After weeks of intense ridicule and criticism over its IPO language and valuation, WeWork moved to halve the price tag of its public offering from $47 billion to somewhere between $20 and $30 billion. Only days later, WeWork is seeking to further cut its valuation to less than $20 billion. With a revenue of $1.54 billion, a valuation close to $20 billion would still be almost 13 times more than what the company brings in.
For reference, Amazon’s valuation is about 4 times what it makes in a year, and Uber’s is 5 times its annual revenue. Even WeWork’s rival International Workplace Group (IWG) trades at around 1x revenue and is essentially a profitable, public version of WeWork valued at $3.7 billion.
When WeWork's parent company, The We Company, first revealed its IPO filing in mid-August, the reception was harsh. One Wall Street analyst called the prospectus a "masterpiece of obfuscation." Scott Galloway, a professor at NYU's Stern School of Business, eviscerated the company's S-1 filing and has called it "WeWTF" ever since. The Verge describes WeWork not as a tech company, but a soap opera.
The prospectus opened with a dedication “to the power of We—greater than any one of us, but inside each of us." The company has thus far lost, on average, $5,197 per customer per year: “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,” the company wrote in its prospectus.
WeWork continues to insist that it’s a tech company and not a real estate company, but it has yet to find a business model that works.
At this point, WeWork only has a few options.
Stop the IPO: It’s the least appealing option to WeWork and the least likely. But WeWork is the latest in a long line of Silicon Valley unicorns that don’t have a profitable business model yet still enjoy inflated valuations that make early investors rich. These companies are then foisted onto the public with IPOs even though they have no clear business model; people invest with the belief that that X or Y unicorn is the next Facebook or Amazon or Google. The reality, however, is that venture capitalists are vultures and the vast majority of their investments fail spectacularly or perform underwhelmingly.
Delay the IPO: Wait until next year. This is more likely if only because of how responsive WeWork has been to criticism. When WeWork rebranded itself into We Co., it paid almost $6 million to a company owned by Neumann to buy the trademark for "We." The backlash was fierce, swift, and sufficient enough to push a reversal of that deal. Its recent moves to cut its valuation also suggest the company may be having some doubts.
Godspeed You! IPO: Little to no delay. The roadshow to pitch WeWork stock ahead of the IPO is set to begin Monday, which would put the company on track to go public by the end of this month. WeWork’s CEO is flying to Tokyo to personally pitch SoftBank—one of the company' s biggest investors—to give WeWork with enough capital to slightly delay the IPO or to help WeWork raise at least $3 billion by buying most of the IPO stock. This is necessary because WeWork has secured a deal with JPMorgan to get access to another $6 billion in financing, but only if the IPO raises at least $3 billion.
WeWork’s growth hasn’t improved its profitability but actually hurt it. Its geographic concentration in high-priced cities and its $47 billion in long-term lease obligations mean that during a recession, WeWork is trapped in "expensive leases and unable to find sub-tenants to cover its rental expense." Add this to a high cash burn rate to fuel global expansion and you have a disaster waiting to happen at the first sign of a recession or any general economic trouble.
WeWork looks like it might be a ticking time bomb that when it explodes will hurt everyone but its earliest investors.