Will the WeWork IPO fiasco cause the technology bubble on Wall Street to burst?

This fiasco follows the first difficult months on the stock market of Uber and Lyft in particular.

Photo by Eloise Ambursley on Unsplash

Before his IPO project turned into a real fiasco and was finally abandoned, everything seemed to be smiling for WeWork and its whimsical founder Adam Neumann. The company, which claimed to be a Tech company and wanted to revolutionize the world of coworking, had succeeded in experiencing exceptional growth since the signing of its first leases in 2010.

WeWork Was Valued At $47 Billion At The Beginning Of 2019

Thus, at the beginning of 2019, WeWork posted a valuation of 47 billion dollars following the last round of financing with investors. First among them was the telecom group Softbank, which, although heavily indebted, tried to act as a market catalyst by investing more than 7.5 billion dollars in Adam Neumann’s company alone.

Although Softbank has virtually unlimited resources through the Vision Fund, which it has held in partnership with Saudi Arabia since 2016, it nevertheless needs to make positive exits to recover liquidity. WeWork’s IPO was therefore intended to enable it to carry out such an output.

The turn of events finally cost Adam Neumann his leadership position and could even cost Softbank several billion dollars. Worse still, WeWork is now embarking on a massive economic plan with major layoffs. In short, the time has come to rationalize a model whose growth seemed limitless thanks to the billions of private investors.

WeWork Has Been A Huge Success…

WeWork’s story begins in 2010 in New York when Adam Neumann and Miguel McKelvey founded a startup whose goal is to provide coworking facilities and services.

The beginnings are promising and in 2014, WeWork is considered as the fastest growing tenant of new offices in New York. A few months later, this scope simply extends to the whole of the United States. In 2016, WeWork raised $430 million in a new round of financing.

In January 2017, SoftBank entered the dance by investing $1 billion in WeWork, which still does not make profits and uses the mountains of cash provided by investors to continue to grow at a forced pace. In July 2017, SoftBank is still part of a new round of financing that allows WeWork to raise $500 million and be valued at $20 billion when it has not yet generated any profit.

Finally, WeWork is valued at 47 billion dollars in January 2019 while SoftBank now holds 114 million shares and has invested more than 7.5 billion dollars in the company of the whimsical Adam Neumann. SoftBank therefore urges the latter to carry out the WeWork IPO in 2019 in order to surf the coast at the highest level of this company that claims to be Tech.

… Despite Heavy Losses

Nevertheless, in the middle of the summer, WeWork’s publication of its IPO document raises even more questions and especially doubts among potential investors. WeWork’s enormous growth has been financed by private investment and losses are staggering, reaching almost $2 billion in 2018 and already reaching over $900 million by mid-2019.

In addition, very serious doubts remain about WeWork’s ability to honor the $40 billion in unsecured rents against the unpaid rents it has taken to deploy in more than 500 buildings around the world.

The banks in charge of the IPO then try to convince WeWork to postpone its introduction date to 2020 in order to have enough time to reassure investors. Nevertheless, nothing is done and more and more people are beginning to consider that WeWork is nothing like the Tech startup it claims to be. For them, it is simply a classic real estate company.

Finally, Adam Neumann’s questionable behavior does not work in WeWork’s favor and although SoftBank is pushing for him to leave his CEO position, nothing is done, the WeWork IPO must finally be cancelled in order to avoid disaster. According to some sources, the IPO would have just made it possible to valorize WeWork to the tune of 10 billion dollars…

WeWork Fiasco Adds To Uber And Lyft’s Disappointing IPOs In 2019

The WeWork fiasco is in addition to the disappointing IPOs of Uber or Lyft that took place earlier in 2019. More than 6 months after their IPOs, the share price of these two Tech startups is still well below their introductory prices.

Evolution of the Uber share price since its IPO

It would seem that Tech companies that are losing a lot of money while financing their growth with money from private investors are no longer on Wall Street.

It should be noted that this type of startup offers gains of around 5% at best this year, while the S&P 500 index shows an 18% increase over the same period. This is necessarily sobering and could be a sign of a reversal of the trend, whereas in the past, newly listed shares had a significant outperformance.

The Future Of WeWork Looks Very Delicate

While it is difficult to know whether this trend will continue in 2020 and future years, it is certain that the future of WeWork looks very difficult. The return to earth is difficult for Adam Neumann who would not even be a billionaire at the last news…

WeWork’s failed IPO did not allow it to obtain the necessary credit lines to continue its massive investments to ensure its development, so the company now has to reduce the sail area. This starts with a massive redundancy plan that should affect 10 to 25% of WeWork’s workforce. As a reminder, WeWork currently has 12,500 employees who help the company manage its 500 sites in more than 30 countries.

A complete rationalization of the startup’s activities is also planned in the coming months. The company that was looking to diversify into education or apartment rental will probably have to separate from its activities too far from its core business.

It is difficult to know if this will be enough to get a company back on track if the heavy financial commitments it will have to meet in the coming years could clearly cause its loss. In the meantime, WeWork can do nothing more than implement a massive economic plan. SoftBank’s CEO, a strong supporter of Adam Neumann, is now also in the spotlight. He is accused in particular of having blindly supported WeWork and its founder for many years.

Is It The Beginning Of The Bursting Of The Technology Bubble?

WeWork’s misadventure is finally symptomatic of the excesses of current capitalism with startups overvalued by private investors such as SoftBank while they are suffering from abyssal losses. These investors with excessive means seeking above all to play the role of market catalyst.

Is It The Beginning Of The Bursting Of The Technology Bubble?

The transition to the public market is the litmus test that brings this type of startup back to life. Not everyone is Amazon, which has been able to afford to post losses of more than $5 billion in its first few years of listing on Wall Street while continuing to enjoy the unfailing support of investors.

One can therefore legitimately wonder whether the failure of WeWork with its IPO, but also to a lesser extent that of Uber and Lyft with disappointing stock prices, could be the beginning of the bursting of the technological bubble that formed around these Tech start-ups.

As such, the Airbnb IPO will be carefully observed in 2020. Indeed, the rental company, which has 150 million users in more than 65,000 cities, has announced its intention to go on the public market next year.

And this despite the misadventure of WeWork…