Jim Duffy comment: WeWork IPO’s lessons on unicorn valuations

An IPO is not a silver bullet for a 'flawed' business model copyable anywhere, says Duffy. Picture: Ian Howarth.
An IPO is not a silver bullet for a 'flawed' business model copyable anywhere, says Duffy. Picture: Ian Howarth.
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Try and get your head around this one. A company that has 425 locations around the globe with 400,000 members.

This business reported revenues up from $886 million (£710m) in 2017 to $1.8 billion in 2018. All seems okay so far. But then this company has doubled its net loss to $1.9bn in 2018. It was valued for an initial public offering (IPO) this year at around $47bn, despite burning cash at an astounding rate each month.

It was a darling of the “tech” unicorn businesses emerging from the USA. But now, investor reality has set in with a big thud. And WeWork, which shelved its IPO to possibly later in the year, may only be valued at $15bn – if that.

Let’s address the business model that was sold to the markets as a tech business. In short, it rents desk space and offices. Mind you, not just any old offices. WeWork has smart, well-kitted-out office space in some very handsome buildings in expensive, premium parts of cities all over the globe. I have visited a few and I was tremendously impressed with what I saw.

Taps offering a free beer to members so they can enjoy some entertainment while they relax in the big comfy armchairs provided in communal areas. Glass partitions, top spec furniture, concierges to help you get about and look after guests who visit you – no doubt to have a beer.

Yes, only the best for WeWork members, who shell out monthly for the privilege. So, let me see… In essence WeWork are short-term landlords? Hardly a tech business model. Not quite Apple, which makes billions of dollars in profits.

So how is this business model funded? Enter “other people’s money” and SoftBank. WeWork’s business model continues to rely on heavy funding from private investors, namely SoftBank, which has poured more than $10bn into the company, including $2bn this year.

WeWork has to plunge cash into real estate in some of the most expensive markets and makes money back over time as companies and individuals pay their rent, or membership. And that is it, folks. That is how WeWork operates with massive injections of cash, while bringing in a decent margin on its rents to generate income and profits. Except there is no profit.

This company badly needs a big chunky IPO to fund its cash-burning business model. Investors are crying out for some relief as they are sending big rounds of finance just to keep the model afloat and growing. Early investors are not best pleased as they are taking a bath on their investments. And where is the CEO of WeWork while all this is going on?

Well, Adam Neumann is now a very wealthy guy. And he is also hugely powerful within the company, no doubt being well guided and counselled by top lawyers. But it doesn’t end there.

While SoftBank ploughs in wads of cash, hoping for that IPO to go through, the businessman – who has now quit the CEO role – has not endeared himself to the markets. Neumann’s behaviour, including the recent news that he smoked marijuana on a private jet, is believed to have left SoftBank’s founder Masayoshi Son unimpressed, while raising eyebrows on the street. Raising IPO cash isn’t easy, and he was finding out the hard way.

But there are bigger questions that need answering from the whole unicorn IPO scene. Just because investors have bought into your pitchdeck, and now have equity on the cap table, doesn’t mean you have a business.

Especially when said investors keep having to fork out to make it all look “big”, “global” and “special”. These final-stage investors stand to make big returns, but an IPO is not a silver bullet for a “flawed” business model that is copyable anywhere and needs bags of cash each month to pay for it all. It looks to me and many others that WeWork is built on bad foundations. Maybe its potential IPO will now bring common sense and a bit more realism to unicorn valuations.

Jim Duffy MBE, Create Special.