Source: Wall Street Insider (ID: wallstreetcn)
Author: Zeng Xinyi
He looks like a long-legged male model from Italy and sometimes a bohem rock star.
With long black curly hair, deep, bright eyes, and whether wearing a suit or a T-shirt, Adam Neumann was used to standing on stage, smiling and depicting that dream of "changing the world." Like all young CEOs in Silicon Valley, his smile is filled with a hint of sincerity and a hint of ambition.
Adam Neumann, co-founder/CEO of WeWork, Source: Haaretz, Israel
With the wave of barbaric growth of the sharing economy, one "unicorn" after another rushed to the sea and stood out. After witnessing the unprecedented success of Facebook, Amazon and even Netflix, Uber, Lyft and Pinterest have long been unable to hold back and decided to share a piece of the pie.
WeWork, the co-working space founded by Neumann, is of course not to be left behind, and wants to take advantage of this shareholder wind to enter the capital market. But unfortunately, he was still one step too late.
During the month, WeWork's "public ipomy" was in full swing, with valuations repeatedly downgrading from nearly $50 billion to less than $15 billion; Neumann's fortunes also took a sharp turn away from one of the world's richest entrepreneurs.
The road to listing has been bumpy, and some people have compared this farce to the humiliating scene of Cersei Lannister in "Game of Thrones" walking the streets in public, "Shame!" Shame! Shame!” Voices echoed the already cancelled roadshow and the postponed IPO plans.
In the midst of such stumbles, some "prophets" gave a sentence early: WeWork's fiasco heralded the end of the unicorn era in Silicon Valley - the market has become wary of a business model that "seems to have a bright future, but in fact cannot make money".
Although in the eyes of the "last unicorn", everything seems to be not over. The company is still hoping to rely on bloody listings to delay the collapse of cash flow shortfalls.
However, a reckoning against the unicorns seems to have begun. The once-dazed market has seen clearly what the predecessors who "died on the beach" look like, and after calming down, all The "sharing" companies at home and abroad should be careful.
The "expansion" of unicorns
Before the U.S. stock market on August 14, WeWork's parent company, The We Company, officially filed an IPO prospectus with the U.S. Securities and Exchange Commission (SEC), disclosing for the first time the overall financial position of the office-sharing startup.
Prior to this, there have been many unicorn companies "pearls in front" during the year, the two major leaders of shared travel, Uber and Lyft, are vying to go public, and Airbnb, another giant specializing in short-term rental homestay models, is pondering and pondering, and also said that it will IPO later this year.
WeWork wasn't the first to eat crabs, nor was it the last. Just like its age, among the brothers spawned by the "sharing economy + Silicon Valley story", WeWork occupies a middle position, watching to take the lead and being wary of catching up later.
As a start-up that will be ten years old, WeWork is still very young. But since its inception in 2010, it has also taken over multiple rounds of $13 billion in financing.
There is money behind the gold owner, and the "dad" who is most optimistic about this co-working unicorn is also its largest external shareholder, that is, Japan's SoftBank Group.
Since spending $300 million in WeWork in 2017, SoftBank has been increasing its capital injection, with a total investment of more than $10 billion so far, and holds nearly 30% of WeWork's equity.
Of particular note is That SoftBank once again increased its capital by $2 billion earlier this year, pushing WeWork's valuation to $47 billion, making it the highest-valued and unlisted startup in the United States.
With the help of SoftBank, WeWork has expanded with great success, and its open office space with bright colors, eye-catching slogans and artistic atmosphere has spread to hundreds of cities around the world. But at the same time, Neumann and the company are also increasingly "inflated", and the pace of rushing to the market is so fast that even SoftBank can't hold back.
New York· WeWork office space
If you want to hit the iron while it is hot, that is, to "sell" yourself when you are still valuable and exchange it for more capital input, it is actually understandable. But it may also illustrate that Neumann knows that high valuation is a double-edged sword that can shape the company's majestic golden body and be the last straw that crushes the camel.
The business model of the sharing economy has long been questioned, and companies that "only burn money and don't make money" cannot be put in the eyes of investors. But the biggest problem now is precisely that WeWork's revenue and loss scale are almost the same proportion of positive growth, and it can even be said that the loss of money is flying all over the world, and the realization of profitability is almost far away.
For the first six months of 2019 ended June 30, the company's revenue doubled year-over-year to $1.54 billion, but a net loss of nearly $905 million, both of which doubled in the first half of 2018. In terms of burning money, WeWork "burned" $2.36 billion in the first half of the year alone, doubling from last year.
In contrast, WeWork's competitors, IWG Group, known for many office space brands such as Regus, are not only profitable, but the number of desks under its command is almost equal to WeWork, but the highest market value is less than one-tenth of the latter.
At $47 billion this mountain is high. Unfortunately, WeWork didn't hold on and only climbed to the halfway point.
The failure of the beach landing
About half a month after submitting the prospectus, WeWork was exposed by people familiar with the matter that the parent company We Company has significantly lowered the IPO target valuation to 20-30 billion US dollars, compared with the valuation of 47 billion US dollars at the beginning of the year, which caused an uproar in the market.
But in fact, although surprised, everyone also knows it - after all, WeWork received ridicule from Wall Street and the US technology/financial media the day after the prospectus was made public, directly praising it as "the best of unicorns".
The reason for this is still inseparable from WeWork's high valuation. In the eyes of Wall Street, the startup mentions the word "technology" 93 times in its prospectus, apparently with the intention of packaging itself as a tech company to justify high valuations in an era when tech giants are eating up global market dividends.
However, whether WeWork should be a technology startup or a traditional real estate company, no one is currently accurate.
According to the financial data disclosed in the prospectus, 93% of WeWork's $1.8 billion revenue in 2018 came from the "membership and services" program, and this income is related to the main business of renting. In addition, the cost of "technology research and development" is relatively small.
At the same time, the two core indicators of high gross margins and high research and development costs of technology companies have little to do with WeWork: Gross margins were only 16% last year, and improved to nearly 20% in the first half of this year, but they are still not high.
From this point of view, WeWork's basic business is still real estate, that is, to lease the property to other owners for a long time, and then rent it out separately for a short time after renovation. This business model gives it the natural characteristics of fixed long-term spending but uncertain income, and the structural mismatch between the duration of expenditure and income can cause cash flow pressures and make it more like a bank or outsourcing company than a technology company.
Beyond that, what's more important is that even if investors can ignore WeWork's nearly $3 billion losses over the past three years and care about the nature of its real estate developers, they have one more thing to do — trust Neumann, the man who has almost complete control of WeWork through a dual-ownership structure.
However, this is precisely what many investors are very worried about:
Neumann and his family have too much power on the company's board of directors, and the relationship between the two sides can basically be regarded as the CEO family's one-handed and intricate.
Looking at the prospectus, WeWork has paid $20.9 million in rent to four properties owned by Neumann in the past three and a half years. As of the end of June, the company's future lease payment obligations were $47.2 billion, of which $237 million was a fee to be paid to Neumann, the landlord.
Meanwhile, WeWork began lending to Neumann in its third year of existence, borrowing more than $30 million between 2013 and 2016, which was repaid in stock or cash. Neumann received loans with ultra-low interest rates, with two loans with an annual interest rate of just 0.2% in 2013 and 2014, and a loan of $7 million in 2016 with an annual interest rate of 0.64%.
In addition, the underwriters of the WeWork listing provided Neumann with a personal line of credit of $500 million, collateral for the company's shares, which are currently outstanding for $380 million. JPMorgan chase and others also extended an additional $97.5 million in credit to Neumann to invest in real estate and purchase personal properties, which were not guaranteed by the company's shares as pledges.
Most notably, 10 of the 29-page risk warnings in the prospectus explain Neumann's entangled and complex relationship with the company as a co-founder. What is even more shocking is that Neumann, as the core figure who has absolute control of the company through B and C shares, has not signed an employment agreement with the WeWork parent company, which the prospectus says is risky, that is, "there is no guarantee that Neumann will continue to work for us or serve our interests in any capacity".
In addition to the various "confusing behaviors" shown in the prospectus, Neumann's unexpected move on the eve of the IPO was also quite confusing to investors.
At the time, Neumann cashed out more than $700 million by selling stock and borrowing, but often the founders of a startup rarely cashed out a lot of their shares before going public, which would make people suspect that their confidence in the company had been shaken.
Although some people familiar with the matter pointed out that Neumann pledged shares to lend funds, it is actually a sign that he is optimistic about the company's long-term development prospects. However, the above series of operations has become a roadblock to the listing of WeWork, which is also an indisputable fact.
Some employees believe that Neumann's outsized personality has a big impact on the whole thing. This, perhaps even Neumann himself, had to admit.
In a recent employee-facing webinar, Neumann apologized for his handling of the IPO and said he needed more time to deepen his understanding of how to become a leader in a company that is about to go public.
Prior to that, WeWork had also filed a revised prospectus with the SEC that halved Neumann's high-priority stock influence from 20 votes per share to 10 votes per share, and said Neumann had agreed to return to WeWork all of his profits from real estate transactions and the $5.9 million the company had previously paid him for the "We" trademark.
In addition, if Neumann dies, is incapacitated, or is removed from office, the new successor will be decided by the board of directors, rather than By Neumann's wife, Rebecca.
After realizing the problem, WeWork's self-reflection came in time. But even if investors regain confidence in leadership, will anyone really be willing to pay for the company's story logic?
I thought it was a difficult brother, but in fact, it was "someone else's child"
A month after the initial prospectus was filed, WeWork's road to listing became more and more bumpy. Fearing that stocks won't come to fruition, the company is now considering postponing its IPO until at least October and beyond, and the roadshow scheduled for September 16 has not been held on time.
Another market rumor said that because the company's valuation fell by $30 billion in a month, the existing valuation was only about $10-12 billion, and the largest external investor, SoftBank, put pressure on it to postpone or shelve the listing.
For WeWork, extending the lead time for an IPO may help improve investors' expectations of the company's value and achieve better results. But if the IPO is canceled, it could mean a disaster for the startup.
Some analysts pointed out that if WeWork cancels the IPO, it will lose at least $9 billion in new capital. The company's prospectus discloses that it has received a $6 billion line of credit from a major U.S. bank, provided that it raises at least $3 billion through an IPO.
The huge sum has been factored into the company's aggressive global expansion strategy, and if this money is missing, it could plunge the company into a liquidity crisis or even the brink of bankruptcy. Naturally, the more than ten billion DOLLAR "olive branches" invested by SoftBank will also be adrift.
For SoftBank, excessive bets on WeWork are now a shackle to the Vision Fund. In the context of poor investment returns, the success of WeWork's IPO is also crucial to the future financing of the Vision Fund.
But then again, the success of landing on the capital market and the success of the stock price performance after the listing are really two different things.
Goldman Sachs recently studied nearly 4,500 IPOs over the past 25 years, and then came to a simple and easy-to-understand conclusion: after the sales growth rate is good, can make money, the valuation is in line with the fundamentals and the younger technology companies are listed, the stock price is more likely to outperform the market.
However, the cruel thing is that looking at the "difficult brothers" who have been listed on the same level as WeWork in the sharing tide, their stock price performance is almost unsatisfactory.
Uber, which is also backed by SoftBank Mountain, broke on the first day of listing, and the revenue in the second quarter was less than expected, and the news of large-scale layoffs was frequently broken recently; Lyft, another giant of online ride-hailing, fell into a bear market on the day after listing, and the short position subsequently surged, and now it has fallen by more than 30% compared with the IPO price.
Are these companies not working? Or is the sharing economy not working? No one can give an answer yet. But in the eyes of some analysts, in terms of business model comparison, Uber, Lyft and even the unlisted Airbnb are still within the scope of "salvation", which is not a star and a half stronger than WeWork.
Like Amazon, Uber, Lyft, and Airbnb have adopted business models that are revolutionary innovations based on the Internet: the traditional taxi industry cannot imitate them, ride-hailing drivers not only don't have fixed daily costs, but can also further reduce costs through carpooling; Airbnb hosts also don't have the various additional fixed fees that ordinary hoteliers have to bear, and all of their revenue is marginal.
WeWork, on the other hand, is not revolutionary or disruptive because its business model is based on wholesale and retail, and it is clear that other landlords can easily compete without disrupting the existing business model.
In other words, it's easy for other giants to replicate WeWork's business model without harming it, but this "stealing the strings" approach won't work at all with Uber, Lyft, and Airbnb, which have revolutionized their business models.
Faced with such a "gap critique", WeWork may also be unwilling. But it is not so simple to want a unicorn that was once promising to completely collapse.
Someone once asked: How can we really end the unicorn era? The answer may be that the U.S. economy slipped into recession or that overseas capital withdrew from Silicon Valley. But for now, such an idea seems to be just thinking of danger.
The story of "you have nothing, but you still cheer for my dreams" is still playing out in the capital market day after day, and the "last unicorn" will naturally not give up the struggle, even if it needs to be shed and shed tears.
However, it seems that it will take investors to wait for WeWork to "return", and what reasons they need to find.