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
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.
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.
“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?