- Vinay Nair
Everything That Went Wrong With WeWork IPO
One of the savviest unicorns of our generation, had emerged on the scene around the time of a worldwide economic meltdown: offering cool, flexible and affordable co-working spaces for young professionals looking to hustle through the crisis.
Nearly a decade since then, the company seems to have wound up with a meltdown pooling around its own feet. It has only been a short while since the controversial IPO plans of this company unravelled and devolved into a hot mess, leaving the once-coveted startup to lick its wounds before it even dreams of making another appearance in the public market. While the company's new co-CEOs Sebastian Gunningham and Artie Minson are pulling out all the stops to get it back on track, WeWork's woes are unlikely to end anytime soon, especially if it does not manage to raise sizeable funds by as soon as the end of November. While efforts are underway to revive WeWork after its very public dalliance with disaster, its failed IPO leaves both Wall Street insiders and interested laymen with some important lessons to learn from.
Before we delve into the learnings I've amassed from the firm's catastrophic turn at the public market, it is only fair to bring the uninitiated up to speed.
A Brief Look At WeWork's IPO Disaster
To recapitulate, the past month saw WeWork move to go public, at a valuation much lower than the $47 billion dollars at which it had earlier raised money from private investors like SoftBank. However, even the massively slashed valuation failed to attract investors in the public market as questions around its lack of profitability and problematic corporate governance began to do the rounds in the market. Its S-1 document, meant to act as a prospectus for potential investors, served as its Achilles Heel, revealing disturbing details of its financial haemorrhage and erstwhile CEO (and founder) Adam Neumann's maverick leadership.
Even though WeWork had long been the blue eyed boy of private equity investors (especially SoftBank, which invested over 10 billion dollars in the company), its operational losses weighed heavy on the minds of the investors in the public market. Moreover, the investors were also not too happy about the extent of influence Neumann exercised over the company's moves, his own decision to cash out more than $700 million from his company, the fact that the company had to pay him a massive sum for the "We" trademark and the costs it bore for buying and maintaining Neumann's luxurious private jet. While the public market had earlier entertained the likes of Uber and Lyft despite their checkered history of poor profitability and operational losses, the word on the Wall Street was clear with respect to WeWork:
Investors were simply not going to put up with yet another overpriced IPO that wouldn't bring them returns.
WeWork did attempt to woo these investors by cutting down on Neumann's voting rights, and waiving the right of Neumann's wife Rebekah Paltrow to choose a chief for the company in case of her husband's death or grave illness. Moreover, in a show of token inclusivity, it announced the addition of a woman into its all-male board of directors. Sadly however, these moves failed to make a mark and, things soon went south for the proposed IPO. In fact, even Neumann's decision to step down, and his replacement by two new co-CEOs proved insufficient to salvage the IPO, and soon enough, the offering itself was pulled from the market. As of now, the firm is reportedly busy chalking out a debt financing package with the likes of Goldman Sachs and plotting a more conservative comeback in the days to come.
WeWork's tryst with the public market leaves us with some crucial takeaways that will possibly characterise Wall Street developments in the months and years to follow.
What lessons did we really learn from the whole debacle?
Venture Capitalists Should Probably Start Tightening Their Purse Strings
As multiple commentators have pointed out in the past couple of weeks, the recent years have seen startups raise an obscene amount of money from private equity investors and venture capitalists. Contrary to the earlier trend of businesses eagerly pitching to the VCs, the tables have turned so that it is the men with the money who are chasing these startups these days. While such spirited fund infusions in innovative unicorns might sound great on paper, they also allow these new companies to expand recklessly without paying heed to profitability, which is ideally a key component of the very definition of what constitutes a "business".
That is exactly what seems to have happened with the likes of Uber and Lyft earlier (both of which are faring quite poorly in the stock market since going public), and now WeWork. WeWork itself had managed to rake in the moolah from the likes of SoftBank, which itself was flushed with cash from the Saudi Arabia's Public Investment Fund (PIF). Till the PIF moved to reduce its own exposure and resultantly reined in SoftBank from pouring more money into WeWork, the unicorn had a merry time at the bank, drawing out more and more money even as operational costs mounted.
These funds effectively inflated WeWork's actual valuation to insane levels and enabled it to harbour inefficient and unprofitable business practices, neither of which sat well with the more cautious investors of the public market. As the hype around unicorns slows down, it is probably a reminder to venture capitalists to hold on to their money with greater vigilance, just like the good ol' days.
The Greater Fool Theory Really Doesn't Work For Too Long (Or At All)
Many have already likened SoftBank's decision to keep pouring massive sums of money into WeWork as a manifestation of the "Greater Fool Theory". The said theory suggests that there will always be someone more foolish to buy out their share for a higher price. To me, it also seems to be a case of classic escalation of commitment: where it went in too deep and simply couldn't stop hoping that the theoretically smart business model of WeWork would eventually work out and spin out an enviable amount of profits to make the humongous investment worth it.
If anything, the decision to keep excusing poor economics of business by waxing eloquent about how a company is "disrupting" or "transforming" the space hardly ever works in the long run. As private investors keep pouring more money into loss-making enterprises in the hope that someone else will just pay more money for the same, the whole thing turns into a vicious cycle leaving no escape route for anyone involved.
Investors are Done with Poor Corporate Governance
Of all the things that went wrong with the WeWork IPO, its problematic and dictatorial patterns of governance were a major part, and for good reason. Initially, the prospectus for the IPO was arrogant enough to spell out Adam Neumann's iron grip on his enterprise, saying:
Adam’s voting control will limit the ability of other stockholders to influence corporate activities and, as a result, we may take actions that stockholders other than Adam do not view as beneficial.
While founder-led companies like Facebook and Google have earlier managed to go public with comparable concerns around governance, the times have clearly changed over the years, leaving the investors unwilling to put up with a CEO that lost his company money and took largely unilateral decisions. The backlash against Neumann's arbitrary and almost despotic control over the company was intense, and the company had no option but to oust him from his position of privilege. Even though that was not enough to get the IPO up and running, it did leave a resounding message for the entirety of Wall Street: today's investors are fed up with mismanaged corporate entities and will no longer put up with them!
Moral of the Story
The WeWork episode is one for the books, more for its telltale lessons about the changing contours of the investment space, than the steady stream of rollercoaster drama it provided to us for a good two weeks.
Hopefully, as SoftBank recovers from its admittedly "embarrassing" investment (as its CEO Masayoshi Son recently commented), it will learn, along with other venture capitalists, to do their math before pouring money into a startup as if it were a bottomless vessel. As for the likes of WeWork, this incident should drive home the merits of a slightly more conservative form of governance and simply undertaking realistic calculations before making a major decision. If anything, it has definitely learnt that investors can no longer be taken for fools, and perhaps that itself is enough!
