WeWork could do worse than follow Pandora’s footsteps
a bailout from its biggest investor and now is valued, perhaps optimistically, at $8 billion. Maybe this episode marks the beginning of a sobering up of cash-burning growth companies with dismal unit economic. If that’s the case, what will that process look like?
Maybe the transformation of music-streaming service Pandora helps show how busted unicorns — closely held startups valued at $1 billion or more — can find new life.
When Pandora had its initial public offering in 2011, it was a tortoise-beats-the-hare success story, after it launched during the dot-com boom in 2000. It survived several neardeath experiences, putting a damper on the cockiness and growth-at-all-costs mentality often seen in fast-growing start-ups. Rather than grant its chief executive officer supervoting shares and complete control, the CEO owned less than 3 per cent of its stock after several rounds of capital injection that diluted his stake.
One can’t fault investors for enthusiasm during Pandora’s first few years as a publicly traded company. Between the fiscal years ended in 2010 and 2013 it increased its active user base from 16 million to 65.6 million. Annual revenue rose from $55 million to $427 million, much of it driven by ad revenue. The company was still losing money, but it appeared to be manageable.
That’s when the downward spiral of slowing growth, increased competition and a falling stock price began. After more than doubling in 2014, revenue only grew by 26 per cent in 2015. Spotify became the new darling for music streaming, and other companies such as Apple joined a parade of entrants into the market.
The beginning of the end of Pandora’s life as an independent company began after Sirius XM Holdings invested $480 million for a 19 per cent stake. Eight months later, Sirius bought the whole company for $3 billion. So far, it seems to be going as planned. In its secondquarter earnings report, Sirius said that Pandora’s revenue increased by 15 per cent while costs only grew by 4 per cent.
Lesson
The lesson here is that when a start-up grows quickly, investors often are willing to overlook all sorts of flaws as long as they buy into the long-term vision of a company, whether that’s dominating commercial real-estate leasing or music streaming. But when growth slows and cash runs low those growth investors will abandon ship, forcing companies to pitch a value proposition to very different types of investors. Some companies might be able to become profitable in their own right, but for others it may mean seeking out a buyer.
The reversal of fortune suffered by WeWork is leading people to wonder how many other potential disasters loom for closely held money-losing growth companies. But as Pandora shows, although valuations may not recover, that doesn’t mean these companies are necessarily doomed.