WeWork: overhyped, overvalued

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WeWork: overhyped, overvalued

Post by Anaxagoras »

It's a company that essentially rents out office space. Not exactly a unique idea or something that others can't do just as easily.
It isn't profitable yet. I guess the one thing they could say was that their revenue growth was fast, but that can't go on forever.

The WeWork mess, explained
WeWork, the coworking unicorn startup whose IPO has been one of the most highly anticipated public offerings of 2019, has been imploding in recent weeks.

The company, which was about to begin its roadshow to get public investors interested in buying its shares, postponed its IPO last week in a highly unusual move after investors have expressed concern about its business model and leadership structure. And now, reports indicate that some of the company’s board members, including officials representing SoftBank, its biggest investor, want to push out WeWork’s founder and CEO Adam Neumann.

In the months and even years leading up to WeWork’s IPO push, concerns abounded about its massive losses, whether it’s really a tech company, and its hard-partying corporate culture. But investors seemed to be fine with WeWork’s many problems — until it registered to trade on the public markets. Suddenly the company’s insider dealings (like being both its own landlord and tenant), its track record of burning cash without a path to profitability, and reports of poor executive judgment seemed to become an issue.

The abrupt drop in WeWork’s valuation, to just a third of the $47 billion it had previously been valued at in a January funding round, probably had something to do with it. WeWork declined to comment to Recode on the matter. SoftBank did not immediately respond to a request for comment.
Here's the part that suggests it's kinda fraud-adjacent, and not merely over-hyped:
Poor corporate governance

WeWork’s corporate governance issues are myriad, and the company’s corporate structure is at the root of it all. Like many other tech companies that have recently gone public, WeWork has a multi-class stock structure that gives Neumann more power than the company’s other stockholders.

Neumann has been able to maintain control of WeWork because the Class B- and C shares he owns each had 20 votes to every one vote regular shareholders would get for their Class A shares. After a wave of criticism, WeWork amended its S-1 two weeks ago and limited Neumann’s super-voting shares to 10 votes for every one regular share’s voting power — but that’s still a high ratio.

This means it will be hard to get rid of Neumann if he doesn’t want to leave since his super votes still give him the power to fire the entire board. But if Neumann did get rid of his opponents on the board, he would run this risk of making WeWork look even more chaotic than it already is in the eyes of investors, threatening the outcome of an IPO. Neumann is reportedly in discussions to voluntarily give up his role as CEO, according to a Reuters.

Original company filings stated that if he died, his wife Rebekah, the co-founder and the chief brand and impact officer of WeWork, would have been charged with appointing a successor. The updates to WeWork’s S-1 changed that Game of Thrones scenario to one in which the WeWork board would be responsible for finding the next CEO in the event of Neumann’s death.

Rebekah is one of several family members employed at WeWork, including Neumann’s brother-in-law, who serves as its “head of wellness.”

Neumann’s board supremacy has allowed him to enact a number of nonstandard financial practices that many have viewed as a conflict of interest.

WeWork, which at its heart is a company that leases long-term office space in order to rent it to others in the short term, didn’t initially plan to own property. Not doing so saved it from larger expenses that would burden its already laden balance sheet. But earlier this year, the Wall Street Journal reported that Neumann was privately buying property that he then leased to WeWork.

And at the same time, Neumann was borrowing money from WeWork at little to no interest. So the company was paying him rent while lending him money.

Responding in part to investors’ concerns, Neumann said he would transfer ownership of these buildings to the company’s real estate investment vehicle, ARK.

In a similar vein, WeWork paid Neumann nearly $6 million to change its name to “The We Company,” a trademark that Neumann owned. In the mea culpa/updated S-1, he gave that money back.
How WeWork is trying to justify its tech company valuation
“Space as a service” does not a software company make.
WeWork, which is officially known as the We Company, released paperwork to go public Wednesday. In it, the coworking company tried hard to defend its whopping $47 billion valuation, which is multiples larger than it would be worth if it were considered a real estate company like its main competitor IWG. What makes WeWork worth more, the company seems to be saying, is that it’s a tech company — meaning its innovation and flexibility make it better than a regular real estate company.

That’s a tough argument to make, given that for a long time, IWG has had substantially more square footage and more customers, and has actually made a profit — yet its market cap is just 8 percent of what SoftBank’s latest funding round thinks WeWork is worth.

WeWork’s filing shows it’s made some huge strides as far as its relative size to IWG, but that still doesn’t explain a valuation that’s more than 10 times higher. WeWork is operating at a huge loss, losing nearly $900 million in the first half of 2019, but it also doubled its revenue when compared with a year earlier.

Today’s release laid on the argument that it is a tech company — and by extension deserves its high price tag — very heavily. WeWork used a version of the word “tech” 123 times in its public filing; that’s more than the video calling software company Zoom did in its 2019 IPO filing, but less than the ride-hailing app Uber did, which also had to contend with arguments that it is basically a taxi company.
At least it's not a public company yet.