US tech company in a conundrum
WeWork picks up the pieces after expansion plans go horribly wrong, writes David Court.
This week the news broke that the New York attorney general was launching an investigation regarding tech company WeWork’s founder possibly ‘‘self-dealing’’.
For those who know the story, and have read about former WeWork chief executive, Adam Neumann, it may seem like a nobrainer. For those not familiar with WeWork, strap yourself in.
The story of WeWork is remarkable. It managed to go from being the most valuable startup in the United States to fending off rumours of bankruptcy. All within the space of six weeks.
Just a few months ago, WeWork had a valuation of US$47 billion (NZ$73.4b). And with that, it had ambitions to take on not only the world but the planet Mars, too.
Fast-forward to the present day, and the company has ousted its founder and is being forced to cut 4000 jobs – that’s 27 per cent of WeWork’s workforce, by the way.
What happened? First, we need to go back to 2010.
Fresh off the back of the financial crisis, New York was in the unique situation of having an influx of sole-traders with nowhere to work and a surplus of offices with empty desks.
Enter Adam Neumann. An entrepreneur with two recentlyfailed businesses under his belt (collapsible high-heeled shoes and knee pads for toddlers). Neumann and his then-business partner Miguel McKelvey founded WeWork – a shared workspace company.
Back then, WeWork was a stable-enough business. It rented out office space for more money than it paid for them. Real estate 101. But not a US$47b tech company.
As the years passed, things grew steadily. By 2016, Neumann had expanded WeWork to 51 locations around the world and attracted more investors along the way, including big names such as JP Morgan and the Goldman Sachs Group.
Now enter chairman and chief executive of SoftBank Group Corp, Masayoshi Son. And here’s where things get interesting. SoftBank is the parent company of the infamous US$100b Vision Fund, a fund that has a star-studded list of other investments, with Alibaba,
ARM, Slack and Uber as part of its stable.
Neumann sells Masayoshi Son the WeWork dream and quickly earns the company an investment of more than US$1b from SoftBank.
So far, so good. WeWork and SoftBank go full-speed ahead towards a 2019 initial public offering (IPO) with a valuation of a whopping US$47b.
Needless to say, this catches a lot of people’s attention. What makes this company so valuable, was the obvious question. And with its IPO looming, WeWork was forced to open its books to scrutiny from investors. And this was where the wheels fell off.
Investors quickly realised WeWork is a money-losing business. It lost US$904m in the first half of this year alone and also burnt through US$1.6b of the US$1.6b revenue it turned over last year.
Now, a tech company that doesn’t make a big annual profit isn’t always a bad thing. It’s certainly not unusual, and won’t put off investors providing the future is bright. However, for a company that’s nearly a decade old, it’s not a great statistic.
WeWork spending 65 per cent of its revenue on literally renting its office space is another not-so-good statistic.
It gets worse. WeWork also made it impossible for investors to figure out how it was a US$47b company thanks to a made-up accounting term it coined: ‘‘community adjusted ebitda’’.
This was the metric WeWork devised to measure net income before interest, taxes, depreciation, and amortisation. Oh, and not forgetting its ‘‘building-and community-level operating expenses’’. Which in plain English means rent, utilities, internet, building, staff wages, and other building amenities, a category that WeWork interestingly described as its biggest ‘‘category of expenses’’.
Investors were looking at a US$47b company that had a massive six-month loss on its books, huge overheads and would not disclose its profit and losses.
Alarm bells started to ring. And in times of crisis, chief executives are said to really earn their money. Not this one. Neumann was seemingly the company’s best and worst asset. The world-class salesman who built a billion-dollar company had some interesting dealings he needed to explain.
First, why Neumann personally charged WeWork US$6m when the company changed its name to ‘‘The We Company’’ – a trademark he owned.
Best or worst of all, why he cashed out a whopping US$700m of stock ahead of his company’s IPO? Not a great sign.
Today, WeWork is undergoing a rescue package by its largest shareholder, SoftBank, which agreed to inject a further US$6.5b into WeWork.
SoftBank is also funding a US$3b buyout of existing shareholders, including US$1.7b package to remove Neumann as chief executive and buy his shares.
All eyes are now on the New York attorney general’s ‘‘selfdealing’’ investigation. Box office stuff.