WeWork, the tech unicorn turning out to be a donkey

Well, that escalated quickly.

A couple of weeks ago I opined that WeWork, the US$47 billion co-sharing workspace goliath, was the most overvalued private company ever, and that it was unlikely to be worth hundreds of millions — let alone billions. Alas, it appears we were too kind — WeWork now appears to be worth even less.

When WeWork filed its S-1 (which is basically a draft prospectus) in August, critics came thick and fast. CEO Adam Neumann, until then an untouchable celebrity businessman, suddenly lost his sheen, with the company revealing hundreds of related-party transactions. The S-1 noted that the company had future lease commitments to Neumann of US$237 million (which had not been discounted) as well as the infamous US$5.9 million payment to the CEO for the use of the name “We”.

NYU professor Scott Gallaway led the charge, dubbing the business “WeWTF” and argued that “the last round US$47 billion ‘valuation’ is an illusion”.

“SoftBank invested at this valuation with a ‘pref’, meaning their money is the first money out, limiting the downside. The suckers, idiots, CNBC viewers, great Americans, and people trying to feel young again who buy on the first trade — or after — don’t have this downside protection … the bankers (JPM and Goldman) stand to register US$122 million in fees flinging faeces at retail investors visiting the unicorn zoo.”

Despite the growing criticism, in mid September Neumann was still trying to get the IPO away, now at a substantially discounted valuation of only US$10 billion (this was below WeWork’s last genuine funding round of US$15 billion way back in 2015) and less than the US$14 billion, which had been pumped into the business thus far. WeWork desperately needed to get the IPO done not only to raise US$3 billion in equity, but also to unlock a US$6 billion debt package. Given the company is burning almost US$3 billion a year and has less than US$3 billion in the bank, the money is needed to keep it alive.

Then more calamity struck. With journalists now crawling all over WeWork, leaks started flowing. The Wall Street Journal reported that Neumann was a regular marijuana user, including on the company-rented private jet. Another incident emerged from 2016 where Neumann announced the firing of 7% of staff for cost-cutting and immediately threw an in-office Run-DMC concert.

Within days of these revelations, Softbank and Benchmark, two of the world’s largest venture capital firms, and which had backed Neumann’s vision, promptly replaced him as CEO and reduced his voting power from 20-times to three-times (removing Neumann’s veto powers). An IPO seems impossible, and the biggest question is whether funders will even bother to inject more money to keep the company alive, or just try to salvage something from the wreckage.

One of the remaining questions to answer isn’t so much what will happen to WeWork (it will most likely not survive in anything like its current form), but what on earth will happen to Neumann. It has been widely reported that he had sold shares and borrowed upwards of US$700 million from WeWork (and used part of that money to buy US$80 million in residential properties in the US as well as commercial properties and stakes in various startups). But little has been detailed of exactly how this happened. It’s highly unusual for founders to cash out before major liquidity events.

Bloomberg noted that earlier this year Neumann borrowed US$362 million from WeWork “at 2.89% interest to help him exercise options to buy stock”. Neumann apparently repaid that debt by surrendering shares back to the company. Given the company’s current predicament, this is highly questionable as it means Neumann was paid hundreds of millions of dollars by other shareholders for what are essentially worthless shares. The other question, which doesn’t appear to have been answered, is whether Neumann has any other loans and whether he provided any sort of security or personal guarantees.

If he did, given his WeWork shares appear worthless, there’s a fair chance Neumann has gone from being nominally worth US$10 billion, to bankrupt, in a matter of months.

Adam Schwab is an angel investor, company director and the author of Pigs at the Trough: Lessons from Australia’s Decade of Corporate Greed.