Business

Lessons Learned — Or Not — From WeWork’s Whirlwind

WeWork

Is this the week of the CEO step-down? WeWork, Juul and eBay have all announced the departures of the chiefs at their respective helms.

Every company’s ascent — or slide — is in part due to company-specific forces in play. Who’s at the helm counts for a lot, of course.

Business models? Well, if they’re sweeping in scope, seeking to upend the way things have always been done, or if they tackle niche markets … that can make a big difference in success or failure. As with so much in life, timing counts.

For WeWork's (OK, actually its parent company, We) stunning slide from would-be investor darling, its ill-fated attempt to make the leap from private to public markets and the ouster of its guiding light and CEO Adam Neumann offer several examples of how some of those factors and forces can align rather unfavorably.

The overarching lesson at this latest chapter in what seems a saga, one that is not over yet, would be this: It takes years to build a reputation, minutes to destroy it. The timeframe certainly has been compressed. WeWork was founded in 2010. The company raised billions of dollars through this year. The initial public offering (IPO) roadshow began this month. The IPO was delayed last week, and Neumann stepped down this week.

Neumann, of course, has been described in the press as having exhibited “erratic” behavior in the past, and that may have led to reservations that a colorful personality would show uneven results as a businessperson. Certainly we’ve seen that movie beforeb, notably at other “new economy” companies.

As to what happens next, Neumann is out, effective as of this week, and yet stays on as non-executive chairman of the board. Two other WeWork executives, Artie Minson and Sebastian Gunningham, are taking his place as co-CEOs. Notably, Neumann’s voting power has been cut drastically, from a reported 10 votes a share to three votes a share, which is in turn down from the 20 votes that were listed in the IPO documents. One blow to the “cult of personality” that help propel Neumann to lofty heights came when SoftBank, a huge shareholder with a stake worth as much as a third of the company, was reported to be in favor of his removal.

Beyond that company-specific golden visionary turned eventual albatross, consider this: Wall Street is a voting machine, and Wall Street is also a weighing machine, to borrow an old investing adage.

Voting and Weighing Machines

Popular companies, when they come public, can enjoy a surge of good will, an upswing based on investors’ FOMO. The sell-side firms (some of them who help underwrite the IPOs) allocate shares to clients, the clamor heats up … and stocks pop several percentage points right out of the gate. Sometimes they double, or more.

But the WeWork saga shows Wall Street as a weighing machine. Over several days, the private valuations, as the company crept along the continuum from private to public territory, went from $47 billion to a rumored $20 billion to even less than that. The scene was and is reminiscent of those infomercials for kitchen gadgets that keep ratcheting the price lower till you finally cannot stand it any longer, pick up the phone and buy, buy, buy: “Now how much would you pay?”

Very generally speaking, tapping public markets exists as a way for new companies to fund cash-burning operations until they gain scale enough to turn red ink to black.

Getting to a sustainably healthy bottom line takes some doing, of course.

And this is where the weighing comes in. The continued leg-downs of the valuation show that the business model — where WeWork essentially enters long-term leases with landlords, outfits the spaces with eye-catching amenities, and rents the space out to other companies (in short-term leases) across more than 100 markets and more than two dozen countries — was not worth the same weight to would-be public investors than had been seen earlier.

Through this business model, the company has lost $900 million through the first half of this year and lost $1.6 billion last year. And even then, the implied valuation at $47 billion would been the second largest IPO of the year, behind only Uber. Along the way, WeWork has said that the model exists as “space as a service” and it seemed to hedge at least some of its bets on New York. The S-1 reveals that a majority of revenues come from five cities, and New York and San Francisco are among them — which, as respective finance and tech capitals, are susceptible to downturns. In the meantime, the company has average lease obligations in place that stand at 15 years.

The company said that its operating and finance lease obligations stood at $47.2 billion at the end of June. A significant portion of leases, at more than 37 percent, we note, roll off through 2024, indicating a potential mismatch between costs and revenues. At the same time, the contribution margin, which is a measure of revenues less expenses, as declined from the high 20s percentage points to about 25 percent, and less than the 30 percent listed in the filing as a target rate.

The lessons learned here are that promises to reinvent the way business is done clearly are getting renewed scrutiny. In the case of WeWork, beyond the vagaries of the CEO’s behavior, the Wall Street weighing machine clearly wanted more heft.

Whether the next “game changer” firm that seeks to come to market heeds the warnings signs of WeWork — well, WeWait to see.

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