How WeWork, the New York-headquartered real estate company with its sophisticated branding strategy and inflated financials achieved a valuation of $47billion is an interesting case study. Let’s discuss
Believed I am a Smart Mascot
WeWork is a real estate company which provides attractive and high-tech shared office spaces on rental to the startups. However, the company successfully marketed and branded itself as an innovative tech company. It defines its business as ” Space- as-a-Service” like that of SaaS (Software-as-a-Service) with a mission statement to elevate the world’s consciousness. With the tech terms use, WeWork established itself as an innovative service provider.
When we analyze the financials of the company, it is like the game of snakes and ladder being played. In 2018, the company’s yearly revenue increased by 106% YoY (Year-over-Year) basis and rose to $1.8 billion and during that same period the company doubled its losses to $1.9 billion. During the first half of 2019 also company incurred a loss of $900million.And now facing a cash crunch and struggling for survival. The reason being the company used to book full year’s rental income in advance and not on due basis in order to inflate the revenues and latter on unrecovered rental booked as an expense.
My Company, So My Rules apply
WeWork worked for the benefit of its founders only and Corporate Governance norms not followed. Company’s founder – CEO Adam Neumann has given his own hi-end properties on rent to the company. Further, WeWork also advanced loans to Neumann. Which were repaid but at lower than market interest rates. And this is how the company diverts its income to the founders. WeWork also paid Neumann’s personal LLC $5.9 million in stock for purchasing trademark rights to the “We” family when it changed its name from WeWork to We Company in Jan’19.
Reaching the top
Even after all these, in January 2019, Softbank invested $2billion in the company which raised its market valuation to $47billion. Softbank invested more than 10bn in total for around 29% stake in the company.
And finally the problem
The company was about to come with its IPO in this August but investors identified the reality that the company’s higher valuation is artificial and its financials are faulty. As a result WeWork value reached to $10 bn to $12 bn, reduced from $47bn. And its IPO was postponed.
However, WeWork is the largest tenant of Manhattan (New York), it will manage to raise finance for survival.
But this the best example of how startups are overvalued and as an investor before we invest in any company have to check its fundamentals.
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