WeWork Mess Highlights Perils of Investing in Unicorns

Photo by Chris Li on Unsplash

WeWork has accepted a bailout by its largest investor, SoftBank Group, which will take an 80 percent ownership stake in the company, according to multiple media reports. The rescue package reportedly values the company at about $8 billion, a stunning reversal from its $47 billion valuation in January, based on SoftBank’s infusion of $6 billion at the time.

From a valuation perspective, the rapid deflation of WeWork’s bubble speaks to the hazards of investing in unproven young companies. This year has seen a string of high-profile initial public offerings by companies that don’t make money (most notably Uber and Lyft) and face stern questions about their paths to profitability. Uber in particular has been growing revenue at the expense of profit, while creating unrealistic customer expectations about the actual cost of transportation – or of having a hamburger and fries delivered to your home.

WeWork was built on a similar model, although its results have been even more extreme. The company, which leases office buildings, spends millions sprucing them up, then subdivides them and seeks to fill them with member/lessees, loses more than $5,000 per customer, according to its public filings. The company lost $690 million during the first half of 2019 on $1.5 billion in revenue. Last year, it lost $1.6 billion on revenue of $1.8 billion.

In January, it was valued at $47 billion, or 26 times its 2018 revenue, based on the SoftBank investment. That multiple, it turns out, was too rich for investors. The company’s IPO filing in August inspired a wave of intense scrutiny and criticism, culminating in the withdrawal of the IPO on September 30.

The failed IPO is a reminder that investing in young, money-losing companies marries the prospect of lofty rewards with a high failure rate. As MarketWatch columnist Brett Arends pointed out in his excellent recent piece on Uber, the experts frequently make mistakes in valuing “revolutionary” companies. He notes that powerhouses like Amazon, Facebook and Netflix all faced questions early on about untested management, potential strategic missteps and supposedly rich valuations.

Unlike those companies, WeWork has yet to articulate how it might ever achieve profitability. An early hint regarding the company’s fate came in 2017, when founder and then-CEO Adam Neumann told Forbes, “Our valuation and size today are much more based on our energy and spirituality than it is on a multiple of revenue.”

While it’s important to do your homework before making any investment, betting on an unprofitable young company requires a leap of faith. Unlike Neumann, who will reportedly receive more than a billion dollars to walk away, the rest of us don’t get parachutes.