Question

WeWork, a New York company that subleases office space, announced that it withdrew its IPO on 9/30/2019 after facing sharp criticism from investors following the release of its IPO filing. The company has raised billions of dollars from private investors, including SoftBank Group Corp., at a $47 billion valuation. But when the company announced an IPO plan on August 14, it was considering seeking a valuation of about $20 billion, which is less than half of the valuation estimated by its private capital. Its co-founder, Adam Neumann, stepped down as CEO on 9/24 and gave up his majority voting control.

So, based on what you have read, how has the company managed to raise significant amounts of capital from investors and ever-increasing valuation levels? What went wrong in WeWork’s valuation in IPO? What would you do now, given the cash flow requirements of WeWork going forward (move ahead with an IPO at a lower valuation, subscribe to equity directly to support We's efforts to raise a loan, etc.)?

Answer 1

A) Investors belief in following led to increasing valuation:

• Increasing brand name of WeWork among shared commercial spaces
• Consolidation happening in industry
• Increasing number of companies or startup looking for dynamic work spaces
• Economies of scale and economies of scope

B) Business model flawed. Gross operating profit not sustainable enough to cater to centralised expenses and capex requirements.

C) For next 5-6 years, WeWork has significant cash flow requirements to cater to increase acreage of commercial space or consider growth via inorganic route. Since current sentiment is not good in market, I advise against going ahead with IPO currently. Also cost of raising fresh equity is also very high. It should switch to taking construction/working capital loan with long moratorium and start generating profit. After it has turned profitable, it should look for raising private equity to pare down the debt and thereafter look for IPO