When I first began following the story of WeWork, I was struck by how quickly a company celebrated as a rising unicorn could unravel.
On 14 August 2019, WeWork filed for its initial public offering with a valuation that almost reached 50 billion dollars, a figure reported at the time by the Financial Times. Yet within weeks, the media documented its astonishing fall from grace.
By mid-September, its valuation had dropped to around 10 billion dollars. After the publication of its third-quarter earnings for 2019, the prospect of an IPO seemed increasingly remote. Bloomberg reported that losses had doubled since the previous year, and despite rising revenue, the company’s value continued to sink.
Following the resignation of founder and former chief executive Adam Neumann, his temporary replacements, Artie Minson and Sebastian Gunningham, decided to delay the flotation indefinitely. With future financing tied to the failed IPO, analysts predicted that without alternative capital injections, WeWork would run out of cash by mid 2020. This led SoftBank, the company’s largest shareholder, to intervene. SoftBank initially held around 30% of WeWork, but increased its stake to roughly 80%, providing five billion dollars in new financing and up to 3 billion dollars for existing shareholders.
At that point, I found myself asking three questions:
What exactly is WeWork?
What went so wrong?
And what does this mean for the business world moving forward?
To begin, WeWork was, and after SoftBank’s rescue still is, a co-working company once hailed as a rising unicorn. It was driven by a charismatic founder, Adam Neumann. Its business model was relatively simple. WeWork rented office space for long periods from property owners, renovated the space to suit young businesses and then rented it out to clients. As the attached document states, “the primary function of WeWork is that it is a real estate company, connecting workers and businesses with places to work.”
There have been many attempts to explain the dramatic fall.
One major concern was that WeWork was a loss-making company and had been for a long time. The company conceded in its prospectus that it “could not predict” whether it would achieve profitability “for the foreseeable future.” Investors questioned its poor cost control and aggressive expansion strategy, which was extremely expensive and unlikely to generate significant returns in the near future.
Other investors were troubled by Neumann’s behaviour. It was reported that he copyrighted the term “We” and forced the company to buy it from him. Several properties leased by WeWork were owned by Neumann, creating an unethical conflict of interest. For a founder with such influence over the company’s future and culture, this damaged investor confidence. As the document notes, “the prospects of the IPO continue to be damaged as discrepancies and uncertainties surround the company.”
However, the fundamental reason for the collapsed IPO was the unsustainability of WeWork’s business model.
The company rented large office blocks for long periods, sometimes up to one hundred years, but leased them to clients for much shorter durations, often around two years. This mismatch created significant risk. After those two years, WeWork could be left with empty offices and outstanding rental payments.
It was even more concerning that much of the space was dedicated to areas that did not directly generate revenue, such as sofas, lunch spaces and breakout rooms. In a muted global economy, investors questioned whether these spaces would remain in demand.
At this point, WeWork was trapped in a vicious circle. Poor financial performance and weak governance led to a failed IPO, which in turn damaged investor trust and the company’s reputation.
Understanding this collapse requires an understanding of the listing regime.
Going public is often chosen by companies pursuing growth strategies and needing capital to fund operations. The process is lengthy, costly and divided into two main parts. First, the company applies to the Financial Conduct Authority in the United Kingdom or the Securities and Exchange Commission and the Financial Industry Regulatory Authority in the United States. This requires months of preparation involving auditors, banks and lawyers.
The final deliverable is regulatory approval and a prospectus. Second, the company applies to a recognised investment exchange, such as NASDAQ or the New York Stock Exchange.
The collaboration with stakeholders is extensive.
Legal teams conduct due diligence, auditors verify financial documents and public relations advisers, bankers and management draft reports that accurately reflect the company. Many companies restructure continuously to comply with regulatory requirements.
Once all documents are prepared, a prospectus is drafted.
It is the primary marketing tool for investors and must include detailed information about stock classes, rights, indebtedness, dividend policies, risk analysis, market data and audited financial statements. WeWork submitted its prospectus, which is publicly available.
However, the document contained informal and controversial elements that reflected the company’s relaxed culture. As the attached document notes, “the laid back culture itself has a section dedicated to it.” WeWork also stated that it did not plan to pay dividends in the foreseeable future, as it intended to continue its aggressive expansion. Combined with financial statements showing poor cost control, this did not inspire investor confidence.
If approved, the prospectus is published, and the company offers its shares at a fixed price. The demand for the stock drives the price up or down on the day of the IPO. Afterwards, the shares are traded daily, and the company must comply with extensive rules governing publicly held companies.
The WeWork saga offers a valuable lesson. Being public offers many benefits, but it also involves high cost and scrutiny.
The laissez-faire management and lack of security at WeWork made the company unsuitable for public trading.
Some have predicted that WeWork represents a bleak glimpse into the future of IPOs. However, I believe this is an oversimplification. The WeWork collapse shows that investors are becoming more cautious and more mature in their decisions. They are no longer willing to invest in companies that make continuous losses without a clear path to profitability.
Uber and Lyft, both loss-making ride-sharing companies, also faced a frosty reception from investors.
While the WeWork saga may not dramatically reduce the number of IPOs, it will likely change the type of companies that go public. The era of the maverick, loss-making unicorn driven by unsustainable growth is coming to an end.
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