The 5 Factors Which Led To WeWork's Messy Year
Chaotic corporate governance, sketchy self-serving deals, and hesitant investors make up just some of WeWork’s problems, so we delve into the mess and investigate what is going on with the company’s IPO.
Perhaps we are being a little bit harsh on Adam Neumann’s shared workspace organization, but it is hard to recall an IPO saga stranger than that of The We Company.
In order to make a little sense of all this, we are going to comb through the 5 main factors that have brought WeWork to where it is today; bleeding money, shrouded in controversy, and on the brink of shelving its IPO.
Let’s get cooking!
It has been a year of overpriced valuations so-far it seems, with the likes of Uber (NYSE: UBER), Slack (NYSE: WORK) and SmileDirectClub (NASDAQ: SDC) all coming in with massive valuations and then struggling since their IPO. The We Company can draw similar comparisons.
Back in January, WeWork was valued at a whopping $47 billion, which would have made it the 2nd largest IPO of 2019, trailing only Uber at the time. Labeled as a tech company (that doesn’t actually sell or manufacture tech), The We Co. has since seen its price fall harder than a skydiver who confused his parachute with his anchor!
Much of this valuation comes from looking at what might be a gilded outlook of a company which, on the surface, was jumping in revenue from $886 million in 2017 to $1.8 billion in 2018, or 106% year-over-year, but beneath it all, was running a very high-risk strategy that relies on a strong market.
Currently, the U.S. is in the midst of one of the longest economic expansions in its history, making conditions ideal for WeWork, but it is still not making a profit. If it cannot make things work now, what will it do in the event of a market drop?
As of the time of writing this article, WeWork is valued at just $12 billion.
Back in August, The We Company finally unveiled its S-1 filing ahead of its long-awaited IPO with a report so confusing and mismatched that Rain Man himself probably couldn’t make sense of the numbers.
One would think that, when filing an S-1, you would plan on building investor confidence so that more money could be raised? This was not part of Adam Neumann’s strategy apparently. Instead, the IPO filing revealed that the co-working company had quadrupled its revenue in 2 years to $1.82 billion, while also declaring an annual loss of $1.61 billion. According to the Financial Times, the company lost $219,000 every hour of every day from March 2018 through March 2019, and Adam Neumann wanted more investors?
In the immortal words of legendary ESPN sportscaster Pepper Brooks: “It's a bold strategy Cotton. Let's see if it pays off for him."
Japanese based conglomerate SoftBank Group Corp is WeWork’s largest outside investor, and in early September, despite the negative effect this would have on its own planning, the company requested WeWork to shelve its IPO plans. This was due mostly to the tepid investor reaction they were getting, and concerns that the necessary capital to move forward would not be raised following We’s public launch.
SoftBank did get its wish, with The We Company announcing the delay of its IPO the following week, which will have a butterfly effect on SoftBank’s overall investment strategy for the upcoming year.
When your largest backer is no longer backing you, you know things are just not going right!
Not quite as detrimental as the other reasons, but damning nonetheless is the fact that WeWork is currently embroiled in a number of ongoing lawsuits that have affected the company’s reputation as a safe working environment.
As of June 2019, three former executives were at various stages of suing WeWork, one alleging age discrimination, one alleging sexual harassment claims that resulted in retaliation, and one alleged retaliation for filing a complaint that women were paid less.
And finally, the most crucial factor in this whole mess: CEO and Co-founder Adam Neumann. While not everything is Neumann’s fault — the non-existence of any semblance of corporate governance at WeWork can take some blame — much of the blame lies with its eccentric CEO.
Here are the red flags regarding Neumann:
1. Neumann is his own company’s landlord, and in a clear conflict of interest, has been collecting rent from WeWork for years. Although the company has sworn to resolve this, the fact that it was allowed to happen for so long is disconcerting.
2. The company has made a number of personal loans to Neumann’s personal LLC (We Holdings LLC) at interest rates below 1%. There is no need for us to explain how this might be construed as controversial.
3. Though debatable, there have been some whispers of nepotism, as the company paid several of Neumann’s relatives to host events in 2018. Non-related, but Neumann’s wife and other family members serve in senior roles at the company.
4. The most ridiculous self-dealing story of the lot came in the fact that in July, in order to rebrand, the company paid Neumann’s personal LLC $5.9 million in stock for the rights to the “We” family of trademarks. Luckily, it was reported that these stocks had been returned by Neumann in September.
There you have it: the perfect WeWork recipe for disaster! However, there may be hope for this meal yet.
On September 13, We Company announced changes to its governance policy, which allowed the board of directors to pick any new CEO and removing Neumann’s family from the board. This, as well as moves to move profits from Neumann’s real estate deals back to the company show that We may finally be getting with the program.
With its IPO delayed until October at the earliest, one hopes that the company can turn things around before it goes public, as investors have had their fill of wacky startups that bring in no profits.
MyWallSt operates a full disclosure policy. MyWallSt staff currently hold loo positions in companies mentioned above. Read our full disclosure policy here.