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We Work and Valuation Greed

Story Highlights

  • Valuation at the last recorded stage of funding: USD $47 billion
  • Loss of USD $1.9 billion for the year, as of March 25th 2019, against a revenue of USD $1.8 billion

The biggest news among tech investors, startup founders and analysts currently is the deluge of negative sentiment faced by the IPO valuation of We Company, the parent organization of the co-working company WeWorks.

For the un-initiated, here are the brief numbers:
What it does: lease out fancy office/co-working spaces with fancy shin-digs across prime locations, all over the world. Basically, real estate with a wee bit of technology
Valuation at the last recorded stage of funding: USD $47 billion
Amount sought to be raised: USD $3 billion – $4 billion
Current largest investor: SoftBank (who have currently invested USD $10 billion into the company)
At stake: USD $6 billion line-of-credit tied to performance of the stock offering
Profit/Loss: A loss of USD $1.9 billion for the year, as of March 25th 2019, against a revenue of USD $1.8 billion
The problem: Investors seem to be hesitant to fork out beyond a valuation estimated around USD $20 billion, roughly less than half of the company’s claimed valuation. And issues with corporate governance.

Worst-case scenario: We Company decides to cancel or postpone the proposed IPO.
Consequence: It will fail to raise the estimated USD $3-4 billion, and the USD $6 billion line-of-credit will cease to materialise. This means either the company will need to find more cash to accelerate it’s growth. We Company’s current valuations were achieved by dangling the meteoric “growth” as the hook to bait investors. This growth was achieved by burning through billions of investors money and with zero profitability to show over the years.

Where’s the “Greed”?

Before we get into the moral arguments of greed, let’s talk of governance. For a while now, We Company’s founder Adam Neumann has been driving analysts crazy. The actions of the Chief Executive, and his coterie at We Company (which includes close friends and family) seem like a blatant violation of any acceptable levels of corporate governance standards.

Adam Neumann, co-founder and CEO of We Works, and We Company.

Here’s a few listed:
– First class shares for Adam Neumann & his wife (co—founder) who’ll hold a controlling portion of the voting power because of the high vote-stock, each shares carry 20 votes. The IPO will have 3 classes of common stock.
– Adam Neumann has sold hundred of millions of his above stock and also availed them as collateral for loans worth more than USD $740 million!
– The charity clause: If both Mr.Neumann and his wife do not full-fill and USD $1 billion charity pledge within 10 years, the number of votes per share shall fall from 20 to 10. This is just bizarre, and utter hogwash!
– Succession Planning: by the spouse. Or their family trust/estate.
– Self-dealing a.k.a ‘conflict of intrest’: One of the biggest red-flags most analysts noted was that one the the largest rent cheques paid by We Work was to, well; Mr.Adam Neumann himself. He owns some of the prime properties that have hefty rental tags, which is leased by We Work.

Simply put: The company has loaned the CEO millions in dollars, who has absolute control over the shareholder money; while also paying him rent. This loan money could be used by the CEO to buy more prime properties, which could then be turned around and leased to the company, for more rent. Hello, Ouroboros.

Who’s the greedy one exactly? Well, whom exactly does one point their finger at? Startups across the world have grown hungrier and hungrier to play a game of musical chairs with valuations, which has no basis against the company actual performance or no relevance to unit economics. But what causes this sky-high valuations to continue on: investors.

An anonymous Silicon Valley partner recently referred to SoftBank as a “big-stack Bully”! SoftBank makes “massive” investments, slinging the startups past their competitors in both valuation and scale. For companies with clear cost economics, this is a perfect bet for all parties involved. For companies like Uber, We etc., only time will tell.

In India too, examples abound: of past companies such as Housing, SnapDeal (<2.0), FreeCharge, Zefo, Akosha a.k.a HelpChat, GoJavas and more. Among the unicorns of today, including Uber; a majority have no clear timelines regarding achieving profitability, no clear regard or concern for share-holder value; and regulators are only playing catch-up with the myriad of deal structures and corporate haze the startups and investors seems to cook up.

 

Note: This article is an opinion piece only and does not offer any investment advisory.

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