We-Work IPO Debacle

The global co-working office space just withdrew its IPO. What Happened?

Starting a new business, looking for a rental office space? Well it isn’t the first time we hear that a newly started business looks for a rental space to save cost. The traditional way of doing this is to meet with realtors, choose the most suitable option, fix a deal, pay for the commission and a lot more.

Looking for an easy way out from this hassle?

Enter ‘We-Work’, a start-up co-founded by ‘Adam Neuman’ and ‘Miguel McKelveyin’ in 2010 , headquartered in New York, is an online platform, providing a one stop solution for leasing office spaces and services like high-speed internet, printers, free refreshments, private phone booths and many more. It provides co-working space to individuals, start-ups, freelancers, small businesses etc. at a lower cost by renting fully stocked and furnished offices. Currently We-Work has offices at 528 locations in 111 cities across 29 countries.

The image below shows that the start-up is based on an Aggregator Model, where it pools the demand for rental working spaces and provides solution for the same i.e. ‘Space-as-a-service’.

Rental- Old model V/S the We-Work new model

With the idea comes a vision and the need of ‘capital’ to achieve the vision. The ‘We-Work’ company now rebranded as ‘The We Company’ started almost a decade ago with a promising idea. To fulfill the need of capital it raised funds. Post series G-1 funding of $5 Bn in August 2019, the company was valued at around $47 Bn.

The image shows various fundings that the company received since 2009 to 2019 and its valuation post the funding

As a part of its growth plan (which seemed more of a survival plan) Softbank backed company filed for an IPO (Initial Public offering) to raise $3 to $4 Billion in August 2019 at a valuation of around $47 Bn. But later in September 2019 the company withdrew from IPO filing as the public investors revalued the company as low as $10 Bn. This was a huge drop in the valuation. Softbank is one the major investor in the company with an investment of almost $10 Bn and also a member of the board along with 29% stake in the company.

What happened? Why did the company withdraw from IPO? Was the company highly overvalued or not? Let’s understand what went wrong. Even after having a huge funding and a big idea the company had some major loose ends.

  1. Loss Making Company- For the FY16, FY17 and FY18 the company earned revenues of $436.09 Mn, $886 Mn and $1.8 Bn respectively. However the bottom line was still in the red. The net loss was $429.6 Mn, $883.9 Mn and $1.6 Bn which is almost 101%, 100% & 112% of the revenue for FY16, FY17 and FY18 respectively. The six monthly losses for FY19 were $689.6 Mn.

  2. High Debt and Lease Payment Obligations - The existing consolidated long term debt stood at $1.3 Bn as of June 2019. This debt is almost 72% of the FY18 revenues. This condition has made the company financially handicapped. The business model of We-Work is based on leasing out spaces. As a part of the revenue model, the company takes long-term leases and rents out those spaces for shorter time frame. Due to these short term leases given out by We-Work there are a lot of empty office spaces for which the company is still paying rent for a longer duration, this has ultimately led to a huge revenue gap. Further the company obligated to pay $47.2 Bn as lease cost.

The Failed IPO

The failed IPO is just a reflection of the above identified flaws in the company. A failed We-Work business model with no positive cash flows and no profit generating ability is the root cause of why the company had to postpone the idea of IPO and withdraw the application. This further pushes the company towards debt-financing leading to high interest costs and keeping it trapped in this vicious cycle.

The Road-map to Survive

Softbank has invested almost $10 Bn in We-Work which makes it one of its major investments. Due to the failure in the We-Work IPO Softbank would have to write off its investment and book huge losses in its books. Hence as rescue plan the Japanese company Softbank will provide $4 to $5 billion as new financing in the equity and up to $3 billion in a tender offer for existing shareholders. Softbank will also spend an existing $1.5 billion financing commitment. After completion and tender offer, Softbank’s stake in We-Work will be around 80%.

Further Softbank has taken over the voting rights of Adam Neumann against $1.7 Bn and has ousted him as CEO. The new co-CEOs are ‘Artie Minson’ and ‘Sebastian Gunningham’. The new management has been putting in new ideas to keep the company afloat. To cut the losses there will be a massive downsizing in the company with almost 30% layoff of in the workforce. Further the new management is planning to sell its non-core businesses.

The Game of Valuation- a risky one

As an investor one is seeking high returns. Start-ups have been a massive opportunity for making investments with high returns. The global start-up economy stands at a worth of nearly $3 trillion, a rise of 20 percent from 2017. Venture Capitalists as the name suggests provide capital funding to new ventures or start-ups seeking funds. When these VC’s look for an opportunity to en-cash their returns by coming up with the IPO for these start-ups, that’s when the reality comes into play. Just like it happened with We-Work, the start-up was highly overvalued at $47 Bn and when it filed for the IPO the company came to a more realistic valuation of $10 Bn leading to a major hit to investors (VC’s). The We-Work IPO debacle is a lesson for the Venture Capitalists to re-asses their investments in start-ups before it's too late.

Thank You!

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©2019 by Equialpha Wealth Advisers