“WeWork’s Bonkers IPO,” according to Fortune’s daily newsletter, mirrored by sister title, CEO Daily’s “The Weirdness of WeWork’s IPO Filing” as it noted: “If a recession is coming, the WeWork IPO filing… will be a fitting capstone for the peak.”
The Financial Times’s analysis, WeWork: You Pay, noted: “WeWork parent The We Company is about to achieve the seemingly impossible by making Uber’s initial public offering look prudent. Like Uber, WeWork is around a decade old, has never turned a profit and does not deign to suggest when it might do so. Losses are vast, obligations are gigantic but in contrast to the ride-hailing company, WeWork has no intention of giving investors an equal say in its future.”
But there is an interesting question about who, exactly, will pay for Uber and WeWork’s supposed madness? Customers have benefited from effectively subsidised services from the venture capital and debt thrown at the companies. Uber raised nearly $30bn in venture capital and at its IPO had an $82.4bn valuation; WeWork raised about $13bn in VC money with a reported $47bn valuation in its pre-IPO round.
Management gained $3.9bn in stock options from Uber at its IPO, which raised $8.1bn, and taking net loss for its second quarter to $5.2bn. Adam Neumann, co-founder and CEO of WeWork, could receive a pre-IPO award of options of 42.5m shares, set to vest over the next 10 years even though the company has no employment agreement with him, according to the FT, which lays out some of Neumann’s personal benefits from the regulatory filing. Neumann already effectively controls the company through his existing 2.4 million ordinary shares and control of 112 million B shares and 1 million C shares (both of which carry double voting rights).
Venture capital investors have seen these companies’ valuations explode beyond perhaps even their wildest dreams while even later-stage investors, such as SoftBank, have found opportunities for tens of billions of capital needing a home and can leverage the investment pace to raise subsequent pots of money. In fact, supporting entrepreneurs able to grow the top line has been enormously valuable skill even at the risk of encouraging conflicts of interest or governance issues down the line from personal enrichment that could possibly even make hardened investment bankers blench with embarrassment.
However, as investment banks will reap hundreds of millions of dollars in fees for the initial public offerings and debt financings – WeWork wants a further $6bn in debt if its IPO can raise at least $3bn – so bonuses that side will be considerable.
Running down the list of other stakeholders, even hedge funds can benefit by shorting the stock if they are right that valuations are too punchy.
So, perhaps the only big category of potential losers could be the big mutual funds and exchange-traded funds (ETFs) that have to buy the stocks if they are part of the market in order to maintain their allocation of the overall market but then face falling prices of the shorted stocks. But if the market overall grows by 5% per year or whatever, then a slight diminishment in ETF returns because a few stocks fall to a greater or lesser extent will be washed out in the annual numbers and their clients, the pension or life assurance accounts of the millions of people who will barely notice the difference the cumulative pennies taken out.
If Uber, WeWork and others do deliver on their promises to change consciousness or deliver autonomous driving or whatever then the future really is different and maybe even better then share prices in these companies might indeed rise, leaving hedge funds out of pocket.
But, with a healthy dose of cynicism about this eventuality, the stocks might indeed fall. The real loser then would be if it helps puncture the innovation capital bubble that’s been building over the past decade that has seen more than $1 trillion in venture capital invested between 2010 and the end of 2018 alone.
Markets might be a weighing machine for valuations but sentiment is important and if enough investors rush to ‘safer’ assets other potential life-changing innovations can see their progress slowed through a lack of funding.
Already, Bloom Energy and half of last year’s California Bay Area IPO stocks are underwater, according to analysis by BizJournal Silicon Valley, and interest rates for 10-year US Treasury notes dropped below those for two-year Treasury bills, a warning signal for recession in the next few years if history over the past 60 or so years has been a reliable guide.
It seems some will take these warning signs and collect the money now before they have to run.
