To listen to Adam Neumann, co-founder and boss of WeWork, is to listen to a motivational speaker shorn of all self-doubt, convinced he imparts rare wisdom.
“If more people follow their superpowers – and everyone has one – then we’re going to be a better society,” the 40-year-old, Israeli-born entrepreneur has said.
If Mr. Neumann seems to operate on a different plane than most other chief executives, so does WeWork, owned by his We Co. WeWork isn’t just a commercial office-property operator; its “guiding mission will be to elevate the world’s consciousness,” he wrote. WeWork wants to bring “meaning and intention into work.” When that happens, the faithful will become a “member of the ‘we generation’ and the money tends to follow.”
Did it ever. The company has hauled in fortunes from some of the world’s most sophisticated investors, including Softbank Group Corp., whose Vision Fund alone stumped up some US$10-billion. Both the charismatic Mr. Neumann and his business achieved cult-like status, propelling We Co. to a US$47-billion valuation, based on Softbank’s latest funding round in January. Its initial public offering was set to be the blockbuster stock-market event of the season.
Before it all blew up, that is. The IPO was yanked this week after potential investors pushed down We Co.’s theoretical valuation to US$15-billion or less. Officially, the IPO is postponed to October at the earliest. But given WeWork’s rapid fall from grace, it seems unlikely the sale will be revived until 2020, maybe later, unless Mr. Neumann accepts a humiliating price. Mr. Neumann’s outside ego wouldn’t allow it.
The private investors who put the frothy, tech-like valuation on the business forget that WeWork is not a tech company, in spite of its fancy app, and just might not be worth almost as much as General Motors. It doesn’t elevate consciousness. It rents out office space.
WeWork was, and remains, a terrific idea, even if it was not an original one. Its strategy is to lease office buildings and stuff them with temporary workers who are treated to beer taps, cappuccino makers, fancy lounges, conference rooms and front-desk services. WeWork has set up shop in more than 100 cities and is the biggest non-government office-space company in Chicago, Manhattan, Washington and London.
If Mr. Neumann had a “superpower,” it was to convince big-name private investors to fund his expansion, driving up the valuation to absurd levels, even as the losses deepened at alarming rates and serious questions were raised about governance. How ironic that it was allegedly less sophisticated retail investors who determined that Mr. Neumann’s creation was worth a lot less than advertised. The underwriters determined that they would refuse to buy into the US$47-billion valuation.
Mr. Neumann entered the business at the perfect time. When the company was founded in 2010, the worst of the financial crisis was over and governments everywhere were making life comfortable for rich, private investors, whose holdings were boosted by ever-lower interest rates – free money, in effect – and the central bankers’ quantitative easing programs. Investors threw money at tech companies like Tesla Inc., Uber Technologies Inc. and Lyft Inc. with abandon, and somehow WeWork nailed an invitation to the tech party. WeWork certainly grew like a tech company. In recent years, its revenues doubled annually, but so did the losses. Last year, the company reported a pretax loss of US$1.9-billion on sales of US$1.8-billion. In the first half of this year, the loss was US$900-million.
The deepening losses were not the only concern. As tech pundit Scott Galloway, professor of marketing at New York University Stern School of Business, points out, WeWork has a glaring mismatch between its long-term lease commitments and its short-term tenants. A recession could convince a lot of them to work from home. WeWork, he notes, has US$47-billion in long-term obligations [leases] and will have about US$3-billion in revenue this year. “What could go wrong?” he asks.
Mr. Neumann didn’t make a lot of fans by treating WeWork as a personal piggy bank. He slapped trademark rights on “We” and licensed them to the company for US$5.9-million (he recently returned the money after the deal was widely criticized). He borrowed US$500-million from JPMorgan Chase & Co. and other banks, using his shares as collateral, and bought properties that he leased to WeWork. He controls in perpetuity almost all of the supervoting shares of the company, which come with an outrageous 20 votes apiece, although he has agreed to knock them down to 10 votes in an attempt to cozy up to potential investors.
The worst sin for potential investors was that the IPO documents did not set out any clear path to profitability. Heady growth stories don’t dazzle investors as they used to, as the dismal IPOs of Uber and Lyft showed. Both of the ride-hailing companies trade well below their IPO prices.
With the IPO sidelined, WeWork is in trouble because it desperately needs fresh capital to fund its ambitious growth plan. The company has negotiated a new, US$6-billion credit line. The catch is that the credit is contingent on raising US$3-billion of equity. The missing IPO means that US$9-billion is stuck in the closet.
The good news is that big-name institutional investors such as Softbank and JPMorgan are taking the hit from WeWork’s crashing valuation. Retail investors had the good sense not to buy into the cult of personality that he had nurtured so well.
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