WeWork, the Cocking startup unicorn startup whose IPO was one of the most anticipated public offerings for 2019, has been growing in recent weeks.
The company, which was about to launch its road show to entice public investors to buy back its shares, postponed its IPO last week after an extremely unusual move after investors raised concerns about its business model and leadership structure. And now, reports indicate that some of the company's board members, including employees representing SoftBank, the largest investor, want to oust WeWork founder and CEO Adam Neumann.
During the months and even years leading up to WeWork's IPO efforts, fears of huge losses were raised, whether it was a truly technology company and its solid corporate culture. But investors seemed to be OK with many of WeWork's problems ̵
The sharp decline in the WeWork estimate, i. just one-third of the $ 47 billion previously estimated during the January funding round probably had something to do with it. WeWork declined comment on Recode on the matter. SoftBank did not immediately respond to a request for comment.
SoftBank, a Japanese telecommunications giant whose $ 100 billion Vision Fund investment flooded Silicon Valley with money and transformed the finances of the industry, first invested in WeWork in 2017. It now owns almost
Masayoshi Son, chairman and CEO of SoftBank Group Corp., in the past, called WeWork its "next Alibaba," referring to the hugely profitable investments it made in China's technology behemoth. At one point, SoftBank wanted to be a majority shareholder of WeWork, a plan that was canceled earlier this year because of market turbulence and investor opposition – perhaps this is an early sign that SoftBank beneficiaries are uncomfortably strapping their finances so tightly. a turbulent company,
But its investors have known about most of WeWork's problems for some time.
"It's one thing for people to know, but when you go to potential investors and they raise all these issues, that's where the tire hits the road," said Amy Borus, deputy director at the Institutional Investors Council. Recode. "It turns out that many investors have asked harsh questions about how the company is structured, how it [Neumann] manages the company, and the economic outlook for the company."
From Alibaba's next financial responsibility to its largest investor, this is how WeWork got to that point.
Bad corporate governance
WeWork's corporate governance issues are endless, and the corporate structure of the company is at the heart of it all. Like many other tech companies that have recently become publicly available, WeWork has a multi-stake structure that gives Neumann more power than other shareholders of the company.
Neumann managed to maintain control of WeWork, since the class B and C shares he holds each had 20 votes in each vote, ordinary shareholders will receive their class A shares. After a wave of criticism, WeWork changed its S- 1 two weeks ago and limited Neumann's Super Voting Shares to 10 votes for each ordinary share vote – but that's still a high ratio.
This means that it will be difficult to get rid of Neumann if he does not want to leave, as his super voices still give him the power to fire the whole board. But if Neumann gets rid of his opponents on board, he would put that risk of making WeWork look even more chaotic than it already is in the eyes of investors, threatening the outcome of the IPO. Neumann is reportedly in discussions to voluntarily resign as executive director, according to Reuters.
The company's original filings state that if he dies, his wife Rebecca, co-founder and chief employee of WeWork's brand and impact, will be accused of appointing a successor. WeWork S-1 updates have changed this scenario Game of Thrones to one in which the WeWork board will be responsible for finding the next CEO in the event of Neumann's death.
Rebecca is one of several family members employed by WeWork, including Neumann's son-in-law, who is his "Head of Health".
Neumann's superiority on board enabled him to apply a number of non-standard financial practices that many view as a conflict of interest.
WeWork, which is basically a company that leases long-term office space to rent to others in the short term, initially did not plan to own any property. Failure to do so will save him from greater expenses that would put a strain on his already loaded balance. But earlier this year, the Wall Street Journal reported that Neumann was buying private property, which he then leased to WeWork.
At the same time, Neumann borrows money from WeWork at almost no interest. So the company paid him rent while giving him money.
Responding in part to investor concerns, Neumann said he would transfer ownership of these buildings to the company's real estate investment arm, ARK.
In that sense, WeWork paid Neumann nearly $ 6 million to change its name to "The We Company," a brand that Neumann owns. In "mea culpa" / updated S-1, he returned that money.
The company is also attracting public scrutiny, as until recently there were no women on board. WeWork finally appointed its first female board member earlier this month.
It's no secret that WeWork is, at least for now, a waste of money. It lost $ 1.6 billion compared to $ 1.8 billion in revenue last year.
But this is on par with the technological startups that WeWork has tried hard to convince the world of. Its ability to burn money certainly makes it a technology company – even if it lacks other important technology company features, such as low growth costs and a network effect, which means its product value increases as more people use it.
The company's expectations have changed since its initial IPO in August. The company's updated S-1 in September got rid of numerous references to "hassle", "profitable" and "cash flow" – assuming these goals were far from expected.
And the operating losses of WeWork remaining after the expense of bringing in revenue are keeping pace with its growing revenue. This means that the more money WeWork makes, the more it loses. Ideally, you would like to see the opposite: loss-making as the company earns more revenue.
Its biggest expense – 65 percent of its revenue – is renting office space, which makes sense for a real estate company, but not for a technology company where you might want to rely on savings as you grow.
Of course, much of WeWork's losses can be attributed to its rapid growth rate. Opening new locations is expensive and can take time to see the return.
Probably, if WeWork stopped expanding, it would reduce its losses. But even this is difficult to know, as WeWork did not explain how profitable or not its location was.
As the Financial Times wrote in August, "[I] after a clean profit and loss table for maturity and growth, WeWork calculates a" contribution margin "- a metric known as" community adjusted EBITDA [earnings before interest, taxes, depreciation, and amortization]. "Like any adjusted financial indicator, it is intended to tell investors, 'ignore these costs because they are irrelevant to our core economy. "" (Investors are very skeptical of the community-adjusted Ebitda measurement.)  What we do know is that WeWork has a lot of debt, including a $ 702 million bond due in 2025 and priced at has fallen since yesterday's CEO news. The company also needs a lot more money, and increasing it becomes more difficult as its valuation decreases.
Other Misconduct and Distracting Business Priorities
The recent allegations that Neumann has brought a "substantial spit" of weed to a private jet across international borders (which is illegal), as well as its general "unusual abundance and excess" as first The Wall Street Journal has reportedly urged him to step down from his starring role.
But for many who follow WeWork closely, these statements are nothing new. These are just a few examples of a long list of other corporate culture responsibilities that some former employees say may be firm parties and inappropriate.
Since its creation, WeWork has been promoting "hard work, hard work," with a focus on the party. One of his biggest differentiating early markets in his co-working spaces was that he served free beer on tap (now a four-beer limit has been placed on his bottomless barrels). Some say it reflects WeWork's culture within its own organization and that it created an unwanted environment, especially for women.
Last year, former WeWork director Ruby Anaya filed a lawsuit against the company, claiming that colleagues had sexually assaulted her at two mandatory alcohol-related work events. Anaya blamed WeWork's leadership for creating a frat-boy culture from top to bottom, claiming that Neumann himself "showered" her with tequila shots in her interview. WeWork denied Anaya's allegations and called her a bad performer.
One of the alleged attacks on Anaya took place at the former annual workplace of the WeWork Summer Camp Festival – where thousands of staff would camp in tents together in bucolic settings like the British countryside, listening to Deepak Chopra's likes and dances of live performances by artists like Lorde. WeWork did not host the event last year.
The company also made a dazzling list of acquisitions and investments – making its $ 13 million investment in a wave pool company – viewed by many as a distraction from WeWork's core business (still burning through piles of money). The company has also tried to get involved in the business of running gyms, condominiums, coding camps and even a school aimed at beginning children entrepreneurs called WeGrow.
The company stated that its ambition was to create a "We" brand that penetrates every aspect of people's lives, but according to the Wall Street Journal, these other endeavors outside of the coworking business of WeWork are struggling.
Announces that Neumann will retire voluntarily after several outlets announced over the weekend that the WeWork board will meet to discuss his potential removal as CEO as soon as Monday. It's unclear exactly how and when this will take place, but Neumann's control of his company may soon change.
Until the WeWork drama reached an inflection point in recent days, the company has been a mess for some time. The warning signs were visible, but the private market largely ignored them and continued to pour billions of dollars into the company, with SoftBank leading the charge.
More than anything, WeWork's current debacle raises bigger questions about SoftBank and the future health of its Vision Fund, as well as the funding environment for tech startups as a whole. SoftBank's other crown jewel, Uber, also went through an executive shake-up in its IPO approach when former CEO and co-founder Travis Kalanik resigned in 2017. But even with new leadership, Uber is struggling in the stock market as it goes public and recently released 8 percent of its workforce.
Whether Neumann, like Kalanick, has been removed from his role, these larger questions will remain.