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What Companies Going Public Can Learn from WeWork's IPO Disaster

What Companies Going Public Can Learn from WeWork’s IPO Disaster

By | Corporates, WeWork

Depending on how you look at it, WeWork’s botched IPO was a brutal failure… and a resounding success.

No, it’s not some quantum paradox nor a case of Schrödinger’s Listing.

There’s no question that WeWork should never have tried going public in its current state. The predicament forced its major investor to own up to a big miscalculation after SoftBank reported a quarterly loss of US$8.9 billion – a loss that Insight Provider Kirk Boodry highlighted in a recent Insight.

At the same time, as NYU professor Scott Galloway pointed out on the Pivot podcast, the whole debacle is a triumph for capital markets regulation and public disclosure requirements.

Another good thing comes out of this whole situation: Much like the Titanic shipwreck, WeWork’s mighty fall serves as a warning to other companies sailing the IPO waters. Here be icebergs, so you’d better plot your course carefully.

Read Kirk Boodry’s full Insight: Softbank G: We Company Deal Is Wrong on so Many Levels

Clear View

The (already well-documented) fall from grace did not happen overnight, or in a vacuum. It was the result of several problems piling up and finally spilling over. But it was the S-1 disclosures that brought everything to light and opened the company up to scrutiny.

Since private companies aren’t subject to the same disclosures as public ones, it’s hard for outside analysts and investors to have a clear idea of their inner workings. 

In fact, this suits some private company founders and executives just fine. Even if you don’t have WeWork’s severe governance problems, disclosure obligations and being accountable to shareholders might be a distraction for some company heads.

But here’s the thing: If your company is on its way to the public markets, you can’t just batten down the hatches and ask everyone to take you at face value. You need objective third parties who can spread the word about your company – especially if you’re a smaller cap without a universal brand. 

This includes analysts who write about your company because they genuinely found positives there, and investors who are interested in supporting your journey because they are confident that your success can be beneficial to all parties involved.

Being available to answer questions, set the record straight, and take control of the narrative around your company can be a powerful tool leading up to your IPO.

House in Order

For transparency to work in your favour, you must have all your ducks in a row. Ideally, those ducks must be nicely lined-up and single-file by the time you go to IPO, and not all over the pond and sometimes underwater, as WeWork’s ducks were. 

But what this overlong duck metaphor means to say is, it’s never too early to work on your governance. Few companies will have the near-parody-level problems of WeWork, but that’s no excuse for shaky management structures, weird debt situations, and unhealthy workplace cultures.

This is especially important since the WeWork wreck could make investors think twice before going into the next fancy big thing. Speaking on online video outlet Cheddar (as spotted by IR Magazine), Jason Paltrowitz, director of OTC Markets, predicted that investors will dig deeper into companies in the coming year. 

“Investors are really looking below the surface to see what is profitable, what the ownership is doing in a company, and what its plans are for growth and for revenue and for getting to profitability,” he said. “You don’t necessarily have to be profitable, but you have to have a clear plan toward profitability.”

The question of whether to even go public at all, or go public through a direct listing (as per the latest trends) is also something to keep in mind.

Read our blog: The Direct Listing Has Shaken Up Public Markets. What’s Next?

As more private companies have better access to funding, raising extra capital might not be as strong an incentive for them to go public. But the transparency and discipline, not to mention the legitimacy, the public markets bring can make all the difference, especially for small- and mid-cap companies. 

So even as WeWork is going through a major crisis of its own making, there is no reason why others can’t learn from its mistakes. It’s an ill wind that blows nobody any good, as they say.

What if there was a network where companies could be connected to analysts and investors and were able to publish and share news and information about themselves? Luckily, there is! Learn more about how Smartkarma helps you do just that – sign up for a FREE account on Smartkarma’s Corporate Solutions, a brand-new range of services for C-Suite and Investor Relations personnel of listed companies that’s been designed to help IR professionals establish and maintain valuable connections to the investment and analyst communities.

Lead image by Eloise Ambursley on Unsplash

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WeWork’s Compromised Vision Offers a Glimpse Into SoftBank’s Vision Fund Troubles

WeWork’s Compromised Vision Offers a Glimpse Into SoftBank’s Vision Fund Troubles

By | General, WeWork

We don’t know whether WeWork has managed to do any serious consciousness elevating lately, but it has definitely elevated the blood pressure of many investors – including those tied to SoftBank’s Vision Fund, which is quickly becoming part of the cautionary tale. 

Despite what’s shaping up to be a costly bailout of WeWork and an attempt to right the ship by SoftBank, the latest developments are throwing a pall over SoftBank Group.

In an early October Insight on Smartkarma, Kirk Boodry noted the 47 percent holding company discount at the Group as investor concerns mounted. The WeWork snafu played a large part in this, but Boodry also points out that several other publicly-listed Vision Fund investments are now losing money. 

Notably, in his latest Insight on SoftBank, Boodry reported the Vision Fund to be down US$6 billion on its largest investments. As of 23 October, the Vision Fund was down 75 percent on WeWork and 6 percent on Uber (which is down 30 percent from its IPO value), even with the latter’s relative rally. And Slack, the other big tech hopeful that went public through a direct listing this year, closed at US$21/share, making it one more money-losing investment for Vision Fund.

Read Kirk Boodry’s full Insights: Softbank G: A Summer of Pain as Cornerstone Vision Fund Investments Falter and Softbank G: We Company Deal Is Wrong on so Many Levels

Why are these numbers important? For one, they’re putting the blockbuster Vision Fund into question. But also, SoftBank was, until recently, talking up an even more ambitious successor fund. Recent developments that made markets more nervous than ever about tech “unicorns” going public have put a dampener on those plans.

“A second Vision Fund is a harder ask when you have lost 75 percent on your largest investment and 6 percent on the second largest,” as Boodry puts it.

But it’s this second Vision Fund that SoftBank is trying to salvage with this bailout of WeWork, argues Mio Kato. SoftBank doesn’t seem to be consolidating WeWork despite taking what seems to be an 80 percent stake, so that it can avoid WeWork’s considerable liabilities – SoftBank would certainly not want those on its financial results.

Read Mio Kato’s full Insight: Softbank: WeWork Rescue Looks Like Desperation to Save Vision Fund 2

Kato runs through several calculations on the number of shares and voting rights. Vicki Bryan also notes that the deal terms have been shaped in such a way as to ensure that SoftBank is not actually acquiring WeWork and will not have defined control thanks to reduced voting rights – which will help with the aforementioned avoidance of consolidation.

As cash lifelines are necessary to keep WeWork afloat, it doesn’t bode well for WeWork bondholders, as Bryan predicted back in September. “New credit facilities… then will bury all WeWork bonds below secured debt that has a superior claim to virtually all tangible assets the company owns,” she wrote at the time.  

Read Vicki Bryan’s full Insight: Gravity Works As WeWork Doesn’t; Now Plan B

Boodry highlights a big part of the problem with Vision Fund when he says that “Softbank is often the only provider of reference prices on the investments it makes and that forces investors to compensate for valuation risk by applying a higher holding company discount.” It remains to be seen what SoftBank’s Q2/FY2019 results look like when they hit on 6 November.

Lead image by Miki Yoshihito on Flickr

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What Can We Learn About WeWork's Listing from This Year's SoftBank-backed IPOs?

What Can We Learn About WeWork’s Listing from This Year’s SoftBank-backed IPOs?

By | General, WeWork

Here’s a non-controversial statement: No one seems to be very fond of WeWork’s upcoming IPO.

When a company goes public, it’s usually a cause for celebration. Private investors are getting a successful exit; founders and employees stand to make a lot of money; and investment banks make a hefty profit. 

It’s understandable, then, how a bearish analyst can be somewhat of a “spoilsport” if they identify potential deal-breakers in high-profile listings. Why let independent, objective analysis get in the way of a good story (and some perfectly good profits)?

As it turns out, some companies and the markets around them need that reality check. WeWork (or The We Company) is an extreme example: One has to put serious effort into finding anyone who believes the firm, mostly known for its stylish co-working spaces and communities, can go public at its planned US$47 billion valuation.

Negative coverage has focused on the firm’s dubious part to profitability, as well as multiple governance problems. The latter, especially, are so severe as to prompt NYU professor Scott Galloway to dub the company “WeWTF“.

They also prompted the company itself to perform token moves like appointing a woman to its board or its CEO returning money to WeWork that it paid him so it could use the “We” trademark that he owns (yes, things get complicated fast here).

Read our blog: WeWork’s Problematic IPO Has Analysts Seeing Red

Public Market Realities

But less extreme examples have not fared well either. This year alone, ride-hailers Lyft and Uber went through with their long-awaited listings.  

Both companies saw their stocks hit record lows this week, both over 30 percent down from their IPO price. While nowhere near as nebulous as WeWork, neither one seems to have an easy road to profitability.

Read our blog: Lyft’s IPO May Be Oversubscribed but Investors Are in for a Bumpy Ride

Slack was another tech hopeful that drew attention by opting for a direct listing. Following Spotify’s daring steps, the work messaging app maker skipped the traditional approach of going through underwriters and issuing new shares. 

While Slack’s financials look a lot better, its stock bottomed out this week after its first earnings report. It closed at US$28.76 on Tuesday, around 25 percent down from its listing price. 

Amongst increasing competition from players like Microsoft, Slack is reporting slowing growth on the one hand, but strong metrics and high user engagement on the other. This makes its story a bit more optimistic than its fellow “unicorns”.

Read our blog: 5 Takeaways from Slack’s Direct Listing

Markets Might Have Had Enough of Unicorns

By now, it looks like a pattern: company beloved by private investors achieves sky-high valuation, dominates the zeitgeist through aggressive growth, goes public. Then, reality and market forces take over.

Following that pattern, we can probably read WeWork’s public market fate in the entrails left behind by its compatriots. 

“Public markets are not really falling for the tech-platform-wrapping on these new spins on very traditional (and low-multiple) businesses,” says Mio Kato, an independent analyst publishing on Smartkarma. “Revenue growth alone will not cut it, and the lack of a sensible path to profitability will not be forgiven easily.”

“Investors are willing to take a positive view of these tech-related companies despite losing money, as long as the amount of operating losses is not too excessive,” says independent Insight Provider Douglas Kim. WeWork, he argues, might be leaning too far towards that “excessive” side.

Read Mio Kato’s full Insight: WeWork IPO: Governing With Elevated Consciousness Not The Lease-T of Their Problems

Private Market Refuge

Problematic tech IPOs have raised the question of whether such companies should stay private as long as they can. Private fundraising is less of a problem than ever, after all. There are plenty of venture capital, private equity, and corporate investors that are happy to keep businesses going for as long as possible by throwing money at them.

Of course, they have to make a return on their investment somehow. Plus, some scales are too big to achieve even for the amounts of private money available out there. 

For WeWork, “that supply is being cut-off,” thinks Sumeet Singh, Head of Research at Aequitas and Smartkarma Insight Provider. “They are too big and have too many investors who want liquidity.” Mighty SoftBank itself had to downsize its last investment in WeWork in early 2019, after their actions faced questions from investors.

“The question is probably whether private markets have the appetite to continue funding this unprofitable growth,” Kato adds. “It appears that many of the new offerings could simply be an attempt to take advantage of high valuations while markets are still in a relatively forgiving mood. Whether that will continue with these high-profile IPO flops remains to be seen.”

Read Sumeet Singh’s full Insight: WeWork Pre-IPO – Even US$15bn Seems Optimistic

The SoftBank Bump

Speaking of SoftBank, its mammoth US$100 billion Vision Fund is, of course, the common thread running through WeWork, Uber, and Slack. Venture capital investments from it have attracted a lot of attention during the past two years. SoftBank has been generous, bold, and diverse. Investments include US9.3 billion in Uber, US$5.5 billion in Southeast Asian counterpart Grab, US$250 million in Slack, US$502 million in gaming company Improbable… the list goes on.

But with two of its highest-profile portfolio companies going public and WeWork gunning to be the third, observers are starting to wonder whether the SoftBank connection is an asset or a detriment to public market investors.

What Can We Learn About WeWork’s Listing from This Year’s SoftBank-backed IPOs?

Excluding majority stake acquisitions. Amounts in US$ billions.

“If investors don’t warm to Slack in the next six weeks, then SoftBank and its Vision Fund are set to bear the downside when it tallies up at the end of September,” writes Bloomberg columnist Tim Culpan in a recent analysis

“While venture capitalists like the Vision Fund are all too happy to invest in big unprofitable businesses with the promise of future growth, such as Uber and Slack, public shareholders are likely to be a little more discerning,” he adds.

With WeWork generating even more losses and being a lot murkier in its governance structure, SoftBank might have more to worry about when (if?) WeWork goes ahead with its listing. “There is no magic number on this, but WeWork would be too much risk to take for most investors, having generated revenue of US$1.8 billion with operating losses of US$1.7 billion in 2018,” Kim muses.

Read Douglas Kim’s full Insight: WeWork IPO Valuations Range Slashed – What’s Next? An IPO or a Capital Infusion from SoftBank?

“Where SoftBank is the last investor, [as in] Uber and WeWork, you probably want to stay clear of the listing,” Singh quips.

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WeWork’s Problematic IPO Has Analysts Seeing Red

WeWork’s Problematic IPO Has Analysts Seeing Red

By | General, WeWork

WeWork, which moved one step closer to IPO last week, touts creativity and inspiration as part of the intangible value that supposedly makes the co-working company stand out from the crowd.

It’s definitely providing some creativity and inspiration to analysts who are looking over the IPO. Some choice examples come from Insight Providers publishing on Smartkarma:

“We cannot even fathom the contortions that would be necessary to articulate a path to profitability here,” writes Mio Kato in his quantamental analysis.

“To pull off this IPO at the most recent private market valuation (US$47 billion) would be like a 90-year granny trying to catch a live, lightning-quick chicken with her bare hands within 60 seconds,” says Douglas Kim, painting a vivid picture in the first of two Insights on the WeWork IPO.

The consensus is clear: WeWork (or The We Company, as they like to be called these days) does not seem like it will be profitable anytime soon, nor does it seem like its lofty private valuation can pass muster in the public markets.

But so far, so Uber (and other tech or tech-related “unicorns”). What makes this particular IPO so problematic?

Read Mio Kato’s full Insight: WeWork IPO: A Quantamental Analysis Aka Hey Uber, Hold My Beer!

The Power of We

The co-working, co-living, just generally co-everything company’s impending listing has eyebrows everywhere raised in disbelief. This Verge article (with an equally creative headline) does a good job of outlining some fundamental problems with WeWork. 

Examples include its labyrinthine org chart, the tangled web between the company and its founder and CEO Adam Neumann, which would make any ESG-minded investor gasp, and its reliance on key shareholder SoftBank for its war chest.

WeWork’s spending has also been highlighted by the media, with Reuters highlighting how the company burned through US$2.36 billion in 1H2019.

Overvalued

Various sources that track private startup funding have pegged WeWork’s valuation at US$47 billion, as of its most recent funding round. With SoftBank as key shareholder, it’s obvious the company has some deep pockets to dig around in for petty cash. But many think the valuation is disproportionately inflated because of the Japanese mega-investor’s involvement.

In a follow-up Insight, Douglas Kim provides estimates WeWork’s revenue in 2019 to be up 87.6 percent year-on-year, at US$3.4 billion, and operating loss at US$2.7 billion. Kim further estimates the company’s revenue to increase by 66.1 percent CAGR and operating expenses to increase by 46.1 percent from 2018 to 2023.

Read Douglas Kim’s full Insight: The We Company (WeWork) IPO Valuation Analysis

Kim’s base case valuation of WeWork is around US$24 billion – quite a bit less than its current private market valuation.

Kirk Boodry also points towards the valuation at which the company did most of its fundraising, i.e. at US$17 billion to US$25 billion. “It seems clear the actual range has not strayed far from US$20 billion, which we think is high but not as unreasonable as the [US$47 billion valuation] implies,” he writes.

Read Kirk Boodry’s full Insight: Initial Thoughts on WeWork’s IPO Filing Aren’t Supportive of a Higher Valuation

Competition Rising

As much as WeWork likes to trumpet its unique mission of “elevating the world’s consciousness”, the fact remains it is mostly a real estate operator specialising in communal use of work and living space. And it’s far from alone in that game.

Besides major competitor IWG, WeWork faces competition from a number of businesses in global markets. In Asia, for example, Sumeet Singh singles out JustCo, a rapidly growing Singapore-headquartered operator of co-working spaces that has been expanding across Southeast Asia and Australia, and UCommune, a co-working space company that has dominated China, where it was born, and now is spreading throughout Asia-Pacific.

Read Sumeet Singh’s full Insight: WeWork Pre-IPO – In the Business of Providing Flexibility by Being on the Hook for US$47.2bn

Singh points out that such competitors will be more appealing to price-conscious startups and freelancers for whom WeWork’s pricing appears just a little too far on the pricey side. 

WeWork might have decided to focus on larger corporate clients lately, but such customers generally have better bargaining power and can command lower prices in return for more members and lower churn. 

“While they will improve the revenue backlog, which was only at US$4 billion as of Jun 2019 (a little over one year’s worth of revenue), and probably help to keep the churn low, that will come at a cost of foregone revenue, in terms of higher discounts,” he writes.

Read Sumeet Singh’s full Insight: WeWork Pre-IPO – Problems with the Company’s Profitability Metrics and Evasive Profits

WeWork’s Problematic IPO Has Analysts Seeing RedReality Check

As lofty as WeWork’s stated vision is, it’s not hard to see reality quickly catching up. “Effectively a low price landlord, WeWork deals with brutal freeholders who demand long-term contracts while its clients are short-term and low-paying with exacting standards,” Rickin Thakrar points out. Its capital-intensive model does not align with any kind of sustainability, he writes.

Read Rickin Thakrar’s full Insight: WeWork IPO Preview: WeNeedCash?

Kato drives the point home when it comes to WeWork’s expenses, which include operating its various locations, general and administrative expenses, and depreciation and amortisation. 

If the company keeps growing quarter-on-quarter at about 10 percent, as it did during the first two quarters of 2019, and maintains its current burn rate, it would burn through whatever cash it raised from an IPO within four quarters. That time frame would be even narrower if WeWork grows by about 25 percent a quarter.

Kato does not mince words: “This should not be a listed company.”

Lead image: WeWork

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