As a private entity, short-term office rental company WeWork (recently rebranded as the We Company to encompass various other ventures, like a company that makes artificial wave pools for surfers) attracted billions in funding from some of the world’s biggest investors, including SoftBank’s tech-hungry Vision Fund. A January 2019 SoftBank investment valued the company at $47bn and it looked like the sky was the limit for We.
Then came We’s fateful and, so far, failed attempt at an IPO.
When the We IPO launched, investment banks were bandying around valuations in the order of $50 to $100bn. But when the rubber hit the road, they found that investors were turning up their noses at a valuation of just $15bn.
___STEADY_PAYWALL___
Chastened, We called off its IPO last week, promising that it would return to the market later this year stronger than ever. However, many observers think that, given its troubles, it may be 2020 or beyond before We looks good enough for investors to bite.
How did it all go so wrong?
The origins of We
Ignoring We’s handful of nutty other ventures, such as a “conscious entrepreneurial school” that seeks to “unleash every human’s superpowers”, the main business of the We Company is WeWork.
Offering trendy office space and “free” coffee and biscuits on short-term rental agreements, WeWork has forged a niche by making office leasing something cool and desirable, rather than an unfortunate necessity. It has also achieved some meaningful operational tricks, most notably managing to pack way more people into a given amount of space than anyone else.
Today, WeWork’s buildings are part of the landscape in most of the world’s big cities – Joburg and Cape Town included. Fuelled by private money, WeWork has expanded into 125 cities and has ambitious plans to go further.
At heart, however, WeWork has essentially taken the drab old business of leasing office space and given it a glamourous sheen of “tech” – much like Uber has done with the boring business of hiring out taxis. Also like Uber, whose share price has fallen almost a third since its listing, We is discovering that not everyone is blown away by the strategy.
We’s ethos has been summed up by founder and CEO – and aspiring New Age guru, by all appearances – Adam Neumann, who describes the company’s mission as “to elevate the world’s consciousness” (rather, I suppose, than to provide desks for the world’s workers).
Neumann’s spiel worked well on the private equity circuit. However, the icy water of public markets has proven to be a different story.
When We announced its IPO, its nonsense-heavy prospectus came in for a lot of humorous commentary. More concretely, however, investors were horrified by the scale of the company’s cash burn, the lack of clarity on its path to profitability, and its many corporate governance horrors (such as a voting structure that gave Neumann absolute and unassailable control and allowed his wife to more or less choose his successor as CEO in the event of his untimely death).
As its investment bank, JPMorgan, made the rounds shilling the stock, became clear that a $40bn-plus valuation wasn’t going to fly, and We slashed its goal to $20bn.
That didn’t fly either. Nor did corporate governance patches, like changing Neumann’s voting rights. In fact, it quickly became clear that there was pretty much no market for We shares at any price and the IPO was scrapped altogether.
To me, this is an encouraging sign that sanity is reasserting itself in financial markets. We is, as far as I can see, basically just an exercise in asset/liability mismatching. It takes on long-term commitments (either buying buildings with borrowed money it must pay off over decades or taking out long-term leases) and then turns them into short-term assets (its leases can be as short as a few days).
Let’s imagine a world in which economies sometimes enter recessions. We’s short-term rental agreements could quickly become no rental agreements at all – the whole point of using such short-term leases is to be able to drop them fast if you need to. From We’s perspective, however, the long-term liabilities remain. The whole reason real estate firms generally insist on long-term leases is to manage the risk of losing renters. Hence the mismatch at the heart of We.
Calling this weirdly leveraged office leasing business a tech company and valuing it as such ignores certain grim realities about its model. After all, in a rational universe, a company should be valued based on its actual business, not its CEO’s hair and use of a fancy website.
In seeing We’s proposed IPO crash and burn, we may be seeing the start of a serious rethink of how we classify and value companies these days. Like We, many of today’s sexy tech companies are not really tech companies. I’m not the only one who thinks this. S&P recently recategorised Uber and Lyft as trucking companies, not tech firms. This more accurately captures the core drivers of their business – their ability to get bums in cars for money.
Similarly, We should be treated the way we treat other companies with a core business of getting bums into office chairs. Short-term leasing peer IWG has more office space under management than WeWork and is profitable. It is valued at $3.7bn. That seems like a reasonable place to start when working out what WeWork should be worth.
