WeWork’s bluff of posing as a tech firm has been called and the valuations of many others need scrutiny
We really don’t work, do we? Okay, that’s a pretty poor way to sum up the WeWork IPO fiasco, which has culminated in the axing of its co-founder Adam Neumann as CEO. But do forgive my muddled phraseology. After poring over thousands of words across media outlets ranging from ZeroHedge to Wall Street Journal, I’m so psyched by the magnitude of executive misdemeanours and financial shenanigans at what was hailed as the shining star of the new economy that I can barely think straight. In my defence, though, like thousands of others, I had been among the first to maintain that WeWork is just a real estate company masquerading as a tech-enabled gig.
Sample this: The We Company, as it is grandly called, makes no money from the sale of any technology product or service. Yet, its exertions thus far have been fuelled by the $12 billion generosity of SoftBank Vision Fund, the Japanese technology-focused mega-corpus, while for its future it was seeking its $47 billion IPO valuation on the grounds of being a tech company.
I am not even talking about the company’s suspect business model, which seemed like a simple rental play of leasing spaces on a long-term basis, giving them a fancy makeover, and then offering them on short leases mostly to other startups. It’s not a bad business if you can keep pulling it off . Others have done it, possibly much better. Thus, IWG plc posted $0.5 billion in profit on revenue of $3.4 billion in 2018. That reflects rather poorly on We’s $1.9 billion loss for the same period on revenue of $1.8 billion.
Yet, the nine-year-old company’s valuation swelled from $97 million in 2009 to $47 billion at the time of its last round of funding earlier this year. It was all building up to a fine crescendo, with its IPO hailed as the biggest thing of the year. Its collapse, or postponement as WeWork chooses to call it, has come as a blow to the entire venture capital (VC)-funded startup ecosystem. Indeed, there is something chilling about its announcement that “we have a history of losses and, especially if we continue to grow at an accelerated rate, we may be unable to achieve profitability at a company level… for the foreseeable future".
All of this has implications for India and holds out some lessons as well. Straight off, it places into some jeopardy We’s ambitious business plans in the country. In its S-1 filing to the US Securities and Exchange Commission, the company said that its India co-locations operated by WeWork India Services Pvt. Ltd earned “none, $0.5 million and $3.7 million, respectively, in advisory fee during the years ended December 31, 2016, 2017 and 2018, respectively". It also has a strategic partnership with an affiliate of Embassy Property Developments Pvt. Ltd, but with the postponement of the IPO, its plan to acquire majority control of this Indian affiliate has also been shelved for now as it was to be funded by money raised from the public issue.
Another of its statements that raises concerns about its operations in India goes: “We also plan to continue to enter into management agreements, as we have done in India, under which the building owner funds all capital expenditures to build out the space to our design specifications and maintains full responsibility for the space, while we function as the manager and receive an agreed-upon management fee." In India’s shattered realty market, where so many builders and property owners are fighting for survival and would, therefore, have agreed to such preconditions, what would happen if We went under?
What should concern us most is that with We’s bluff of posing as a technology company being called, where does it leave the scores of Indian startups selling products ranging from fish to fowl, as well as services such as laundry and car wash? Dubbing themselves as tech companies and boosting their valuations on that premise is akin to Tata Motors seeking to reclassify itself as a company in the rare earths business as those minerals are used in its cars’ motors, windshield wipers, and power steering. Tata Motors will obviously never try this, but in the startup space where valuations are the only name of the game, such miscasting is rampant.
In that context, it will be interesting to see if the relationship between SoftBank and its many investee companies in India gets redefined. The We debacle has been a setback for SoftBank’s feisty founder Masayoshi Son, whose relationship with Neumann, which according to WSJ began in India, finally deteriorated over issues of corporate governance and the latter’s unbelievably skewed differential voting rights. Son has had something of a charmed relationship with most unicorns he has funded in India, particularly with Ritesh Agarwal of Oyo Rooms, another firm now under the valuation scanner, its blistering growth notwithstanding. Its valuation of $10 billion does look inflated, given that its revenue of $59 million last year pales into comparison with those of hotel giants such as Marriott International. It may just be coincidence that the WeWorks IPO unravelled at a time when SoftBank Group International was in the midst of a search for an “experienced Valuations Director to join the Finance team with the objective of determining the fair value of its investments".
With SoftBank’s shares taking a hit on account of WeWork, Son’s own net worth is also under pressure. With some of his high-profile bets looking overpriced, will Son take a relook at the valuations of some of his Indian investments as well?