capital is betting on WeWork.
Mr. Son of Softbank believe that WeWork is his next Alibaba and in total, Softbank has invested $7.5 B in WeWork HQ, $1.6 B in WeWork’s overseas subsidiaries and planned to double down their investment by another $1.5 B in 2020. Softbank is trying to recuperate their invested capital by taking drastic measures of control and ownership after the failed IPO. According to the Sanford Bernstein analyst:
SoftBank would have made a $7 billion paper profit if WeWork had maintained the $47 billion valuation reported in January.
On paper, if WeWork were to go public at $20 billion, that would amount to $1.3 billion in unrealized losses for SoftBank, Lane maintains. At a $15 billion valuation, SoftBank’s potential loss on paper grows to $3.8 billion.
Based on these calculations, WeWork would need to eventually IPO with at least a $25 billion valuation for SoftBank to make a profit from its original investment.
Other Venture Capitals are waiting for SoftBank’s move and are currently on guard to either top up or cut loss on their existing investment based on the result. WeWork is the role model for Co-Working investment thesis and its valuation will dictate the “Multiple” that will be used when the VC is making an exit.
To illustrate, consider this three scenario, WeWork is listed with such valuation (In Yellow: $47B, $35B and $20B). If we use its revenue as the base metrics, it means that its shares are traded with such multiple (In Blue: 31.33, 23.33 and 13.33). VCs will then derive “their coworking brand” by using the said multiple (In Red). This multiple result could make or break their Return On Investment and would greatly influence their decision to either double down or fold on the investment.
3. Co-Working space is betting on Venture Capital.
Most co-working spaces providers are still running on the red. It means that they will still need an external funding to cover their operation cost. Not as massive as we work, nevertheless they are still bleeding . Some co-working spaces could break even by providing other services such as company incorporation service and corporate innovation, but their backbone rental revenue will be more or less the same with WeWork.
According to the Coworking Indonesia association, Indonesia is now home to more than 200 co-working spaces across the country. Based on my knowledge, the Venture Capital industry is the major responsible party that fuel that rapid expansion. The VC absorbs the loss through its generous funding and bets that its investment could be the Indonesian equivalent of WeWork.
The “So-What”
With the recent development and WeWork’s failure to be listed, VC investment and interest in the Co-Working industry is proportionally diminishing. The first domino has been toppled.
Local Co-Working spaces will need to conserve their existing cash to survive the funding drought and focus more on survival rather than growth for the time being.
They should also find another source of revenue to hedge against real estate downturn. The one which is not affected by the rental market price, such as incorporation or corporate innovation services.
Thank you for reading. Do you agree with my opinion? Any co-working space founder that would like to share his/her insight? Please let me know about your comment and please re-share if you find this article useful. You could connect with me at linkedin.com/in/erikhormein/.
