Mark Twain is often cited as the source of the perennial financial advisory warning that “history doesn’t repeat itself but it often rhymes”.
The pending WeWork IPO could be about to provide a number of harrowing wording lessons which will rhyme very sharply with recent history.
This writer can recall the frenzied final days of the TMT bubble when the mere addition of “dot com” could inspire investors to plough capital into bog standard franchises which were suddenly poised to conquer the world with an additional 3 letters in their trading name.
The Pets.com IPO in February 2000 is often cited as the “shoeshine moment” in marking the top of the bubbly market – pet food supplies business meets logistics reality.
Closer to home one might remember the official launch of worldoffruit.com a month earlier and a 64% rise in the parent company’s, Fyffes, share price. Bananas stuff.
If pet food and fruit sounds fairly well established product proposals how about commercial real estate or, more specifically, leasing office space but not even owning the buildings?
Welcome to WeWork’s service proposition which is about to IPO in New York with a proposed valuation of $47 billion.
But it’s not a real estate company. No, no it’s a technology company. Just read the prospectus (and weep).
In its public filing WeWork has used a version of the word “tech” 123 times which is more than the video calling software company Zoom did in its IPO earlier this year (thank you VOX for doing the checking).
To be blunt, WeWork is a triumph of linguistic gymnastics over substance and start-up founders would be well advised to avoid the temptation to follow its lead. The inevitable backlash will be brutal and prompt increased scrutiny of businesses playing fast and loose with words and financial information in their investment story.
Managements who are planning a fund raising should review their story and pay particular attention to the following:
Corporate Structure: An overly complex ownership structure will raise red flags for prospective investors. WeWork already has three classes of shares and it is debatable whether the entity being listed in New York has any real assets or control of the business. Keep it simple.
Governance: With a complicated corporate structure, sharper investors will be keen to explore any conflicts of interest. WeWork is the gift that keeps on giving….. to its founder and CEO, Adam Neumann. Adam owns 10 buildings that he has leased to WeWork at a decent profit, unlike the loss making WeWork. Bizarrely, he also owns the rights to the “We” trade mark which the firm has decided it must own and pay their own CEO $5.9m for the rights! Investors might be allowed to ask whether the interests of the business, shareholders and the CEO are truly aligned.
Financials: Loss making is a frequent fact of life in the early years of a start up. However, there should be some evidence that increased revenues are benefiting from economies of scale i.e. incremental units of sales can demonstrate better gross margins. WeWork has been operating commercially for 9 years. The S-1 filing shows revenues have almost doubled in H1 2019 to $1.54 billion but losses have spiralled up to $1.3 billion. So for every dollar of sales the company is losing 84 cents. That’s pretty staggering for a “tech” company and would raise red flags for most tech savvy investors. More alarmingly, word sophistry has reached new levels of weird with WeWork reporting “Community-based EBITDA” which takes out lots of expenses including real-estate costs. Repeat after We…. “We are not a real estate company”. Innovative/creative profit metrics are not recommended for investment pitches.
Leverage: Equity investors are typically nervous of debt-heavy balance sheets. As global economic indicators roll over we would repeat our cautionary mantra from previous articles about business models relying on “other people’s money”. Think businesses with long term liabilities and no control over short term funding (other people, lenders, customers etc). WeWork is a hair-raising example with $47 billion of long term obligations (leases) supported by variable short term revenues of potentially $3 billion this year.
Management Incentives: Equity investors want their interests aligned with the management and preferably any wealth created to be shared at the same time in the investment journey. WeWork having lost $700m in 2018 don’t see any problem with their revered CEO selling shares to the tune of the very same $700m. Almost three quarters of a billion dollars taken off the table by the CEO just before investors are invited to pony up circa $4 billion. This CEO must be special. Previous articles have highlighted the importance of credible advisory boards. Inspirational founders certainly help fund raising but cult cultures can also raise red flags. The wording of the WeWork IPO prospectus brings idolatry to new levels of cult.
If one’s gagging reflex has survived the WeWork opening statement – “Our mission is to elevate the world’s consciousness” – brace oneself for a whopping 169 mentions of “Adam” (as in the CEO) compared to an average 25 mentions for founder/CEOs in other unicorn prospectuses.
Even Uber’s colourful CEO, Dara Khosrowshahi, managed a measly 29 mentions.
In this Trumpian world, buzz words and a cult-like absence of governance can be effective in the near term but can build up for the future a very dangerous debt to the truth.
How Mark Twain would smile at the power of words today.
He too caught the technology bug and lost nearly all his money on a new typesetting technology invented in the 1890s.