By Mikael Fevang.
The We Company – aka WeWork – is crashing and burning. In less than a month, the company has had its valuation shaved from $47 to $15 billion. The initial fire was caused by disclosures made in its IPO prospectus, but the increased scrutiny has since led to a cascade of damaging facts being uncovered. The fire has become an inferno. Creative accounting, questionable corporate governance, high senior staff turnover, and founders being dethroned – WeWork bears all the hallmarks of a corporate scandal about to unfold. This is the story of how it got here.
WeWork was founded in 2010 by Miguel McKelvey and the couple Adam and Rebekah Neumann. Their business model was simple enough: enter long-term leases on prime office real estate, create hip co-working spaces, and then offer smaller subleases to individuals and companies. This recipe proved to be extremely attractive to investors, allowing the company to snowball through multiple funding rounds. In just six years, WeWork raised a total of $1.7 billion in equity from a variety of investors. Being attracted to momentum like flies to faeces, SoftBank’s Vision Fund targeted WeWork as an apt candidate in 2017.
Since then, SoftBank has been the only external investor while the company expanded to more than 500 co-working spaces in 111 cities around the globe. One would believe, considering their explosive growth, that WeWork was a very profitable business. That would be wrong. In 2018, WeWork spent $2 for every $1 it generated in revenue. A catastrophic cash burn by any measure, but far from unique in the wild and wacky world of high-growth, “disruptive” companies (see for example Uber’s results last quarter).
That fact, that the company is haemorrhaging money, was concealed by creative accounting (“community-adjusted EBITDA”) up until the IPO prospectus was released. The prospectus also disclosed other dubious arrangements, mostly revolving around Adam.
· Adam was on the landlord-side of several of WeWork’s long-term leases at the same time as the company extended loans to him.
· He changed the name of the company to fit trademarks he himself owned and sold those trademarks to the company.
· He cashed out a large chunk of his shares with company credit.
On top of that, it appears that the company’s co-working spaces aren’t nearly full and that poaching customers from competitors has become commonplace. Not too pretty, from a $47 billion point of view.
So what caused WeWork’s valuation to skyrocket? The prime suspect is Adam himself, notoriously charismatic and magnanimous. Almost universally well-liked, the company seems to have been organised around him in an almost cultish fashion (his name appears 150-odd times in the prospectus). The guy certainly knows how to sell.
In addition to that, we have SoftBank which single-handedly led the funding rounds causing the $47 billion valuation earlier this year. That SoftBank didn’t do their due diligence on WeWork is unthinkable, considering their size and investment expertise. The fact that Adam had a personal relationship with its CEO, Masayoshi Son, does not detract from that fact as there must have been dozens of others involved in SoftBank’s engagement with WeWork. They must have been able to see that the company was in a dire financial state – nobody funnels billions of dollars into something they don’t have intimate knowledge of.
Rumour on the street is that they did indeed know of WeWork’s dire state but that they relied on Adam (and underwriters) to continue hyping the company into the IPO. This would allow existing investors to unload their overpriced shares on the public, securing a hefty profit in the process. Certainly devious, but as it is not necessarily illegal it is not unthinkable. Finance isn’t exactly renowned for its high ethical standards — caveat emptor is almost axiomatic.
Though ousted this time, it is almost guaranteed that we will see similar schemes in the future. To quote Dan Murphy on Twitter: “the entire economy is Fyre Festival.”