We Company, the US-based workspace provider backed by telecommunications group SoftBank, yesterday formally withdrew from an initial public offering that had been tipped to raise up to $4bn.
We Co was founded in 2010 as WeWork – still the name of the subsidiary that operates a network of almost 530 co-working spaces across 29 countries, offering office facilities and equipment to individual workers and corporate customers.
The company had raised $11.5bn in debt and equity financing altogether, with much of its later investment coming from SoftBank and its $98.6bn Vision Fund (more details here), and it was valued at $47bn as of January 2019.
However, We Co’s IPO filing in August threw out some troubling details including a $5.9m payment to founder Adam Neumann (who had already sold $700m of stock in the run up to the offering) for the rights to its new name.
Subsequent media reports revealed the company was now expecting to float at a valuation of as little as $15bn. Neumann agreed to step down as CEO and after initially putting the offering back to later this year, We Co confirmed yesterday it was being put on hold.
While the end result is still up in the air, for now it’s fair to say corporate venturing has not seen such a significant downfall (for a pre-IPO company anyway – SoftBank was also one of Yahoo’s key investors, while Google invested in AOL at a $20bn valuation), and it raises a number of questions that will be of interest to investors.
What does this mean for long-term business models?
One reason We Co was able to raise so much money was its long-term vision of space-as-a-service, where it would offer access to areas beginning with work but leading to accommodation, education and leisure, through beautiful spaces managed by the company. It could make big losses in the short term ($905m in the first half of this year, from $1.53bn of revenue) because the payoff would eventually be so much larger. Call it the Amazon model if you like.
Industries like ride hailing operate from a similar place – a vision in which autonomous electric cars shuttle consumers back and forth and individual car ownership is no longer necessary – but you can essentially link many app-based service providers to this way of thinking, where establishing a service through a mobile on-demand mobile and then taking market leadership in the space is prioritised ahead if profits.
However, WeWork has never provided a compelling picture of how its business model can generate profit, especially considering it requires renting space in some of the world’s most expensive real estate markets through long-term leases.
Growth at the expense of profitability isn’t much of an issue if you’re an early backer and you’re able to make money from any kind of exit, but when you’re investing huge amounts pre-IPO you need the company to thrive in the long term to avoid losing your hat. If you’re an investor, is it time to start putting a higher priority on profitability than vision?
Is the age of the founder CEO drawing to an end?
It’s worth noting that WeWork’s business model had been called out by the media for years, often the same media that took for granted it would keep growing, and that it continued to raise huge sums of money at ever increasing valuations regardless. A good part of that can be attributed to Neumann’s magnetism and vision.
The likes of Mark Zuckerberg, Jeff Bezos, and Larry Page and Sergey Brin have attracted bad publicity but it’s generally been based on moral issues – ultimately, no one doubts their ability to run the companies they founded profitably. But the fact the We Co farrago came so quickly after the ousting of Travis Kalanick at Uber (and within memory of the Elizabeth Holmes-managed chaos at Theranos) must throw a pretty big question mark over the issue.
An interesting side point is that one of the other most celebrated founder CEOs of recent times is Stewart Butterfield at Slack, which like We Co and Uber, counts SoftBank Vision Fund as a notable investor, and which has seen its market cap drop by a third since it went public in June this year. SoftBank (not to mention Benchmark, which holds board seats at Uber and We Co) cannot afford to get a reputation as an investor that gets rid of founders, but you can’t help feeling there’s a sea change of sorts going on.
How about the workspace model in general?
Although it is the biggest company in the market, We Co is far from the only workspace provider operating in the US, though it is of course worth asking to what extent its success or otherwise affects that of the sector in general.
Three other workspace providers – Knotel, Industrious and CommonGrounds Workplace – have each raised between $80m and $400m in the past six weeks. Quick question: what do they have in common with each other but not WeWork? Answer: All three have property developers and/or real estate advisory firms among their investors.
The experience and expertise of an operator in the industry inevitably comes in handy if you’re hunting out properties in which you can get decent rental rates, and if they’re an investor you also have the option of leasing directly from them, potentially at beneficial rates. The investor also takes on an extra sense of responsibility not just for its equity investment but in the sense that it is in their interest for one of their biggest customers to stay buoyant.
Industrious makes a point of working partnerships with landlords into its core model, helping it to stay asset light and thus reducing risk while sharing responsibility. In fact all three had already sought to separate themselves from the WeWork model (which is perhaps a given considering the size differential), with CommonGrounds and Knotel both focusing on providing tailored spaces for each customer. All of them will inevitably now look to heighten that thematic separation.
And SoftBank?
Well, SoftBank should be worried frankly. The company was an early winner in corporate venturing due to its stake in a then-nascent Alibaba but it has bet big on its Vision Fund model. Vision Fund’s investments tend to have two common themes – artificial intelligence and app-based services – and it’s the latter that could be an issue.
The failure of the We Co IPO is especially pertinent due to SoftBank still being in the process of sealing capital for a second Vision Fund which has secured $108bn in MOUs without reaching any kind of official close. Reports had already suggested the Middle Eastern sovereign wealth funds that supplied $60bn for the first fund are less keen this time round, but perhaps more concerning are reports that a fair amount of that capital was debt-based, and that Vision Fund has to show some decent returns relatively quickly.
The increase in valuation for We Co allowed the fund to do so on paper – even if it was due to its parent company’s money – but the likes of Uber and Slack have seen their market caps fall post-IPO, while other bets, such as dog walking service Wag, are reportedly also facing difficulties. Recent reports indicate SoftBank may be willing to put up an extra $1bn to get We Co back on track but several of Vision Fund’s portfolio companies will likely need additional capital soon and may find it tricky to do so at increased valuations. To say nothing of profitable exit routes.
That’s not to say SoftBank cannot buck the trend; I personally didn’t believe the first Vision Fund would raise the money it did until it did, and it has overturned pessimistic expectations in the past. But it has a lot to do, and fixing the We Co issue will have to be its key priority.
