*this article was written prior to WeWorks’s withdrawal from IPO. Adam Neumann, the ex-CEO of WeWork has since been removed from his position and stripped of his voting rights.
The We Company has filed its S-1 paperwork on 14th August in its plan to go public in around mid-September 2019. It is set up as the holding company behind “WeWork” – the startup well known for designing and building co-working spaces for entrepreneurs and companies.
Backed by SoftBank, the managed office company was initially valued at US$47 billion (we will discuss more about it later). With that, WeWork’s IPO is targeted to become the second-largest offering of the year behind only Uber, which was valued at $82.4 billion following its May 2019 IPO.
“How did the sky-high valuation comes about?”
According to Commercial Observer, WeWork’s valuation had ballooned with each funding round as per below:
It started at $97 million with its Series A in 2009, and by its Series C in 2011, investors had valued the coworking behemoth at $4.8 billion, according to Craft, a website that tracks corporate financial data.
By 2015, WeWork’s valuation had reached $16 billion. Four billion dollars from Softbank last year boosted WeWork into $40 billion territories, and the funding round in January (2019) brought it to $47 billion.
The incredible speed of how WeWork’s valuation has skyrocketed attracted plenty of backlash from the investor community.
- https://qz.com/1685919/wework-ipo-community-adjusted-ebitda-and-other-metrics-to-watch-for/
- https://www.profgalloway.com/wewtf
- https://medium.com/@amuse/weworks-most-important-disclosure-in-their-s1-ark-e5db66e1f9c8
It also led us to dig deeper about the red flags for WeWork’s IPO. We will first touch on what they have amended in the revised filing and then cover about other critical points you should know.
Changes to WeWork’s IPO filing
To be honest, this came as quite a surprise. WeWork is reported to consider: slashing the valuation it will seek in an initial public offering (IPO) to a little over US$20 billion (S$27.7 billion), less than half the US$47 billion valuation it achieved in a private fundraising round in January.
Furthermore, the company added a woman, Frances Frei – formerly Senior Vice President of leadership and strategy in Uber – to its all-male board. They also announced that its CEO would return a US$5.9 million payment for use of the trademarked word “We.”
The changes come about as WeWork has come under fire for the much extensive and unusual ties between the co-working space startup and its controlling shareholder, CEO Adam Neumann. One of them includes him being a landlord to the company on some properties.
Although the amendments can be taken as a positive sign that the top brass are willing to accommodate the criticism, we still think that there are plenty of things to worry about.
Here are 3 main things we think you should watch out for.
1. “Founder-led” Problems
Truth be told, founder-led companies are usually deemed as good companies because the founder has a big stake and hence, would have the same alignment of interests with the shareholders. Mark Zuckerberg is one good visionary leader who has grown Facebook by leaps and bounds from the very beginning of the company.
However, on the flip side, that one man can also bring down a company.
In the case of WeWork, the prospectus seems to focus greatly on WeWork co-founder Adam Neumann as a charismatic face of the company. He’s mentioned almost 170 times in the prospectus, compared to the usual 20 or 30 in other unicorn prospectuses. For instance, Uber’s CEO, Dara Khosrowshahi, is mentioned only a mere 29 times in their prospectus.
Furthermore, Adam Neumann has cashed out more than US$700 million in stock prior to the IPO listing. While it’s reasonable to sell some shares to diversify your holdings and get some liquidity, US$700 million is too excessive in our opinion.
That’s not all.
According to the Wall Street Journal, Neumann worked with JPMorgan Chase to borrow against his stock to buy office properties in New York and San Jose — in which he leased 4 of them back to WeWork in exchange of millions in rent.
It gets worse.
Adam owned the rights to the “We” trademark, which the firm have to pay the founder/CEO US$5.9 million for using the trademark. (Update: Adam will return the US$5.9 million to WeWork after receiving backlash).
Together with his ownership of super-voting shares with 20 votes each, CEO Adam Neumann will control at least 50% of voting power after the offering.
All in all, I feel that Adam is personally trying to exploit the company for his own benefits.
2. Still Overvalued
WeWork has been the most controversial IPO for a long time. In their most recent private funding round, they’ve been valued at $47 billion (which would make it the second largest IPO, if they went with this valuation).
Although they are looking to slash valuations at the time of writing, let us look more in-depth into their margins and peer comparison with IWG.
Listed in London, IWG plc (formerly Regus) is a multinational corporation that provides serviced offices, virtual offices, meeting rooms, and videoconferencing to clients on a contract basis. It would serve as a good peer comparison given their similar business models.
There is a stark comparison when you look at the table above.
IWG owns more square footage, members and locations + higher revenue at S$3.4 billion as of FY2018 yet trades at a valuation 10x lower than that of WeWork (US$3.7 Billion versus US$47 Billion as seen on the last row of the table).
The most important thing is that IWG is profitable with US$0.5 Billion profits in FY2018 while WeWork racked up over US$1.9 Billion in losses.
Finally, we see that WeWork is valuing their company at 26.1x revenue ($47B / $1.8B) when even the tech giant Amazon or its competitor IWG trades at only 4x and 1x revenue respectively.
3. Flawed Business Model
The last point here pertains to the questionable business model of WeWork. Experts have commented that WeWork has a high exposure to an economic crisis and here’s why…
Taking competitor IWG as an example again: IWG operates in over 1,000 cities whilst WeWork is only operating in a few highly-priced ones, such as San Francisco, LA, NYC and London.
This results in a serious lack of diversification and risk mitigation – whilst paying a lot more per square foot. It spells serious trouble upon a recession, as firms constrict and reduce office space and their workforce.
The biggest problem here is that when their revenue would likely take a hit, their costs do not drop in equal proportion. This is because their leases are 15 years’ long – which equate to $47 billion in obligations (ah, that cursed $47 billion figure again).
Being stuck with high property prices with rapidly decline in revenue will put a major drag to its cashflow. With negative operating cash flow and hefty capital expenditure leading to a negative free cash flow of -US$2.2 billion, we see slim chances of how WeWork can potentially drag themselves out of the mess if a financial recession really happens.
Conclusion
In short, we think WeWork is a big fallacy. And it seems like we are on the right track especially when SoftBank (their largest backer) is urging WeWork to shelve its IPO.
As a recap, the company is not grounded in technology like what they claim in the prospectus. Founder Adam Neumann’s name is all over the prospectus in a forced sense of self-actualization; and has even cashed out of US$700 million before the IPO.
Lastly, the company has never turned a dime of profit before and may never do so. Adding the vast difference in WeWork’s initial $47 billion valuation and IWG’s $3.7 billion market cap, I think this IPO is like a ticking bomb waiting to explode upon listing. Investors beware.
We have always stressed that management should have aligned interest with shareholders. It is in fact, one of the key criteria for us when we decide on whether to buy a stock or to give it a pass. To anyone with a keen nose for corporate disgrace, Adam Neumann’s selling of the We brand to the company for millions, his sales of $700 million worth of shares, and his borrowing against his own company, were all gigantic red flags.
That’s not even counting the fact they were overvalued, overhyped, and under-earning.
Investors should be always be wary of such companies and beware of buying into the hype.
As Buffett said. “If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes”.
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Is it just me who thinks that Adam Neumann looks like the latest Joker without make up?