Following a lukewarm to indignant reception from possible investors over its proposed $47 billion plus valuation, and serious corporate governance questions over the company and its founder and CEO Adam Neumann’s entangled business interests, WeWork has been urged by its biggest investor to shelf IPO plans for now. Softbank’s Vision Fund, the $100 billion venture capital fund that has become the world’s largest tech investor, owns approximately 29% of the We Company, parent of the WeWork coworking brand.
The Vision Fund’s latest investment in the company was $2 billion earlier this year, made at a valuation of $47 billion. Having pushed back the original IPO date, which was planned for September, to allow for more time to gauge investor interest in the offering if the company lowered its value to between $20 billion and $25 billion, it now looks as though it could be binned altogether. At least in the near term.
WeWork want to raise between $3 billion and $4 billion from an IPO, which would also, on the condition of at least $3 billion being raised, unlock an agreed $6 billion loan facility to be put up by a consortium of banks including Goldman Sachs and JPMorgan Chase. That cash pile has been earmarked for continued aggressive expansion. Founded in 2010, WeWork has already grown at a frightening rate, fuelled by venture capital riches injected by investors. The Vision Fund has contributed the majority of that cash – around $10 billion with another $1.5 billion due next year. The company has come from nowhere to become the biggest single Class A office tenant in London in just a handful of years.
The company takes over office buildings, or parts of office buildings, on long term leases. It then invests in the interior design, layout standards and perks such as gourmet coffee machines and beer taps that are the brand’s trademark. The new WeWork branded and managed office spaces are then sub-let to tenants that range from freelancers to SMEs on flexible, short-term contracts. The model has worked well for WeWork to date and the company says that all of its ‘mature’ locations operate at a profit. But there are concerns what effect a turn in the economic cycle that reduces demand for premium co-working office space would have on the business model. WeWork would still be locked into its own long term lease obligations regardless of demand from co-working sub-letters.
The valuations at which WeWork has raised investment capital over the years have had more in common with fast growth tech companies than what would be expected for a commercial real estate management company – which many argue WeWork is. WeWork, and presumably the Vision Fund as a tech investor, consider the company a ‘tech company’. That definition is based on the suite of space design and management software it has developed and which it says gives it an edge over traditional commercial property companies.
However, given the falls in share price experienced by other big tech companies to have IPO-d this year, notably Uber, Lyft and Slack, even investors accepting WeWork is a hybrid between a commercial property and tech company might not have been enough to allow them to swallow a valuation of $47 billion or higher. There is now a feeling that private equity and venture capital companies such as the Vision Fund have pushed the valuations of privately owned growth companies too far. Public markets are proving less accommodative of long term ‘world domination’ strategies resulting in big, short term losses.
For the Vision Fund, however, WeWork deciding upon a lower valuation to unlock another $9 or $10 billion in expansion capital, from a combination of selling equity and unlocking the $6 billion credit facility, would be bad news. Having last invested in the company at a $47 billion valuation, that would reduce the paper value of its 29% stake by around 50%. Which would not look good at all as Softbank attempts to secure another $108 billion in investment for its Vision Fund II.
As the We Company’s single biggest shareholder, even if the founders retain majority voting rights, the Vision Fund’s opposition to going ahead with an IPO under current conditions will hold weight. Which means either a change of strategy, with WeWork slowing expansion to demonstrate its profitability potential before returning to an IPO a little further down the line. Or the company finding an alternative way to raise the $3 billion to $4 billion it was presumed the IPO would deliver. That could mean a new investment round that the Vision Fund, or Vision Fund II would be expected to lead – and WeWork remaining privately owned for the foreseeable future.
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