How WeWork's inflated valuation bubble has burst into speculation of bankruptcy
WeWork has become a staggering example of Silicon Valley’s inflated valuation in private equity that doesn’t stand up to the scrutiny of public investors. Earlier this year, it was valued at $47 billion, one of the highest valuations a company has reached this year. However, trouble was setting in.
In 2018, SoftBank had planned to invest $16 billion in the real estate giant, however it downgraded its plans to invest $2 billion, putting WeWork’s value at $47 billion.
Since WeWork needed more cash to keep its operations running (as we know from its financials), and investment from the biggest fund in the world had restricted the cash flow, it followed the route towards an IPO.
Just ahead of the IPO, Adam Neumann made massive headlines for cashing out more than 700 million in stocks and debt — an unorthodox and unlikely move that gave cause for concern to all current and potential stakeholders.
In the six weeks since it filed its IPO papers early morning on 14th August, giving the world a peek into its financials, public investors have been wary, and stakeholders in WeWork have been worried. The castle in the clouds has started disappearing to show the reality.
It’s IPO papers showed that for every dollar that WeWork made, its losses accounted for almost the same amount. A recipe for disaster in the public eye.
Moreover, the public’s experience with Uber, Lyft, Theranos and other high valuation companies, made many of them look deeper into WeWork’s financials. What emerged was disastrous. WeWork’s Earnings before interest, taxes, depreciation, and amortization (EBITDA) had been “community adjusted”, which essentially saw them remove figures of expenses such as utilities, internet, the salaries of building staff, and the cost of building amenities — WeWork’s largest expense categories — showing better numbers.
That’s not all, there is also the matter of Adam Neumann himself owning stakes in real estate properties that were being leased by WeWork; essentially paying him twice.
These weren’t the only ways in which WeWork tested the public. It also had “complicated” share structures that gave Adam Neumann 20 votes per share, more than all others. Moreover, in the event of his death, his wife would get to choose his successor independently of the board.
Of course, this made investors angry and SoftBank, who has the highest stake in WeWork, didn’t stand for it.
Valuations dropped simultaneously to $12-13 billion — a strong decline that is not witnessed very often.
Following this, events unfurled quickly. First, Adam Neumann dropped his votes to 10 votes per share. But that wasn’t enough. A few days later, he stepped down from his position as CEO, although he remained on as a non-executive chairman, while his wife’s right to choose a successor was also striped. Bloomberg reporting SoftBank and other investors forced Adam to relinquish his position. Sebastian Gunningham and Artie Minson were appointed as co-CEOs to run WeWork.
In the middle of it all, the IPO has been delayed and Son is figuring out a way to turn this mess around. SoftBank has a 29 percent stake in the company, according to Bloomberg.
There are reports now that Son is banking upon Marcelo Claure, former chief executive officer of Sprint, to clean up the rental company. However, no decision has been made yet. There are also reports of SoftBank injecting additional funds to help turn the company around.
SoftBank has the largest stake in WeWork, and as such, it is expected to take actions to clean up the company and not make a total loss. But can the reputation of WeWork and public’s trust be reinstalled? Adam Neumann was a charming CEO who for all that’s gone wrong, played a critical role in gaining investor interest. However, a vision is not all that counts. In the world of finance, profitability is critical, as advised by Masayoshi Son to his portfolio companies following WeWork's debacle.