Column: WeWork carries Silicon Valley & # 39; unicorn & # 39; mania to its absurd limits

For all you killjoys and Cassandras looking for the apocalyptic ending to the Silicon Valley "unicorn" craze, WeWork is starting to look like a godsend.

Until recently, the company looked like the most glittering unicorn in the high-tech crew since its heyday in Uber, with a $ 47 billion private market valuation.

It might seem strange to a company whose core business is providing office space, but WeWork clad the tedious business model in a high-fallow cinderella rhetoric about how its mission is not just to give office drones a nice place to plant their bottoms, but "to raise the consciousness of the world."

When we heard this statement by WeWork's charismatic co-founder Adam Neumann, investors were waiting for it with solid gold sprouts. It helped that the richest venture fund of all, Softbank's Vision Fund, was a major investor.

WeWork seemed destined for a worldwide public offering this month. Goldman Sachs, a leading insurer, initially made it known that the company could be worth as much as $ 65 billion after the IPO.

Still over the last week or so, things seem to be coming out.

The current valuation of the company at the IPO has dropped to around $ 20 billion, possibly even $ 1[ads1]5 billion. The doubt as to whether the IPO will occur as the plan increases.

It can be a positive sign, if it means that irrationality is finally burned out of the investment environment. In recent years, venture capitalists' willingness to finance losses until they could exit their positions through a profitable stock exchange listing has given rise to disturbing private market values, and created a flock of "unicorns" – companies with a $ 1 billion valuation plus. [19659007] Some of these highly anticipated IPOs have turned out to be busts, so far. Uber, the original Uber unicorn, valued at as high as $ 70 billion, went public in early May at $ 45 and recently traded at around $ 34, at a market value of $ 56 billion. Its rival Lyft went public at $ 72 in late March and recently traded in the mid-$ 40s.

Softbank has reportedly pushed for the postponement of the WeWork IPO, according to Bloomberg. WeWork is also being pressured to rework corporate management, which has also lifted the hack to potential public investors, though details are unknown.

But little can be done about the economic history, which must be written in Crimson ink. WeWork lost $ 1.9 billion in revenue of $ 1.8 billion in 2018, and another $ 904 million in revenue of $ 1.54 billion during the first half of this year.

The company has a three-class share structure in which two classes, with 20 votes each, belong to Neumann and his employees. The third class, which will be sold to the public in the IPO, has only one vote per share. The scheme gives Neumann unavailable control of crucial business policies, according to the company's IPO registration statement, filed August 14 to the Securities and Exchange Commission.

Neumann's control may actually extend beyond the grave, since in the event of his death his supermajority shares would be transferred to people he designated without dilution of their voting power. "You may not agree with the management's decision and will not have the opportunity to influence our decisions," the enrollment statement warns.

Supermajority control founded by the founders is not unusual with technology; It is a feature of companies like Facebook, Google and Snap. In this case, however, the disadvantages are compounded by the diversity of WeWork's relationship with Neumann.

Begin with the company's recent re-branding as "The We Company." (For the sake of clarity, we will continue to refer to it as WeWork, to distinguish the trademark "We" from the traditional use of "we" meaning "us.") The company wrapped this re-mark in a typical Rococo episode of retail where Neumann , 40, sold the "we" brand to his own company for $ 5.9 million in WeWork shares.

WeWork later settled the transaction "in the direction of Adams" (perhaps the doubt it inspired in the investor community had something to do with the decision), leaving Neumann 0.03% less of his company and a general impression in the market that neither he nor WeWork the board had some scruples whatsoever.

In recent years, WeWork leased four Neumann properties for sublease. Neumann leased three of these properties to his own company the same day he bought them, and the fourth within a year of buying it. WeWork has paid Neumann a total of $ 20.9 million for the properties so far, although it has received a $ 11.6 million reimbursement of tenant improvement from him. But WeWork still owes Neumann an incredible $ 236.6 million in "future undisclosed minimum rental payments," according to the registration statement.

WeWork has also been a money source for Neumann to borrow, at enviable low rates. In 2013 and 2014, the company lent Neumann's WE Holdings three-year loan totaling $ 25.4 million to 0.2% a year. The loans were collateralized by WE Holdings' shares in WeWork and repaid by WeWork's repurchase of the shares.

In June 2016, WeWork provided an additional $ 7 million to Neumann at 0.64% annual interest rate; He repaid the loan in its entirety, including $ 100,000 in interest, in November 2017. These were deeply below market rates at a time when the primary interest rate – usually charged to a bank's most creditworthy customers – ranged from 3.25% to 3.5%. [19659002] Much of the company's registration statement appears to be designed to imply that its 29 pages of "risk factors" do not matter. WeWork is an arbitrage company dressed up as a high-tech unicorn in the new age by claiming to have a disruptive model for buying and leasing office space for renters.

"We give our members [that is, tenants] flexible access to beautiful spaces, a culture of inclusion and the energy of an inspired community, all connected to our extensive technology infrastructure," the registration statement states. "We believe that our company has the power to lift how people work, live and grow."

Such word usage comes from the Silicon Valley IPO playbook. It's reminiscent of Google's IPO mantra "Don't Be Evil" and Facebook's mission statement that "it was built to perform a community mission – to make the world more open and connected," and Snap's claim that "reinvent the camera represents our greatest opportunity to improve the way people live and communicate. "Uber's IPO mantra was" We light up opportunity by starting the world. "

This type of flapdoodle is an old hat now. Investors certainly know that it is meaningless on the basis of profit and loss, or at least without a probable path to profitability.

The most important point to remember about WeWork, when the baroque dealmaking and new age blather is supported, is that the business model almost seems to begging to blow themselves into blacksmiths. Boiled down, it means that WeWork buys office space in bulk through leases with an average term of 15 years, and sublets it through lease contracts (sorry, "membership p ”) with an average maturity of 15 months. WeWork recognizes that "in many cases, our members can terminate their membership agreements … with as little notice as a calendar month."

US economic history will recognize that the disproportion to long-term debt and short-term assets underlies virtually every economic crash ever, including the crash in 2008. In this case, a downturn could cause the WeWork tenant base to evaporate and leave it on the hook for lease commitments it estimates $ 47.2 billion. WeWork tries to remedy this problem by finding that in a downturn, after all, the cost of leasing and construction will be lower.

Real estate experts not listed by WeWork's touchy-feelism do not buy this. One is Chicago-based entrepreneur Sam Zell, who told CNBC this month that he had invested in a similar sublease company once and has the scars to prove it. "Every single company in this place has gone broke," he said. "Why is this something different?" During the period he owned Tribune Co., then the parents of The Times, Zell may have proved to be uniquely malicious as a newspaper owner, but there is no point in pretending that he does not know real property.

WeWork & # 39; s model is also nothing new. Back in the 1970s, for example, it was Los Angeles-based law firm management, which provided lawyers with less time offices equipped with receptionists, clergy, and law libraries they could not afford on their own. The seats became known as "Fegen Suites" by the company's chairman, Paul Fegen (pronounced "fee-jun"), a lawyer. But the company went bankrupt in 1983 during a property crash. The coward was later ruled out for misunderstanding multiple client accounts and has since resurrected as a professional magician.

It is not entirely inconceivable that WeWork has broken a code that remained opaque to Fegen and the types of property known to Zell. Neumann absolutely wins the paludits that sell. As my colleague Roger Vincent reported in May, some major office developers have looked at WeWork & # 39; s business model and made it the ultimate compliment to copy it – offering tenants more flexible leases and occupancy facilities.

There is no good news for WeWork because it emphasizes that within real estate there is nothing new under the sun, or at least nothing that cannot be copied. Even without competition from old real estate companies, WeWork faced competition from other well-funded office rental companies.

However, the doubts surrounding the ongoing IPO suggest that investment markets may have finally become wise to the limit of IPO mania for companies with high-tech brilliance but low-quality economic quality. WeWork may not offer magic like Fegen, but alchemy. And the great age of alchemy was centuries ago.