BY: Shira Ovide
Two people believe fervently, wholeheartedly in WeWork Cos., which leases real estate to commercial tenants and also bathes in self-parody. They are Adam Neumann, WeWork’s co-founder and CEO, and Masayoshi Son, the boss of SoftBank Group Corp.
Let those two have each other. The rest of us should get on with our lives.
The fresh news is that SoftBank plans to commit $2 billion more toward WeWork — scaled back from what was discussed as a $16 billion investment that could have left SoftBank as the sole outside stockholder in the young company. That massive potential deal was met with resistance from the investors in SoftBank’s nearly $100 billion technology investment fund. I should say that $2 billion is still a lot of money to plow into a rapidly growing but wildly unprofitable young company whose headline valuation is many times that of established peers.
The common thread from the multiple times SoftBank (or the SoftBank technology fund) invested in WeWork since 2017 is that the transactions are intricate and designed to maximize WeWork’s cash and headline valuation but also protect SoftBank from a possible WeWork implosion. One example: In investments SoftBank negotiated last year, the Japanese company essentially determined WeWork’s valuation and guaranteed a return on its WeWork investment. WeWork on Tuesday confirmed those two transactions plus the new SoftBank financial commitment.
That should demonstrate that WeWork and Softbank operate in a closed loop in which WeWork and Softbank negotiate only with each other, and they alone control how WeWork is funded, operated and valued.
That means the scaled-back investment in WeWork may not necessarily have bigger implications for technology companies or for the availability of capital for young technology (or “technology”) companies.
WeWork and SoftBank live on a planet inhabited by only two parties in a far corner of the universe. Don’t take any lessons from them.
WeWork — which is now named “The We Company,” Neumann told Fast Company without any hint of self-awareness — is not really worth $45 billion, or $20 billion or whatever numbers people are tossing around.
All startup valuations are fiction, but WeWork’s valuation is science fiction determined solely by whatever WeWork and Softbank want it to be.
And that’s fine for those two sides. Softbank has clauses and subclauses that are intended to protect its investments and oversight of WeWork.
In return, WeWork gets a true-believer investor and the money to expand its real estate empire, create a fancy children’s school, spread grain bowls to the world, provide financial services and bring killer surfing waves indoors. (Side note: These appear to be things that WeWork is doing with investors’ money. Is that OK with everyone?)
Investors not named SoftBank who purchased WeWork bonds have voted with their wallets. As my Bloomberg Opinion colleagues noted on Tuesday, WeWork bonds have underperformed other similarly risky corporate debt.
SoftBank shares also rose on the news of the company’s scaled-backed investment in WeWork.
To recap, the Middle Eastern investors in SoftBank’s technology fund were reportedly worried about plowing more money into WeWork. Softbank’s stockholders are concerned about the company committing more money to WeWork.
The WeWork bondholders are worried about WeWork. The only people not worried about WeWork are WeWork and SoftBank.
We’ll never know if WeWork works, or if Son is a genius or a fool, until there is a shakeout economically or until WeWork no longer has access to an endless supply of SoftBank cash to grow at will. Neumann told Fast Company that an economic downturn would be an opportunity for his company. He’s wrong. WeWork can exist only because of robust economic conditions for its commercial real estate tenants and for the capital markets of young technology companies.
WeWork is growing like a weed, yes, but that’s a conscious choice to expand drastically without regard to sustainability. Its valuation— whatever SoftBank says it might be — is many multiples of what peer companies are worth.
The company that has never stood on its own feet financially told investors last year that it was on the hook for $18 billion in lease payments in coming decades.
Startups, particularly in this decade, have always been predicated on faith rather than cold hard facts. WeWork and other young commercial real estate companies are doing the world a favor by shaking up a stodgy, clubby industry.
We just don’t know if any of this is real or a play put on by WeWork and SoftBank. Like that indoor pool that WeWork’s CEO loves so much, the company is creating a lot of waves, but they’re artificial.