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Financial News

Oct 29, 2019

The Rise and Fall of WeWork

By Team Stash

Stash explains why IPOs sometimes don’t work out

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wework sign on building exterior

WeWork’s initial public offering (IPO) was supposed to be one of the most successful of 2019.

In less than a decade, it had received billions of dollars from investors, expanding from a single office building in Manhattan to a network of shared working spaces across the globe.

But soon after it filed its S-1 paperwork with the Securities and Exchange Commission (SEC) in August 2019, things began to unravel.

The paperwork showed WeWork had hundreds of millions of dollars of debt, which reportedly caused investors to question the company’s $47 billion valuation, and whether the company’s business model was working. It also brought up questions about the leadership of Adam Neumann, WeWork’s chief executive, and co-founder.

Sometimes things don’t always work out as planned. And an IPO can just as easily be unsuccessful as successful.

If you’re confused by what happened with WeWork, we’ll break it down for you.

Why are IPOs important, and why do they sometimes fail?

  • IPOs can be one of the major events in a private company’s life. They usually occur following a rapid period of rapid growth, after a company has taken in money from investors, called venture capitalists. This money helps companies increase their size, and hopefully become profitable. But investors eventually expect a return on their investment.
  • Two ways that can happen is if the company goes public, or is acquired by another business. Both scenarios allow investors to sell their shares, hopefully for more money than they paid for them.
  • But IPOs require companies to reveal information about their operations to the Securities and Exchange Commission, in a document called an S-1, or prospectus. This is a public document, which anyone can view. It opens up the company to public scrutiny, and if a company has any financial problems, it will come to light. In WeWork’s case, the massive amount of its losses—reportedly more than $200,000 every hour—immediately became apparent.
  • Investors can lose confidence in the company and its prospects in the public markets. Investors reportedly had concerns about Neumann, specifically around his controversial leadership style.  Neumann reportedly cashed out  $700 million worth of shares via sales and loans prior to the IPO, which was not a good sign for the company. Typically, the CEO will wait until after the IPO to sell shares, at what’s expected to be a much higher price.

More details about WeWork

  • Founded in 2010 by Neumann and Miguel McKelvey, the company grew to 12,500 employees, and claims to manage 16 million square feet of office space with 500,000 members around the world, according to its prospectus.
  • It received $13 billion of financing from investors. One of its largest investors is the Japanese tech firm Softbank, which owned 30% of the company.
  • Neumann was known for a freewheeling leadership style, which some employees said led to an allegedly “frat boy” atmosphere. Neumann reportedly voiced a desire to be “president of the world,” the world’s first trillionaire, and he wanted to put WeWorks on Mars, among other things.
  • The company’s valuation dropped to $8 billion from a massive $47 billion, in early October, and it was on the verge of bankruptcy.
  • It received a $10 billion rescue package from Softbank, its top investor, while announcing the layoffs of thousands of its workers.
  • Neumann received a $1.7 billion payout package, in exchange for leaving the company and giving up his ties and titles there.

Other unsuccessful IPOs this year

While WeWork’s scenario is extreme, because it ultimately cancelled its IPO and had to be bailed out from the brink of bankruptcy, it has followed other unsuccessful high-profile IPOs this year, such as Uber, Lyft, and Peloton.

The lack of success of ultra-hyped IPOs has led experts to speculate that private valuations of many companies seeking IPOs today are maybe too high.

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