WeWork and the Pros and Cons of Going Public
Isadora Teich wrote this article
WeWork is a unicorn startup that became world famous for all of the wrong reasons.
Just this year, a documentary was released charting its spectacular public rise and fall. It’s called “WeWork: Or the Making and Breaking of a $47 Billion Unicorn.”
Despite a highly publicized misstep and a failed IPO, they are currently trying to go public again.
WeWork agrees to sell itself to a blank-check company in a deal that values the troubled startup at $9 billion including debt and marks a 18-month turnaround from its failed attempt at a traditional IPO https://t.co/JI4hq2hd2d
— Bloomberg (@business) March 26, 2021
There are many layers to this situation. You might be wondering, how exactly can a startup that crashed and burned maintain public attention for years. Why are people still talking about it?
I think that all startups can learn a lot from WeWork’s missteps.
It can also be argued that the WeWork of Adam Neumann’s reign did more harm to startup IPOs that followed than good — but they can teach us some important lessons.In honor of WeWork's new plan to go public, let’s take a walk down memory lane to the 2019 historic disaster that was WeWork's IPO. Click To Tweet
A Little Bit of Background on WeWork
Many people don’t actually know what WeWork does, or that it is even still an operating business.
When you strip away the glitz and glamor, WeWork was founded in 2010 to be an office leasing company.
Their goal was to rent aesthetically pleasing modern commercial spaces to companies and entrepreneurs. And while WeWork is far from the only co-working space out there, it is amongst the most ubiquitous and has high brand saturation.
While this seems straightforward enough, it became a truly wild ride thanks to rampant overvaluation and the dubious antics and powerful connections of WeWork CEO and founder, Adam Neumann.
He is often spoken about in the media as some kind of con man or even a person with cult leader aspirations.
Essentially, Adam Neumann excels at amassing capital, regardless of whether he has viable business plans. He and his wife have numerous failed ventures and ideas between them, including apps, and even a school called WeGrow where tuition was more than $40,000. Recently, the founder of a startup acquired by WeWork talked to Business Insider about how it almost destroyed their company.
The Failed 2019 IPO
So, what exactly went wrong? It’s a lot simpler than you might think.
Basically, when WeWork tried to go public, many people took a closer look at their company and numbers and realized that a lot of things just weren’t adding up.
While it was initially valued at $47 billion, largely due to branding and hype, it didn’t take long for people to dig deeper and realize it was not worth that much at all. Don’t get me wrong, your brand is a large part of why customers choose you. A strong brand can certainly impact profitability for the better.
But while hype, clever branding, and an endless supply of capital can get you far, if you try to enter the public market, people will quickly realize if your numbers don’t add up.
Ultimately, someone will figure out if you are promising impossible things. WeWork sunk from a towering valuation of $47 billion to one of $5 billion after its SEC filing, a part of the public IPO process, revealed a lot of deep issues beneath its glossy exterior.
Here are only 3 of the many glaring problems:
-Billions in losses
-Plans to continue spending aggressively
-WeWork had loaned millions to CEO Adam Neumann and a company he owned
Doubt piled onto WeWork from investors and the market in general. As a result, WeWork’s largest outside shareholder, SoftBank, asked the company to delay the IPO. Adam Neumann was even ousted as CEO.
However, it could be argued that one of the only things keeping the vastly unprofitable WeWork afloat was Adam Neumann’s ability to generate capital and support. After he was fired, the company quickly ran out of money. It was bailed out by SoftBank, who still owns it.
The Complexity of Valuation
It is important to note that industry professionals are struggling somewhat to determine the valuations of these new types of companies.
And, even amongst established powerhouses, you can find debate on if their valuation is worth it. For example, while Tesla has many die hard fans, others consider it a poor investment currently because its valuation is so high.
Even amongst experts, different opinions will always exist.
You can see a lot of how this gray area plays out in the buzz leading up to the recent IPO debut of Coinbase.
Before its debut, experts had such a wide range of possible valuations that it almost didn’t seem to mean anything. It’s estimated market cap ranged from $19 billion to $230 billion, depending on who you asked.
Currently, weeks after its release, Coinbase has a market cap of around $86 billion.
The Consequences of WeWork
WeWork left a bad taste in a lot of people’s mouths, and left many skeptical of the long term power of startups in the market. They gave startups trying to go public a bad reputation, and likely made it harder for people to take them seriously.
Since WeWork, we have seen a lot more caution when it comes to startups going public.
While WeWork was greeted with a hype-heavy fervor (until people got a hold of its numbers) current newcomers are greeted with a lot of caution and even skepticism. However, it is important to note that there is also a lot of optimism and money going into this sector as well.
Currently, venture capital is flooding into tech startups at record numbers.
It is likely only a matter of time before the shadow cast by WeWork is forgotten as disruptive and well-funded young tech companies continue to innovate and prove their power and legitimacy.
What Can We Learn From WeWork?
While this is an interesting topic to explore, what really matters is what startups that want to grow and possibly even go public one day can take away from it.
Many have focused the blame entirely on ex UpWork CEO Adam Neumann, and painted him like a cartoon villain.
However, this is not a complete contextualized picture.
According to FastCompany, this is more a question of everyone collectively struggling to understand these new types of businesses.
In 2019 alone Uber, Endeavor Group Holdings, SmileDirectClub, and Peloton all attempted to go public and either failed, or started with overblown valuations and then dipped significantly.
This could be because even the people who work in these companies themselves have no precedents to follow or standard to measure themselves against.
The market is largely predictive, using past data to gauge a potential reasonable future. If there is not a lot of past data, you can’t base predictions off anything.
However, this chaotic new world does not mean that all of the principles of smart business no longer apply. While experts will likely never agree on the exact market caps that companies should have, they can easily look at a company’s paperwork and see if they are actually making a profit.
Why Go Public At All?
Going public is an expensive and complicated process that opens up companies to public scrutiny. So, why are so many startups that have succeeded and grown pursuing this?
For one, if you are actually running a strong company, this public scrutiny benefits you. Experts and investors will see your numbers and find your company to be a worthy investment. There are so many benefits to this, including:
-The ability to raise a lot of cash quickly, without taking on debt or playing by the rules of venture capitalists
-This cash lowers a company’s debt to income ratio
-More money means more funds to invest in things like research and development and advertising
Bottom line, WeWork was not in a position to go public in 2019. However, for many companies with stronger numbers and management, it is absolutely the right move.
Ultimately, the WeWork story is a fascinating one. It is an interesting cautionary tale about the importance of staying grounded and realistic, regardless of what your company is trying to achieve.
Connections can get you very far. A compelling story and hype can also get you very far.
However, if nothing is underpinning that glossy branding, and you can’t strategically manage even seemingly endless fountains of capital, it is only a matter of time before it all comes crashing down.
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