Lessons from WeWork: Go for profit before valuations
This might be a financially conservative point of view, but I’ve long believed in the importance of profitability. In recent times, as startups get romanticised and venture capitalists pour in millions to support their market growth, there has been an interesting shift in perspective of entrepreneurs.
I’ve heard them talk about increased valuations from market expansion, with little emphasis on profitability. The only way this is possible is if they’ve got a strong influx of money from investors. This spree of rampant growth isn’t new. It has been observed from behind curtains since more than a few years now. However, the recent IPOs of tech unicorns has brought them to light.
Till the time the game is within private equity, valuations are critical. However, as we’ve seen with Lyft, Uber and more recently WeWork, the public market isn’t too thrilled with losses in the face of expansion.
Masayoshi Son has called upon his portfolio company leaders to tell them they need to become profitable long before they go public. According to Bloomberg, Son has advised his portfolio companies, that counts the likes of Ola and Oyo, that public investors will not tolerate gimmicks such as super-voting rights, complicated share structures and extra privileges enjoyed by founders over the stakeholders.
The recent issues with WeWork, which saw Adam Neumann, the CEO and founder of WeWork step down amidst pressure from investors, seems to have pushed Masayoshi Son to have this talk with the rest of this portfolio companies.
WeWork was valued at $47 billion earlier this year. Following its IPO filings, the financial data showed losses to be at par with revenues, along with Adam Neumann having stakes in the real estate properties that were being leased by WeWork, as well as his demand to have 20 times more voting rights. This did not go down well with investors.
In the past two weeks, WeWork’s valuations have declined to $13 billion, with Adam Neumann being reportedly asked to step down.
WeWork has since had to delay its IPO. Masayoshi Son’s SoftBank has 29% stake in the company.
Many of SoftBank’s portfolio companies are planning their IPOs in the coming years, which also means SoftBank will be able to exit its stake hopefully with a profit, which seems unlikely now with WeWork.