photo by Ajay Suresh
WeWork’s planned initial public offering triggered an investor’s nightmare, with tens of billions of dollars evaporating practically overnight. While the company is still fighting for survival, its rapid and steep fall is the kind of cautionary tale that investors will be talking about for years to come.
WeWork filed IPO paperwork in mid-August, triggering close scrutiny from investors and the media. While the company is best known for providing shared workspaces for entrepreneurs, freelancers and enterprise customers, the IPO reflected its broader ambitions. The business – officially called the “We Company” – also included the enterprises WeLive (a residential business) and WeGrow (an educational arm aimed at entrepreneurs). IPO paperwork revealed losses of $900 million in the first half of 2019 alone. Rett Wallace, the chief executive of Triton Research Inc., called WeWork’s prospectus “a masterpiece of obfuscation.” Amid questions about its path to profitability and its leadership practices, WeWork delayed the IPO as of mid-September. The company’s CEO and founder, Adam Neumann, stepped down as chief executive on Sept. 24.
The bad news kept coming. In a span of about six weeks, WeWork went from a company with a $47 billion valuation to one rumored to be in immediate danger of running out of funds. The company’s new co-CEOs shelved the idea of a public offering in late September. The company announced plans to lay off nearly a quarter of its employees soon after. Those layoffs were reportedly delayed because WeWork lacked the cash to pay severance. On Oct. 22, news broke that SoftBank Group, WeWork’s largest investor, would bail the company out in exchange for an 80% stake in the enterprise, now valued below $8 billion. As a condition of the deal, Neumann gave up his remaining title as chairman of the board.
Many observers argued that SoftBank would have been better off walking away. Prominent hedge fund manager Bill Ackman said he thought WeWork was likely worthless as an equity investment. In other words, even with the bailout, WeWork might be doomed. At a recent investor conference, Ackman said, “As someone who has put good money after bad, I think this looks like putting good money after bad.”
I saw firsthand that money was no object for WeWork in its heyday. A building next door to our office in Atlanta had been vacant for some time, suggesting that the landlord had struggled to find a tenant. Once WeWork moved in, the space was built out beautifully in only a few months. I understand why someone might want to work in that sort of space; I am less sure why someone might want to invest in that sort of company.
At its heart, WeWork is not a tech startup. It’s a real estate company. There is nothing wrong with being a real estate company, but WeWork insisted on being treated – and valued – as a tech company instead. Neumann often said that his goal was not to build a successful company, but rather to “change the world.” He also said that he expected to become the world’s first trillionaire. The company’s prospectus pronounced, “Our mission is to elevate the world’s consciousness.” Hubris is not fraud; WeWork is not Theranos. But by modeling itself as a Silicon Valley unicorn, WeWork set itself and its investors up for a rude awakening.
Another contributing factor to the size of WeWork’s collapse is the investment of the Vision Fund. SoftBank CEO Masayoshi Son organized the fund to make large bets on technology startups. The Vision Fund, at $100 billion, dwarfs other venture capital funds. At its launch, critics worried that it would distort the venture capital market. In WeWork’s case, this seems to be exactly what happened. SoftBank and the Vision Fund together invested nearly $11 billion in WeWork over the past two years. Most of the capital WeWork raised came from them. There’s no guarantee that WeWork could have raised anything like the funding it achieved without Vision Fund and SoftBank’s ability and willingness to make a huge bet.
WeWork’s problems extended beyond its valuation and financial practices. The company’s IPO paperwork revealed that Neumann had taken large personal loans from the company at below-market rates. More alarmingly, he had trademarked the word “we” and then licensed it back to his own company in exchange for $5.9 million in stock. (He has since returned that payment.) But Neumann’s reported behavior ventured past the fiscally questionable into the outright weird. Some employees described a quasi-religious undertone to company meetings. Others called Neumann’s management style imperious and hard to predict. One executive told FastCompany that Neumann “had a Game of Thrones approach to management.”
In the end, WeWork’s crash illustrates the sunk cost fallacy that many of us learned in Economics 101. Rationally, costs that have been incurred and cannot be recovered should not affect current decisions. But investors are not perfectly rational in the real world. Despite all WeWork’s losses, investors – specifically SoftBank – kept bailing them out. At this point, according to The Wall Street Journal, SoftBank’s equity investment exceeds $13 billion in a company currently valued at less than $8 billion.
SoftBank’s CEO has, at least, admitted that the initial over-exuberance was misguided. At a news conference, Son said, “In the case of WeWork, I made a mistake. I won’t make any excuses. It was a very harsh lesson.” That lesson reportedly has cost SoftBank approximately $4.6 billion to date. Even so, Son remains committed to making big bets on ambitious startups, at least for now. He is securing backers for another venture capital fund devoted to investments in artificial intelligence. Son has said, however, that SoftBank will be more cautious about the timing of IPOs in the future.
WeWork does offer a service that people want; that service is co-working space, not “elevating the world’s consciousness.” Whether a slimmed-down version of the company survives or not, its founder’s fall and its massive loss of value should remind investors of the dangers involved in letting hype carry them away.