If you missed the IPO train this year, don’t worry. WeWork, an office space sharing company is getting ready to raise over $1 billion in its upcoming initial public offering. The parent company ‘The We Company’, which was recently rebranded as ‘We Co.” was valued at $47 billion during its most recent round of valuation in January’19.
However, the same has been slashed by underwriters by more than 50 percent. The revised valuation of the company stands at $15 billion or lower. The company will be trading under the ticker “WE” but it hasn’t clarified which exchange it intends to trade on.
Here are a few things that you need to know about the WeWork IPO.
WeWork’s IPO is still not 100% fixed
The company first talked about its intention to go public in August this year and has since gathered some heat over its business model (more on this next). Since then, no concrete thing has been said about its public offering. While there is some clarification that the company’s IPO plans have not been stalled yet, there are significant delays and derailments from its original plan, which is frustrating for some investors.
The WeWork business model
The questions about the long term potential of the company in making money are still not adequately answered. We have seen two massive IPOs fall flat on their face this year- Uber and Lyft. Their financial numbers are less than lucrative, and investors don’t have a great appetite for consistent losses.
WeWork follows the same path of highly-valued unicorns taking the plunge in the public markets, where investor sentiment is completely different from private VC fundraises. According to a Thursday report in the Wall Street Journal, both analysts and investors are concerned about the company’s corporate governance and its business model.
If there is one thing that overshadows the entire WeWork success story, it is the company’s valuation problem. As noted earlier, the company’s valuation during the January fundraiser (which SoftBank participated in) was a whopping $47 billion. The company then lowered its valuation to around $15 billion or lower.
According to the latest reports, it is now looking at a valuation below $15 billion and may even postpone to the public offering to next year. Now there is extensive skepticism in the market about the company’s actual valuation and its ability to make a profit. Note that lowering valuation right before the IPO is not uncommon. Uber did it earlier this year. However, cutting the number short by over 50% is a unique situation.
In the first half of 2019, the company doubled its revenue to $1.5 billion. However, during the same time, its losses increased to $905 million, marking a 25% increase.
The Adam Neumann situation
WeWork’s CEO Adam Neumann’s shenanigans aren’t helping the company either. He holds the largest chunk of the company’s voting shares and has raised a whopping $700 million by either selling or borrowing against this stock. Not only this, he went on to send a $6 million invoice to the company for its trademark. Adam is a cult figure within the company, and his name is mentioned 169 times in their IPO filing.
In fact, his relationship with the company is incredibly and unusually close. He owns a stake in four commercial buildings leased by his company. What is more interesting is that he took on a stake in these properties on the same day that the properties were leased by WeWork. In the last three years, these properties have generated $20.9 million in rent for these properties, some of which went to Adam.
The nitty-gritty into the IPO
Whether or not the IPO is delayed, it is not scrapped off (at least for now). Both Goldman Sachs and JP Morgan will be working as lead underwriters in this IPO. The company will have three different share classes. Class C will carry 10 votes per share, and Adam Neumann is expected to hold the lion’s share of this class. Class B shares will also carry 10 votes per share, and Neumann is again expected to pick up a big chunk of this class (Votes per share revised as per amended S-1 filing). Class A shares will carry one vote per share.
Some other key changes
CEO Adam Neumann’s voting power curtailed after vote stock got reduced to 10 votes per share instead of 20 earlier. He owned the majority of Class B and Class C shares.
The company also changed a key provision which allowed Rebekah to search for an heir in case Neumann got deceased or permanently disabled. Now, the board will have the final say in deciding the successor. The filing also stated that no one from the CEO’s family would be part of the board.
The company will get back the entire profit which Mr. Neumann makes from his real estate transactions.
Mr. Neumann will not be able to sell more than 10 percent of his holdings in the second and third year once the company gets listed.
According to its IPO filing, the company will focus immaculately on “community” and even said that it aims to “elevate the world’s consciousness.” It writes a slogan too, “We dedicate this to the energy of we – greater than any one of us but inside each of us.”
WeWork locations turn profitable quickly
One of the biggest problems with WeWork is that the company isn’t profitable yet. However, the large losses could be because of the rapid rate at which the company is functioning. It is acquiring some of the best commercial real estate available in 29 different countries. It currently has 528 locations, and according to the company’s prospects, their locations breakeven in less than six months. Each location can reach sale in less than 2 years.
Things to factor in before investing in WeWork
If you are interested in participating in the WeWork IPO and want to ensure that you have a solid investment in your portfolio, consider a few things.
- WeWork CEO may possibly face a conflict of interest issues
- He would continue to hold a controlling stake in the company
- The company is eventually a “brick-and-mortar” business
- It is aiming to position itself as a cloud business
- It isn’t limited to office spaces alone
- WeWork business model is easy to replicate
- The company’s corporate structure is complicated
- The company is yet to turn profitable
- Experts frequently cite that the business isn’t recession-proof.
The company signs long-term agreements for commercial spaces (around 15 years) and usually rents them out for the short-term. However, it has taken hints from its critics and started working on getting larger and long-term clients with lesser chances of default. The company is also expanding into other types of real estate.
WeWork holds promise, but if it goes public, its journey will be all about gaining profitability. After the IPO filing, Fitch Ratings downgraded its credit rating from BB- to B. They clarified that the company might take several more years than expected to turn a profit. They also noted that the company now has 12,500 employees, up by 8,500 since the beginning of 2018 which has increased its overheads by 60%.
So, here are all the things you need to know about the WeWork IPO, whenever it finally arrives.