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 who, exactly, will pay for Uber and WeWork? 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, the 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. The newspaper lays out some of Neumann’s personal benefits from the regulatory filing. He 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 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.
However, as investment banks will reap hundreds of millions of dollars in fees for the initial public offerings and debt financings – WeWork wants another $6bn in debt if its IPO can raise at least $3bn – bonuses that side will be considerable.
In terms 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 is the big mutual funds and exchange-traded funds (ETFs) that have to buy the stocks if they are part of the market 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 a similar factor, then a slight dip in ETF returns because a few stocks fall will be washed out in the annual numbers and their clients, the pension or life assurance accounts of millions of people, will barely notice the difference in cumulative pennies taken out.
If Uber, WeWork and deliver on their promises to change consciousness or deliver autonomous driving or whatever their USP is, then share prices in these companies might rise, leaving hedge funds out of pocket.
But it seems more likely that the shares will indeed fall. The real loser then would be the innovation capital funding 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 has dropped below those for two-year Treasury bills, a warning signal for recession in the next few years, if the past 60 or so years are a reliable guide.
