It seems that being a fast-growing tech company isn’t enough anymore; investors need a well-defined path to profitability as well.
Which has been a real kicker for the likes of Uber, Lyft, and IPO-hopeful WeWork, none of which is anywhere near actually making a cent.
WeWork was last valued at $47 billion during a private round of funding. But now it’s rumoured that WeWork will be seeking a $20 billion valuation or lower at IPO – and that’s if it even goes ahead at all.
Last week it was reported that CEO Adam Neumann had flown to Tokyo to meet with SoftBank Group – one of the company’s biggest investors. Amongst the ideas floated was the possibility SoftBank could provide another capital injection so that the IPO could be postponed until 2020.
Whether SoftBank will or not remains to be seen. The company might be feeling stung at having committed to investing $4 billion at a valuation of $47 billion when there is no chance WeWork will hit that kind of market capitalisation when it goes public.
SoftBank has to be careful. The company’s largest investment was in Uber – pouring billions into yet another dire tech company float would not reflect well on a company look to raise money to launch a second tech-focussed Vision Fund.
It isn’t just in conversation with SoftBank that the idea of shelving the IPO has been raised. Some existing investors, perturbed by the reception the IPO prospectus has garnered are suggesting putting things on hold.
Executives at WeWork showed they are not entirely unaware of the market reaction to unprofitable tech companies. Both Uber and Lyft are well below their initial offer price. But they were wrong if they thought even more-than-halving the valuation would be enough to placate concerns –especially when similar-sized competitor IWG is profitable and yet only valued at $4.6 billion.
There are other issues bothering investors anyway, who have concerns over the way the business is run, it’s structure, and the huge concentration of power.
WeWork’s share structure includes three classes; CEO Adam Neumann owns 2.4 million class A shares (<1.5%), 113 million class B shares (98%) and 1.1 million class C shares – that’s all of them. Class A shares give one vote, class B and C each grant 20. Neumann’s total holdings equates to 2.27 billion votes.
The co-founder occupies a large amount of space in the Risks section of the company’s S-1 filing due to potential conflicts of interest. Neumann has, or had, significant operational interest in several of the locations WeWork leases. He also charged the company almost $6 million to use the We trademark (WeWork is owned by The We Company – the structure is very complicated and has created further unease amongst investors).
At the start of the year, Uber and Lyft seemed like exciting prospects. Markets looked likely to get swept along by the spiel of these cash-burning, lossmaking companies. But it seems Uber and Lyft failed to provide a convincing response to the profitability question.
It shouldn’t be a surprise, then, that when WeWork released its prospectus, complete with an admission it may remain unprofitable ‘for the foreseeable future’, investor response has been cold.
WeWork seems to have realised that its current offering isn’t enough to get the market onboard. But with expectations that its roadshow could begin this week, does the company have enough time to fix such deeply-entrenched issues as corporate structure and distribution of power, let alone its financial outlook, in time to avoid becoming 2019’s next big IPO flop?
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