WeWork, the shared office space provider valued at US$47bn, has submitted its IPO homework, filing the S1 form required to take the company public -- but dig down into the company’s workings out and things look far from rosy.
If you’re of a certain persuasion, S1 filings for unicorn startups are an enjoyable read. For those of us who are dubious about the tech-utopianism of these mega-startups, the eyes immediately drift towards the ‘risk factors’ section of an S1.
It’s here where, after all the bluster and investment rounds, a business has to disclose all of its deepest, darkest fears. And for many of these loss-making unicorns, this includes the frank admission that they could never profitable. By way of example, between 2016 and the first half of 2019, The We Company (WeWork’s parent) lost $4.2bn
The We Company is targeting a mega-IPO. The company is hoping for a share sale of about $3.5bn. Combing through WeWork’s S1, the risk factors for WeWork’s would-be shareholders are substantial -- and in some cases, downright weird.
The headline number is that $4.2bn loss mentioned earlier. Within the broader unicorn ecosystem, however, these losses are actually paltry. Uber lost $5.2bn in the second quarter of this year alone, for instance.
But then again, WeWork generated only $4.7bn in revenue over this period. That’s likely why WeWork is seeking up to $4bn in debt alongside its IPO, over and above the $8bn in investment it has raised to date.
Indeed, WeWork has been a prodigious investment raiser: the company completed a $1.7bn Series G at a $21.2bn valuation in August 2017. But despite its VC-backed prowess, there have been troubling signs, too.
Specifically in relation to WeWork’s unique relationship with its co-founder and CEO Adam Neumann. Neumann, as well as other WeWork board members and top execs, has received millions in loans from WeWork. In Neumann’s case, he received $7m, which he has repaid.
But the web of financial arrangements between Neumann and WeWork doesn’t end there. The S1 filing details Neumann’s $500m personal line of credit with numerous banks (three of whom are underwriting the IPO).
As detailed by the Wall Street Journal earlier this year, Neumann has used some of the credit to buy buildings in New York and San Jose and leased them to WeWork. WeWork’s defence for this CEO-as-landlord scenario is that “Adam bought four buildings in order to help prove WeWork as a viable tenant to landlords” after many landlords refused to have the company as tenants.
This has all, the company said, been approved by the board of directors. And the S1 filing illustrates an unwavering belief in Neumann (who curiously doesn’t have a contract of employment with WeWork).
“Adam is a unique leader who has proven he can simultaneously wear the hats of visionary, operator and innovator, while thriving as a community and culture creator,” WeWork’s S1 explained.
“Given his deep involvement in all aspects of the growth of our company, Adam’s personal dealings have evolved across a number of direct and indirect transactions and relationships with the company.”
All in all, Neumann has reportedly liquidated his holdings to the tune of more than $700m, through a mixture of loans secured by equity and share sales. All of this before the IPO has even occurred.
While Neumann remains the biggest shareholder in the We Company, the astronomically high cash out pre-IPO will raise eyebrows. Most founders wait until after IPO to avoid spooking investors.
“It’s more and more common to get some kind of liquidity along the growth journey,” explained Caroline Plumb, an entrepreneur and founder of Fluidly. But, she added, “there’s taking some money off the table and then there’s taking $700m”.
Is WeWork a tech business?
WeWork has always positioned itself as a tech company, and the reason for that is likely to do with valuation. As Paul Condra of PitchBook explained, “if you’re going to raise capital, it’s an easier way to get your foot in the door by saying you’re some new kind of disruptive tech company”.
But in the course of this article, you may have noticed words like “lease”, “tenants” and “buildings”. WeWork certainly seems like a real estate company. The company is certainly eager to boast its tech credentials, however, reeling off all the tech businesses it has acquired.
Despite its acquisitive streak, WeWork remains an almost anachronistically old-fashioned business. The company might claim to want to “elevate the world’s consciousness”, but it remains inextricably tied to earthly matters.
WeWork has $47bn of mostly long-term lease obligations. While it prides itself on flexibility for WeWork customers, enabling them to cancel their subscriptions easily, long-term leases are less forgiving.
While WeWork might claim to be a tech company now, that self-perception might go out the window when a recession strikes. What’ll be left then is a real estate business with a tonne of exposure.