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Is Failure in Store for the WeWork IPO?

Dana Blankenhorn

WeWork parent The We Company has delayed the office-sharing startup’s initial public offering until the end of the year. It now either won’t come to the public market at all, or come at such a low valuation its venture backers will take a loss. This isn’t terribly unusual for 2019.

Source: Mitch Hutchinson / Shutterstock.com

So far in 2019 there have been 94 IPOs, and 38 of them have shown negative returns.

The big winners, like CrowdStrike Holdings (NASDAQ:CRWD), Beyond Meat (NASDAQ:BYND) and Zoom Video Telecommunications (NASDAQ:ZM), have generally come to the market prepared to make a profit. There have also been big medical winners with market caps near $1 billion, like ShockWave Medical (NASDAQ:SWAV) and Turning Point Therapeutics (NASDAQ:TPTX). Most IPOs are still hits — but the batting average is declining like an aging slugger’s.

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WeWork is distinguished by the same flaws as Uber (NYSE:UBER) stock and Lyft (NASDAQ:LYFT) stock. It’s not making money, even at scale, and current investors are looking at you for a bailout.

The WeWork Problem

WeWork’s model is to buy lots of office space, fix it up, then sell it at retail in the form of “memberships.” As I wrote in August, it’s more like LA Fitness than Cloudflare (NYSE:NET), which went public Sept. 13 and is already showing a 25% return.

Worse, WeWork’s business model is not unique. IWG (OTCMKTS:IWGFF), founded in Belgium back in 1989, has been operating in low-cost suburban office parks for years. It came public at the end of 2016 and only proved itself this year. IWGFF stock is up 92% year-to-date.

The difference is that IWG has a market cap of $4.8 billion. WeWork was initially seeking a market cap of $47 billion. Worse, WeWork needs the $3 billion it was trying to raise in order to secure the $6 billion line of credit in order to keep operating.

The business model is based on a myth of young workers with startups signing up for prestige “co-working spaces” dressed up with amenities they like. In fact, WeWork has mainly signed up established tech companies seeking contingency space like Salesforce (NYSE:CRM), Cisco (NASDAQ:CSCO) and Facebook (NASDAQ:FB). It’s expansion insurance.

CEO Adam Neumann

Meanwhile t-shirted CEO Adam Neumann has come off as something of a fraud. He isn’t a dweeby kid. He’s a 40-year old Israeli military veteran who spent big money before earning a dime for shareholders. He tried to score $5.9 million from his own company for trademarking the word “We.” This is also a mom-and-pop operation; co-founder Miguel McKelvey gets only six mentions in the U.S. Securities and Exchange Commission Form S-1, against 20 mentions for Neumann’s wife Rebekah.

While portraying a handsome young family man on TV, Neumann also created a fraternity culture that drew a sexual harassment suit last year.

Worse, it’s clear the business model is not yet working. WeWork lost $1.9 billion in 2018, then another $904 million for the first six months of 2019, on revenue of $1.5 billion.

The Bottom Line on the WeWork IPO

The real loser is SoftBank (OTCMKTS:SFTBF) and its Vision Fund. It brought $100 billion to the party in order control the technology of the future — and it’s trying to raise another $100 billion. SoftBank founder Masayoshi Son runs the fund, but the money is mostly from sovereign wealth funds in Saudi Arabia and the United Arab Emirates.

Son’s losers, in addition to WeWork, include Uber, Sprint (NYSE:S) and Slack (NYSE:WORK), which is down more than 30% after coming public in June. Son has called his Vision Fund the ultimate disruptor, but it may be Son who turns out to be the greater fool.

Dana Blankenhorn is a financial and technology journalist. He is the author of the mystery thriller, The Reluctant Detective Finds Her Family, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.

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