WeWork to reportedly go ahead with IPO despite investor's call to delay

Will free beer and a “we” spirit be enough? WeWork, the office space pioneer, is reportedly forging ahead with plans for a $20bn share sale despite being urged by SoftBank, its largest private investor, to delay it.

Concerns over WeWork’s massive operating losses, pricey lease agreements and executive payouts have mounted in recent weeks. But according to CNBC, the company is still planning to start its investor roadshow and will start marketing itself to investors next week.

Related: 'End of irrational exuberance': WeWork considers slashing valuation in half

Pressure to shelve the offering began last month after the company, now known as the We Company, released a prospectus that showed the company has lost about $3bn over the past three years.

SoftBank, which has invested more than $10bn in WeWork, is believed to have been spooked by a substantial drop in the company’s valuation and, according to the Financial Times, its bankers have discussed putting the initial public offering (IPO) on hold.

WeWork’s IPO underwriters at JPMorgan Chase and Goldman Sachs are testing the appetite for a valuation between $15bn and $20bn – a substantial drop from the $47bn valuation SoftBank gave the company earlier this year.

Their apparent hesitation, said Dan Ives at Wedbush Securities, speaks to a “fork in the road” in investor willingness to support profit-free tech companies.

That concern, he said, is reflected in the weaker than expected investor demand for Uber and Lyft – both companies’ valuation has fallen since their public listing.

“It’s about profitability and the nature of the business model,” Ives said. “The math doesn’t lie and investors are saying enough is enough with these valuations. We’re seeing a more valuation-sensitive investor and it’s having an impact on companies that lack profitability.”

MKM Partners’ Rohit Kulkarni said in a note last month that investors would “have to take a big leap of faith in order to believe that WeWork would show signs of a sustainable economic model” given mounting losses and ambitious expansion to plans that could grow them further.

WeWork reported that it has 527,000 members as of 30 June, an increase of more than 90% from the year before. That rapid expansion if reflected by a rapid increase in properties. WeWork has 528 locations, up from 485 at the end of the first quarter of 2019, and said it plans to open 169 new locations.

But WeWork suffers from further complications, not least about its management. WeWork’s CEO and co-founder, Adam Neumann, has taken $700m out of the company ahead of its IPO, an unusual move for a founder. He also owns properties that WeWork rents, a potential conflict of interest.

Neumann is also keen to expand WeWork beyond office rental. According to a recent blogpost from Neumann, the company’s new “guiding mission will be to elevate the world’s consciousness”.

That, he continued, “means being a student of life, for life, where we accept that we are always growing and in a constant state of self-discovery, self-growth and change”.

Under the rebranding and expansion efforts, which largely focus on unpredictable growth in China, Neumann has also said he sees WeWork as a “global platform” for things like “space-as-a-service”.

For investors, who note that not a single woman will serve on the company’s seven-member board, investing in the company means having confidence in Neumann.

Under a complicated share structure, Neumann controls the majority of the voting rights through the company’s class B and C shares. Neumann’s holdings could increase under the IPO, and WeWork’s leases include four buildings owned in part by him.

Since founding WeWork nine years ago, Neumann has spent more than $80m buying at least five homes, as well as commercial properties and stakes in startups, including a medical cannabis company.

According to corporate governance expert Charles Elson, the problems WeWork is having with its valuation and the prospect that it may be forced to shelve its IPO come down squarely to problems often reflected when a company offers a dual-class stock that in effect offers investors no accountability.

“The common shareholders have basically no power – it’s all concentrated in the founder,” said Elson, director of the John L Weinberg Center for Corporate Governance and Edgar S Woolard Jr chair of corporate governance at the University of Delaware. “Given the conflict of interest transactions that took place there over the years, it’s problematic. When you combine those actions with the dual-class structure, the concern is, could this happen again?