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11 big things: the strange world of WeWork

PitchBook  |  23 Aug 2019Text size  Decrease  Increase  |  
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Where to begin? This week, WeWork unveiled one of the most anticipated IPO filings in recent memory - a rather confounding document about which many thousands of words could (and already have) been written.

Buried within its 350-plus pages are a bunch of revealing, controversial and otherwise interesting nuggets about the most valuable VC-backed company in the US.

Missing, though, is any indication of how WeWork actually plans to make money anytime soon.

The past seven days brought two other major IPO filings, as well as the stunning fall of a former unicorn and a deal that could help shape the streaming wars to come.

But our rundown of 11 things you need to know from the past week couldn't start with anyone other than WeWork:

1. WeIPO

There's a lot to say, and I'm still recovering from the devastating absence of the phrase "community-adjusted EBITDA" anywhere within WeWork's IPO prospectus. So let's just dive into the highlights, lowlights and other kinds of lights: 

• The most obvious question about WeWork is how it plans to make a profit. The New York-based company's IPO filing revealed run-rate revenue of US$3.3 billion, up 86% YoY, which is great; it also reported a net loss of more than US$1.9 billion for 2018, which is more than twice as much as the company lost in 2017, which is in turn more than twice as much as it lost in 2016. That part is not so great. 

The future "profitability profile" WeWork outlines in the prospectus is based on its existing locations maturing and generating additional cash. The company says it believes the timing of any future profitability "depends to a significant degree on levers we control," referring mainly to the planning of new locations. Fewer expensive new locations, the theory goes, would lead to fewer expenditures. Which seems fair enough. But this concept also seems to be at odds with WeWork's statements elsewhere in the filing that it plans to continue its rapid expansion. 

Perhaps the most relevant statement on the matter from the IPO filing is this: "We have a history of losses and, especially if we continue to grow at an accelerated rate, we may be unable to achieve profitability at a company level (as determined in accordance with GAAP) for the foreseeable future."

• It was difficult to ignore that the filing dropped during a week when the US stock markets experienced their biggest dip of 2019 and signs of a coming recession continued to mount. It's long been posited that WeWork's real estate-heavy business model could encounter stress if the economy turns south. Is it a hypothesis that's about to be tested? 

• The first two sentences of the filing really set the tone: "We are a community company committed to maximum global impact. Our mission is to elevate the world's consciousness." That's one way to describe a business that rents out office space, I suppose. I don't know how much it does to justify WeWork's on-paper valuation of US$47 billion. 

• Speaking of which, here's a list of companies that closed the week with market caps of less than $47 billion: Target, Tesla, Ford, FedEx, Delta Air Lines, Marathon Petroleum, Humana, Dollar General, eBay, Allstate, Thomson Reuters and General Mills. These aren't apples-to-apples comparisons, but again: WeWork posted a loss last year of nearly US$2 billion. 

• The business often cited as WeWork's closest analog on the public market is IWG, a European co-working space company that has more locations than WeWork and currently turns a profit. Its market cap at Friday's close: a bit shy of $4 billion. 

• I've got to get to Adam Neumann, I suppose. The filing certainly did: As Bloomberg noted, the name Adam appears 169 times across the whole of the prospectus. The most eyebrow-raising occurrence, in my opinion, came when WeWork revealed that, as part of its rebrand to "The We Company" earlier this year, it paid US$5.9 million to acquire the trademark related to the We name. The previous owner of those trademarks? None other than Neumann. The filing also confirms earlier reports that Neumann has leased buildings he owns back to WeWork, another unusual arrangement.

• WeWork will go public with a three-class share structure that will concentrate a large amount of power in Neumann's hands. It only adds to the quasi-messianic role that Neumann seems to play at the business. In its prospectus, WeWork says that its "future success depends in large part on the continued service of Adam Neumann," shortly before noting that the company has "no employment agreement in place with Adam, and there can be no assurance that Adam will continue to work for us or serve our interests in any capacity." Well alright then. 

• Another random note: If Neumann doesn't donate US$1 billion to charity in the next 10 years, his extensive voting rights will be cut in half. 
 
• I could keep going, but it's probably time to wrap this up. I didn't even get to the US$10.7 billion SoftBank has pumped into WeWork over the past three years, or various other Neumann-related self-dealings and conflicts of interest. If you're the sort of person who enjoys perusing financial documents (and you're reading this newsletter, aren't you?), I'd really suggest giving the whole thing a read. 

2. Tumblr's tumble

Six summers ago, Verizon paid a reported US$1.1 billion for Tumblr, which had raised well over $100 million in prior VC funding. This week, Verizon (VZ) unloaded the blogging and social media site to Automattic (which owns WordPress) for what Axios reported was a price of less than $3 million, a stunning dip in value for a company that was once an internet darling. Is it a coincidence that the sale comes about eight months after Tumblr banned pornography? 

3. Pools of PE

Friday bought a trio of major developments from the world of private equity fundraising. Ares Management is seeking US$9.5 billion for what would be its biggest PE vehicle ever, while Apollo Global Management is targeting US$1 billion for its first impact investing fund, both according to Bloomberg. The creation of Apollo's new impact arm comes shortly after KKR reportedly raised more than US$1 billion for its impact investing debut. New York's Veritas Capital also got in on the action this week, establishing a US$6 billion target for its seventh flagship fund.

4. Ice cream 

It's hard to explain the Museum of Ice Cream in a sentence. Earlier this week, I wrote that it was "like if you dropped acid before touring the Ben & Jerry's factory." If that doesn't draw you in, maybe the fact that it was just valued at US$200 million will do the trick. Another startup with a name that reminds you of cold, creamy goodness was also in the news this week, as Scoop brought in US$60 million at a US$250 million valuation to fuel its corporate carpooling services.

5. A filing flurry

Cloudflare, a VC-backed company with a US$1.8 billion valuation, was in the headlines earlier this month for severing the internet services it was previously providing to 8chan, a controversial message board that's been linked to multiple mass shootings. This week, it hoped to change the narrative by releasing an IPO filing of its own, revealing a leap in revenue and net losses that are on track to decline in 2019. SmileDirectClub also filed for an IPO this week, less than a year after raising US$380 million at a US$3.2 billion valuation from Kleiner Perkins, Spark Capital and Clayton, Dubilier & Rice

6. Transportation

Scoop raised cash this week for cars. San Diego's TuSimple did the same for trucks, revealing that UPS Ventures has acquired a minority stake in the developer of autonomous trucking technology. In the realms of bikes and scooters, Lime is in talks with SoftBank and other backers about a new round that could total US$500 million, per Business Insider. And on the water, a peer-to-peer boatsharing company called Boatsetter banked US$10 million this week at a US$65 million valuation.

7. The waiting game

After literally years of on-and-off discussions, CBS (CBS) and Viacom (VIAB) consummated an all-stock merger worth a reported US$11.7 billion, which will create a media behemoth with more than US$28 billion in combined revenue. The deal will also bolster CBS' content catalog just as the streaming wars with Netflix (NFLX), Disney (DIS) and others are heating up. Another long-awaited merger inched closer to completion this week, too, as the chairman of the US Federal Communications Commission recommended his organization approve T-Mobile (TMUS) and Sprint's plans to combine. 

8. In-air entertainment

Some travelers prefer a magazine. Others might want to dive into an immersive 3D experience. This week brought something for everyone. BlackRock (BLK) invested US$875 million into Authentic Brands, reportedly valuing the new owner of Sports Illustrated at more than US$4 billion. And on a smaller scale, a startup called Inflight VR raked in €4 million (about US$4.4 million) to develop its VR headsets designed for those soaring through the friendly skies. 

9. Sports stakes

Earlier this summer, the Brooklyn Nets signed superstars Kevin Durant and Kyrie Irving to massive new contracts. Now, the franchise has a new majority owner, as Alibaba co-founder Joseph Tsai officially agreed this week to buy out Mikhail Prokhorov's 51% stake for US$2.35 billion, a record figure for an NBA team. Moving from the hardwood to the (artificial) grass, the Seattle Sounders of the MLS were also involved in some dealmaking, as Microsoft CEO Satya Nadella and NFL star Russell Wilson were part of a group that acquired a stake in the team. 

10. VC debuts

New York hedge fund Two Sigma is deepening its commitment to VC, as the fund's Two Sigma Ventures unit brought on Villi Iltchev to help lead its first dedicated venture fund, per Axios. Bain Capital Ventures alum Salil Deshpande is planning a VC debut of his own, according to The Wall Street Journal, a US$100 million vehicle that will focus on software and cryptocurrency. And a scion of the Bechtel construction empire has his eyes on VC, too, as Darren Bechtel and his Brick & Mortar Ventures closed an inaugural fund this week on US$97.2 million.

11. BC's buys

London-based private equity firm BC Partners lined up two deals this week worth more than US$2 billion apiece. First, it agreed to buy a stake in British software giant Advanced from Vista Equity Partners, with the Financial Times reporting a valuation of £2 billion (about US$2.4 billion). BC Partners followed that up with a deal to take IT infrastructure specialist Presidio private for US$2.1 billion.

Kevin Dowd is a private equity writer at Pitchbook. 

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