The search for yet another unicorn hit a major snag last month. So severe was the blow that it might just kill off the whole unicorn hunting business, for a while at least.
WeWork, needs your money, 50 billion dollars of it to be precise, your chance to buy a slice of what many in the know reckon might just be pie in the sky.
Perhaps you have heard of We Work. The brainchild of Israili born Adam Neumann, the idea is not a new one, but the vision and the sales patter is straight out of the 21st century millennial vernacular. We Work want to revolutionise the modern working environment to reflect the new century’s trend towards freelancers and startups with sexy new office locations around the world, in return for a reasonably steep monthly membership. The model is simple. Take long leases on prestige buildings in high profile locations. Redecorate them with modern trendy open plan working spaces, with beer taps, coffee bars, slides, ping pong tables, you know the kind of thing, and rent them out for daily or monthly hot desking for individuals and small companies. The idea is not a bad one, and has been running for decades with other companies, like Regus. The difference here is the scale of ambition, and the increasing belief that this is delusional.
The sales pitch capitalises on the search for the modern unicorn, in business terms this is defined as a privately held business valued at more than 1 billion dollars. Names you are probably familiar with like Snapchat, Google, Facebook, Uber, Lyft etc all fell into that category. These diverse businesses often have one thing in common. They hemorrhage money at first while they attempt to spend to become large enough to dominate a market, and eventually turn a profit. Some like Facebook and Google clearly achieved that and their share prices have soared, many more like Uber and Lyft continue to burn through their IPO cash with no hint at turning the balance sheet’s red numbers into black ones, and their share prices have tanked. Investors are understandably on safari to bag as many of the good unicorns as possible, while swerving the bad ones.
Adam Neumann’s pitch is a familiar one, long hair, t shirts v’s suits, and he has largely shunned hard financial data and projections, favouring visionary language. Their self proclaimed mission ‘to elevate the world’s consciousness. Living a conscious life means choosing to live proactively and with purpose’. The business structure too reflects is self proclaimed messianic view of himself, ceding little control to shareholders, installing himself, and his family in sole control for life, and beyond. The numbers in the business however don’t add up, or at least they do add up to a whole heap of trouble if nothing else. They have expanded at breakneck pace. They have leased 35 million square feet of office space in 528 locations in 29 different countries. They have taken on 15 year leases, yet their monthly members typically remain customers for around 15 months. The lease obligations add up to $47bn, while their revenue is around 10% of that. They are losing around $52k per customer in a market with plenty of competitors with a business model that is impossible to patent and easy to replicate. It is strangely coincidental that they are trying to raise around $50bn in the IPO. If you smell a rat here you are smarter than a good few people who should have known better. Backers at JPMorgan Chase, Goldman Sachs and their main financier SoftBank are in up to their eyeballs and are facing the loss of a lot of cash, and an awful lot more reputation in the process.
As we close for press the IPO is scheduled for the end of September, and the amount they are looking to raise is dropping by the day, and the founders are prepared to hand more control to the potential investors, ironically as the price drops the offer seems less tempting as they seem to be increasingly desperate to get anything for it to paper over the cracks in the company accounts.It seems Adam Neumann is learning an expensive lesson, if you want $200 from a millenial on kickstarter then t shirts and wooly mission statements might just work. If you want $50bn of bankers in suits you’d better give them a graph, and it had better be a good one.
Why is any of this important? We have lived through a period where blinding investors, sophisticated or otherwise, with tech and visions has enjoyed some success in raising vast sums to enrich the founders of often quite basic, or even unsound businesses. Perhaps the IPO of We Work has just pushed its luck a little too far, and possibly blown it for those that follow. With fingers already burned and the world apparently heading into a rocky financial future in the months ahead, the smart money, and some of the stupid money is looking for safety, not speculation. There seems to be a spreading consensus that the Emperor’s new clothes are not all that splendid after all, and may possibly not even exist.
By Phill McCoffers
