Out of office

The We Company’s prospectus, filed on 14 August 2019, contained a number that deserves to be better known than its founder’s lifestyle. The firm had committed itself to $47.2bn of future minimum lease payments, at an average initial term of about 15 years.^{4City A.M.We burn cash: deciphering the WeWork IPO filing14 Aug 2019} Its revenue in 2018 was $1.8bn.^{4City A.M.We burn cash: deciphering the WeWork IPO filing14 Aug 2019} WeWork rents offices on long leases and sublets them on short ones. That is a respectable trade, known elsewhere as property, and it is usually valued as such.

It was not valued as such by WeWork’s private backers, who put the firm at $47bn after a further $1bn from SoftBank in January 2019, and who briefly hoped to take it public at nearly $50bn.^{1Associated Press, via The Daily RecordWeWork withdrawing its stock market IPO filing30 Sept 2019,3Crunchbase NewsCharting the We Company's S-114 Aug 2019} SoftBank and its affiliates had by then invested or committed about $10.65bn.^{3Crunchbase NewsCharting the We Company's S-114 Aug 2019} On 30 September, six weeks after the filing, the company said it would withdraw its offering. Its new co-chief executives, Artie Minson and Sebastian Gunningham, said they would “postpone our IPO to focus on our core business, the fundamentals of which remain strong”.^{1Associated Press, via The Daily RecordWeWork withdrawing its stock market IPO filing30 Sept 2019}

We think the episode should be read as a success, and not just for the investors who stayed away. Public markets exist partly to ask awkward questions of firms that private markets were too enthusiastic to put. Here the questions were answered by the prospectus itself, and the answers were poor.

Start with the economics. WeWork lost about $1.9bn in 2018, on the headline measure of its filing, and a further $0.9bn in the first half of 2019.^{4City A.M.We burn cash: deciphering the WeWork IPO filing14 Aug 2019} (The Associated Press, using the share attributable to WeWork’s own shareholders, gives $1.6bn for 2018.^{1Associated Press, via The Daily RecordWeWork withdrawing its stock market IPO filing30 Sept 2019} ) Revenue in the first half of this year was $1.5bn, double the figure for the same period of 2018, but location operating expenses, which are mostly rent, absorbed about $1.2bn of it.^{2Commercial ObserverWeWork Files for IPO With Billions in Revenue and Losses14 Aug 2019} Over 2018 as a whole, such costs ran to about 80% of revenue.^{1Associated Press, via The Daily RecordWeWork withdrawing its stock market IPO filing30 Sept 2019} Growth that costs more than it earns is not a business. It is a subscription to someone else’s capital. The company itself said it could not predict “whether we will achieve profitability for the foreseeable future”.^{4City A.M.We burn cash: deciphering the WeWork IPO filing14 Aug 2019}

Then the governance. The firm’s Class B and Class C shares carried twenty times the votes of ordinary Class A stock.^{3Crunchbase NewsCharting the We Company's S-114 Aug 2019} The filing also set out a “potential conflict of interests”: Adam Neumann, the chief executive, had leased space to the company in several of his buildings and, according to the Wall Street Journal, “raked in millions of dollars”.^{2Commercial ObserverWeWork Files for IPO With Billions in Revenue and Losses14 Aug 2019} Buyers of the new shares would thus have owned a loss-making lessee, answerable to a landlord who happened to be its chief executive. Investors, to their credit, noticed the arrangement.

The strongest counter-argument is that this was a fashion, not a verdict. Public investors, the case goes, have grown short-sighted, and a patient funder such as SoftBank is better placed to build a firm whose returns come late. That is not absurd. But WeWork’s story was a promise to turn rent into a technology company by renaming it, and the prospectus gave investors the tools to price that promise. They did. A $6bn bank financing, which depended on raising at least $3bn in the offering, is now in question.^{1Associated Press, via The Daily RecordWeWork withdrawing its stock market IPO filing30 Sept 2019}

The cost of the failed flotation falls mostly where it should: on the private investors who set the $47bn mark and on a founder who has just stepped aside as chief executive.^{1Associated Press, via The Daily RecordWeWork withdrawing its stock market IPO filing30 Sept 2019} Employees and lenders will bear some of it too, which is the real argument for scrutiny before a listing and not after. The cheaper lesson, for the next unicorn, is that disclosure is not a formality. A firm that cannot stand being read should not offer itself for sale.

SoftBank wrote the cheques, and the market, at length, read the footnotes.