To delay an IPO like this, after filing with the SEC, is extremely unusual. Companies that file for a public listing expect to be scrutinized and want to address potential investors' concerns, so they tend to have their ducks in a row. For example, they usually lay out a compelling growth strategy and path to profitability, provide transparent finances, and show their executives are properly incentivized and accountable for their actions.
WeWork's IPO filing had little of that.
While it scrapped its invented vanity profit metric of community-adjusted EBITDA, it failed to convince investors that its shared workspace model can turn a profit or weather the next economic downturn. It also revealed CEO Adam Neumann has effectively unilateral control of the company and a history of questionable dealings. Even a raft of governance changes last week wasn't enough to assuage investors' doubts.
The company's plans to go public were ultimately scuttled by three key factors: an unclear path to profitability, a heady valuation, and a controversial CEO. We consider each factor below.
WeWork has a questionable business model
WeWork signs long-term leases for properties, divides them into smaller spaces, renovates them, then rents them out on a short-term, flexible basis. Analysts have questioned how that business model will hold up during a recession, as clients might leave, downsize, or demand better rates, leaving WeWork on the hook to building owners, with contracts it cannot alter. WeWork has argued companies would seek out its cheaper, more flexible workspaces during hard times.
The group had $4 billion in future lease commitments from customers as of June 30, less than a tenth of its $47.2 billion in future lease obligations to its landlords, according to its IPO filing. It's annual revenue is only $1.8 billion. That imbalance could leave it in a bind if revenues drop off and bills start to pile up.
Its valuation has come under fire
WeWork secured a $47 billion valuation through a private fundraising in January. It has slashed its targeted public valuation to between $10 billion and $12 billion, according to Reuters, due to growing doubts about its path to profitability, market opportunity, and whether it's a technology company or a prosaic real estate firm.
The group is growing sales quickly but its losses have risen at a similar pace. WeWork doubled its revenue year-on-year to $1.5 billion in the first half of 2019, but its operating losses also doubled to about $1.4 billion over the same period.
WeWork pegged its potential global market opportunity at $3 trillion in its IPO filing, basing that figure on what companies spend on office space for an estimated 255 million desk workers. However, real-estate analysts told Business Insider the group has vastly overestimated its target market, as WeWork's shared spaces might not appeal to lawyers or researchers who handle confidential or sensitive information, companies like Apple that have spent billions on bespoke headquarters, and suburban businesses.
While WeWork plans to pursue a listing on the tech-heavy Nasdaq index, there's minimal technology involved in its business. Rent, utilities, and maintenance and repair bills make up the bulk of its costs, and it doesn't spend a significant proportion of revenue on developing new technologies. Rapid growth, rising losses, and a high valuation don't make it a tech company.
"This isn't lipstick on a pig, but Botox on a lame Unicorn," NYU Stern professor and tech-industry pundit Scott Galloway said about the company's pitch to investors.
CEO Adam Neumann is a controversial figure
Investors are wary of cofounder and CEO Adam Neumann's control of the company, large stock sales, real-estate deals, and family members' involvement in the business:
- Neumann controls the lion's share of WeWork voting rights, raised $700 million by selling and borrowing against his company's stock, and even charged the company nearly $6 million for the "We" trademark.
- He holds stakes in property companies that lease four properties to WeWork, raising a potential conflict of interest as he's both the landlord and the tenant. He has made millions through this arrangement, according to The Wall Street Journal.
- WeWork paid one of Neumann's immediate family members to host eight company-related events last year, and it employs another as its head of wellness.
- His cofounder and wife, Rebekah, serves as chief brand and impact officer, and was a member of the succession committee.
The backlash to WeWork's unorthodox governance prompted an overhaul last week. WeWork said it would halve the voting rights attached to Neumann's "high-vote stock."
Neumann also agreed to sell no more than 10% of his company stock in the second and third year after the IPO, pledged to pay back any profits from his real-estate deals with WeWork, and vowed none of his family members would sit on the board.
WeWork's board, composed of a majority of independent directors, will also choose his successor — not a smaller succession committee as planned.
WeWork's IPO fell through because investors have become skeptical
WeWork pitched itself as a revolutionary tech company disrupting the workplace with its trendy coworking spaces and partnerships with millennial brands. However, the inherent risks of its business model, a jaw-dropping valuation, and murky corporate governance under CEO Adam Neumann raised serious questions about its prospects. Investors backed away, forcing the company to delay its IPO.