September 6, 2019

Breakingviews: WeWork dents the case for private markets

by Breakingviews.

Private beats public, according to many entrepreneurs. Abundant money from sovereign wealth funds, venture capitalists, private equity firms and even traditional equity investors has allowed startups to grow rapidly without the strings that come with stock-market listings. It has also enabled poor governance and unrealistic valuations. The hapless WeWork shows the gap is wide.

The shared-office space company led by Adam Neumann may go public at a valuation as low as $20 billion, less than half the $47 billion implied by its last private fundraising just eight months ago. The market hasn’t seen a so-called down round on that scale since payments company Square made its initial public offering four years ago. The problem isn’t that public-market investors are too narrow-minded, but that private investors have been too wide-eyed.

SoftBank and its giant Vision Fund is the biggest culprit. It has plowed over $10 billion into WeWork, including the check that produced that $47 billion price tag. Yet the Japanese firm isn’t alone. Venture capital firms plowed a record $131 billion into U.S. startups last year, according to Pitchbook. Blackstone is joining private equity rivals TPG Capital and KKR in getting into the venture game. Even mutual fund managers like Fidelity are making pre-IPO investments.

WeWork stresses its growth ambitions repeatedly in its IPO prospectus, but profit is less of a priority. The company has lost $3.6 billion on $4.7 billion of revenue in the past three and a half years. Rideshare company Uber Technologies, also not profitable, is currently trading 28% below the price at which it went public back in May.

Public market investors may be prone to short-termism, and quarterly earnings calls are a drain on management. Yet the collective input of millions of investors makes for a better gauge of value than that of just a few. And the market has less tolerance for supervoting rights and related party transactions.

Such discipline might dent Neumann’s net worth – and WeWork is so complex that it barely looks suitable for public markets today. But that’s perhaps the point: shaping companies up for public markets, which may render them simpler and less extravagantly valued, is a good way to increase their chances of survival. Square’s stock, it should be noted, is up 600% from its IPO price.


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