Column: WeWork brings Silicon Valley's "unicorn" infatuation to its absurd limits

WeWork is starting to look like a boon for all those who love to kill and Cassandra looking for an apocalyptic end to the madness of "unicorns" in Silicon Valley.

Until recently, the company looked like the most glittering unicorn of the high-tech herd since the great years of Uber, with a private market valuation of $ 47 billion.

This may seem strange for a company whose core business is the subletting of office space, but WeWork has dressed this monotonous business model into a Cinderella dress of great rhetoric about the fact that its mission is not simply to give desktop UAVs a nice place to plant their funds, but "to raise the consciousness of the world."

Hearing this expressed by WeWork's charismatic co-founder, Adam Neumann, venture capital investors found it with massive gold ladles. This has helped the richest venture capital fund of all, Softbank's Vision Fund, to invest a lot.

WeWork seemed destined for an initial public offering that was beating the world as early as this month. Goldman Sachs, the lead underwriter, initially said that the company could be worth up to $ 65 billion after the IPO.

Yet last week, things seem to be jumbled.

The current valuation of the company at the IPO has been reduced to about $ 20 billion or even $ 15 billion. Doubts as to whether the IPO will occur on schedule are becoming more numerous.

This could be a positive sign if it means that the irrational is eventually eliminated from the environment of venture capitalists. In recent years, the willingness of venture capitalists to finance their losses until they can get out of their positions via a profitable IPO has fueled exaggerated valuations of private markets, creating a "herd of "Unicorns" – companies valued at $ 1 billion or more.

Until now, some of these highly anticipated IPOs have turned out to be busts. The Uber company, the first original unicorn, valued at $ 70 billion, went public in early May at $ 45 and has recently traded at about $ 34, for a market value of $ 56 billion. His rival Lyft went public at $ 72 at the end of March and recently traded in the middle of the $ 40.

Softbank reportedly asked for a postponement of WeWork's IPO, according to Bloomberg. WeWork is also under pressure to rework its corporate governance, which has also raised the burden of potential public investors, although the details are unknown.

But you can not do anything about its financial history, which must be written in purple ink. WeWork lost $ 1.9 billion on revenue of $ 1.8 billion in 2018, and an additional $ 904 million on revenue of $ 1.54 billion in 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 its associates. The third category, which would be sold to the public during the IPO, has only one vote per share. The deal gives Neumann unchallenged control over critical corporate policies, according to the company's statement on its IPO, filed on August 14 with the Securities and Exchange Commission.

Indeed, the control of Neumann could extend beyond the grave, since in the event of death, his shares by qualified majority would be transferred to persons he would have designated without any dilution of their voting power. "You may not agree with our management's decision and have no opportunity to influence our decision," warns investors.

The control over the supermajority entrusted to the founders is not unusual in technology; it is a feature of companies such as Facebook, Google and Snap. In this case, however, its disadvantages are magnified by the many peculiarities of WeWork's relationship with Neumann.

Start with the recent corporate brand change in "The We Company". (For clarity, we will continue to call it WeWork, in order to distinguish the brand "We" from the traditional use of "we" which means "we".) The company has concluded this new image of Mark in a typically rococo informal transaction episode in which Neumann, 40, sold the "We" brand to his own company for $ 5.9 million in WeWork shares.

WeWork then settled the deal "according to Adam's instructions" (the doubts it inspired within the investment community may have been related to this decision), leaving Neumann with a 0.03% lower stake. in his company and a general impression on the market. WeWork's advice had the least scruple.

In recent years, WeWork has leased four properties to Neumann for its subleases. Neumann leased three of these properties to its own company on the day of its acquisition and the fourth one year after its acquisition. WeWork has paid Neumann a total of $ 20.9 million for properties to date, although it has received $ 11.6 million in leasehold improvements. But WeWork still owes Neumann an incredible $ 236.6 million in "undiscounted minimum lease payments in the future," according to the registration statement.

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

In June 2016, WeWork made a new $ 7 million loan to Neumann at an annual interest rate of 0.64%. it repaid the loan in full, including interest of $ 100,000 in November 2017. These were much lower interest rates than the market at a time when the prime rate – generally applied to the most creditors – ranged from 3.25% to 3.5%.

Much of the company's registration statement appears to be designed to suggest that its 29 pages of "risk factors" do not matter. WeWork is a real estate arbitrage company disguised as a high-tech and new generation unicorn, claiming to have a disruptive model for the purchase and lease of office space to sublet to tenants.

"We provide our members [that is, tenants] with flexible access to beautiful spaces, an inclusive culture and the energy of an inspired community, all connected by our extensive technological infrastructure, "says the statement of registration. "We believe that our society has the power to improve the way people work, live and grow up."

Such verbiage comes directly from the Silicon Valley IPO gamebook. This is reminiscent of Google's motto on the IPO 'Do not Be Evil', as well as Facebook's mission statement that 'it was designed to accomplish a social mission: to make the world more open and more connected, "and Snap says" reinventing the camera is our greatest opportunity to improve the way people live and communicate. "Uber's IPO was:" We create opportunities by putting the world in motion. "

This kind of flapdoodle is old hat now. Investors surely know that this does not make sense in the context of profit and loss, or at least without a plausible path to profitability.

The key point to keep in mind about WeWork, when Baroque bargaining process and the new age is written off, is that its business model almost seems to crave to collapse. In summary, it is up to WeWork to acquire bulk office space through leases with an average term of 15 years and to sublet them via tenant agreements (excuse me, the "memberships") of An average duration of 15 months. WeWork recognizes that "in many cases, our members may terminate their membership agreements … with as little notice as a calendar month".

Aficionados of economic history will recognize that the inadequacy of long-term liabilities and short-term assets is at the root of every financial crash, including that of 2008. In this case, a slowdown could lead to the disappearance of WeWork's tenant base, which would leave her lost. the hook for lease obligations is estimated at $ 47.2 billion. WeWork is trying to ignite the storm by saying that after an economic slowdown, the cost of leases and construction will be lower.

Real estate experts who have not experienced the touching sensuousness of WeWork do not have the purchase. One of them, Sam Zell, is a Chicago-based entrepreneur. He told CNBC this month that he had already invested in a similar sublease company and that he had the scars to prove it. "All companies in this area have gone bankrupt," he said. "Why is it different?" At the time when he was the owner of Tribune Co., then a parent of The Times, Zell was singularly clumsy as a newspaper owner, but there is no point pretending that he do not know really well.

The WeWork model is not new. In the 1970s, for example, Los Angeles-based Los Angeles Law Office provided small lawyers with offices equipped with receptionists, clerks and legal libraries that they could not afford to pay for themselves. . The spaces were known as "Fegen Suites", according to the president of the cabinet, Paul Fegen (pronounced "fee-jun"), lawyer. But the company went bankrupt in 1983 during a real estate crash. Fegen was later written off for mishandling several customer accounts and has since resurfaced as a professional magician.

It is not totally inconceivable that WeWork has broken a code that has remained opaque to Fegen and the types of real estate known to Zell. Neumann certainly wins paludits as a salesman. As my colleague Roger Vincent pointed out in May, some of the major workspace developers have looked at WeWork's business model and made it the best choice by copying it: providing tenants with more flexible leases and equipment. occupation.

This is not good news for WeWork because it highlights that in real estate, there is nothing new under the sun, or at least nothing that can not be reproduced. Indeed, even without the competition of traditional real estate companies, WeWork faced competition from other venture-backed office rental companies.

However, doubts about the current IPO suggest that the investment markets may have finally reached the limits of the mania of IPOs for companies with a high-tech glossary but financial measures poor quality. WeWork may not offer magic like Fegen, but alchemy. And the climax of alchemy goes back several centuries.