WeWork IPO Postponement: What’s The Impact For Startups?

The IPO process has turned into a nightmare for WeWork. Simply put, investors have been far from convinced about the opportunity–at least in terms of the current valuation. There are also nagging issues about the business model and corporate governance.

“There has been a lot of scrutiny in the run-up to the We Company’s filing of their highly anticipated S-1,” said Kelly Rodriguez, who is the CEO of Forge. “As the financial community has been largely divided on its viability as a business, many hoped the filing would help clear the air and provide a more comprehensive look at their business model. While there is a lot to like in the We Company’s S-1, like the sharp revenue growth year-over-year, there are still a lot of loose ends and ambiguity that leave potential investors questioning its ability to sustain long-term growth.”

In light of all this, it should be no surprise that WeWork has delayed its public offering. It looks like the offering will happen next month.

Now all this comes as the equity markets are near all-time highs. But it does look like investors are getting more cautious on some deals, especially for those companies with substantial losses (last year WeWork reported a $1.61 billion loss on $1.82 billion in revenues).

So what does this all mean for startups? Well, I reached out to entrepreneurs and experts to get some viewpoints:

Mike Volpe, the CEO of Lola.com:

The market is merely working exactly as it should. The problem is specific to WeWork and their business, not a systemic issue. The company has huge capital needs but produces slim profit margins for each customer they sign up. Wall Street is saying WeWork is not a great investment at their recent lofty private valuation. A different company that is growing fast and has great profitability per customer would be able to have a wonderful IPO today.

Tobias van Gils, who is a co-founder of Countach Research:

Investors have shown that they do not perceive WeWork as a tech company as it fails in multiple key characteristics in comparison to tech companies. Two such examples are scalability (limited by locations and the need for consultations and brokers for larger businesses) and the very large percentage of revenue going to rent payments.

Charley Moore, a tech attorney and CEO and founder of Rocket Lawyer:

With the economy and financial markets giving off late cycle signals, there appears to be a shift away from growth at any cost and toward value. When that happens, compliance, regulation and governance tend to pick up steam as the government seeks to fix the excesses of the prior expansion and investors become more cautious. Examples include the increased antitrust scrutiny of big tech, and Facebook and others in the spotlight over privacy.

One implication of this example could absolutely be a heightened focus on profitability. And companies that are losing money, thereby facing existential capital needs, may have to trade control for survival. This seems to be at least part of the trading going on in the WeWork deal.

Vineet Jain, the Founder and CEO of Egnyte:

More than ever before, the path to profitability is being heavily evaluated. A company can burn through money—and ultimately lose money—however, if that company is demonstrating a reduction in losses and a convergence toward break-even, you will still get the benefit of the doubt from public investors if you have a high growth curve.

The other thing I think investors are not buying into is the dual share structure: founders or CEOs with one share that is the equivalent to 10 shares of voting rights. I believe that is going away.

Timothy Spence, a SEC Consultant:

Does the WeWork IPO bode poorly for tech? No. The scrutiny means you have to have a solid business model. Clearly, what’s happening in the IPO world is an investment in a future potential of the company.

Surprises With Tech Compensation

The IPO market continues to be red hot. This week, Medallia (MDLA) soared 76% on its debut and Phreesia (PHR) rose 39%. And yes, this bullish activity is driving up compensation in Silicon Valley, especially from stock option packages.

Yet this is also causing some problems. After all, non-tech companies realize they need to hire technical talent but have fewer resources to compete. Hey, even startups are feeling the pressures.

But when you look at compensation data, there are some other interesting trends that are emerging. Consider the findings from a recent report from Hired, which is a marketplace for matching tech talent. It is based on more than 420,000 interview requests and job offers across 10,000 companies and 98,000 job seekers.

So then what are some of the takeaways? Well, let’s take a look:

Boston, Austin and D.C. are gaining momentum: As should be no surprise, the San Francisco Bay Area is the highest paying market for tech workers (the salary levels rose 2% last year). But the fact is that the market is dynamic and workers are looking elsewhere. For example, tech salaries in Boston jumped 9% last year and Austin and Washington D.C. saw 6% increases.

“The salary growth in up-and-coming tech hubs is a clear sign of these cities doing everything they can to attract the best tech talent and compete with the Bay Area — and from our analysis, it’s working too,” said Mehul Patel, who is the CEO of Hired. “Our data shows that Austin, where average tech salaries grew from $118K in 2017 to $125K in 2018, is the most appealing place for tech talent to work.”

IPOs and equity compensation: Keep in mind that the IPO boom is not creating a frenzy for equity. “We also looked at tech worker sentiment around the importance of equity in a compensation package and despite this year’s IPO wave, our results found that more than half of global tech workers (54%) are on the fence about forgoing a higher salary for company equity, suggesting that added pressures could be boosting salaries,” said Patel.

Tech workers will move: The situation in the Bay Area is creating something odd. That is, tech workers feel underpaid because the cost of living is increasing even more, the taxes are high and real estate prices are at extreme levels.

According to Hired, when you make adjustments for these factors, an average salary in Austin would be $208,000. In other words, a typical tech worker would need an $83,000 raise to get to parity.

Currently, the most popular cities to relocate include: Austin, Seattle and Denver. Oh, and 60% of tech workers plan to relocate within the next five years.

Age: Tech remains generally biased towards younger people. The Hired report indicates that the average tech salary plateaus at 40 in the US.

Education: The requirements are changing rapidly. For the most part, tech workers do not see as much value in advanced degrees. The Hired survey shows that 31% believe they could have the exact same job without their degree and only 23% of those with master’s or doctorates believe they command higher salaries because of their advanced degree.

Instead, tech workers are looking to alternative forms of education, such as coding bootcamps and online learning platforms.

The Hired report notes: “Tech giants like Apple, Google and PayPal have moved away from traditional education requirements and are increasingly interested in candidates with specific in-demand tech skills and on-the-job experience that may not be acquired through higher education.”

Endeavor IPO: Turning The Agency Business Upside Down

In 1990, futurist George Gilder published Life After Television. He set forth a vision where a global network of computers – supercharged with fiber optics — would wreak havoc on mass media, leading to user-generated content, distance learning and even smart devices. Keep in mind that he wrote this book five years before Netscape went public, heralding the Internet revolution.

One of the readers of Life After Television was Ari Emanuel, who was a senior agent at ICM (International Creative Management). According to him, in a letter to shareholders: “[The book] changed the way I thought about content and distribution. That book was a catalyst that led me to leave a large, established talent agency to start a new and nimble one.”

The result was the creation of the Endeavor Agency in 1995. But for the most part, Emanuel focused on building a traditional operation and amassed a powerful line-up of clients.

However, during the past decade or so he has transformed the company. In fact, he is now in the process of taking the company public.

This is certainly unconventional as the last talent agency to be public was ICM, back in the 1980s. Let’s face it, there’s a natural aversion to disclose compensation packages, which could provide valuable information to rivals. Another issue is that Wall Street generally does not like labor-intensive businesses. They can be extremely difficult to scale and remain profitable.

So what makes Endeavor different? Why might investors be interested? Consider that Endeavor has been aggressive in building an entertainment platform that includes a myriad of revenue streams. The IPO filing points out the following: “media rights sales, pay-per-view programming, sponsorships, subscriptions, license fees, ticket sales, profit participations, profit sharing, pay-per-view programming, commissions and strategic consulting fees, data streaming fees and tuition.”

All these come from three business segments:

  • Representation: Endeavor is the largest talent agency, providing services to over 6,000 clients – whether talent, brands or IP (Intellectual Property) owners. Note that last year the firm represented more Academy Award and Grammy winners than any agency. A key boost to this segment was the mega merger with the William Morris Agency in 2009 as well as the $2.4 billion acquisition of IMG in 2014.
  • Endeavor X: This business – which came through the acquisition of NeuLion – is primarily focused on streaming for customers like the NFL, NBA, WWE, UFC and PBR.
  • Entertainment & Sports: This is perhaps the most important business – at least for Wall Street. The segment includes the ownership of brands like Ultimate Fighting Championship (UFC), which cost a hefty $4.1 billion, the Professional Bull Riders (“PBR”), the Miami Open and Frieze. With these assets, Endeavor puts on hundreds of live events every year.

To get a sense of how all this works together synergistically, let’s take a look at the UFC. At the heart of this is the representation business, in which Endeavor helps with movie roles, book deals and modelling. Then there is the development of original content like “The Contender Series” and “UFC: Destined.” Next, the UFC gets the benefit of marketing, distribution and sales. This involves licensing arrangements, such as for apparel and fitness, and the securing of media rights – say the 7-year deal with ESPN and ESPN+. Oh, and then there is the direct-to-consumer segment, which includes the FIGHT PASS streaming service

Really doesn’t look like a typical agency, right? Definitely not. Endeavor is instead a global entertainment powerhouse. In 2018, the company was able to generate $3.6 billion in revenues, up from about $3.02 billion in the prior year, and net income of $231.3 million.

The Risks

There are certainly nagging risks with the company and the public offering. Endeavor is a complicated organization, which could make it difficult for Wall Street to understand. Usually investors prefer pure plays (say a company like Pinterest).

Endeavor also has taken on significant debt. As for the end of last year, it was at about $4.6 billion along with roughly $3.7 billion in contingent liabilities for guaranteed media payments and other obligations.

Something else: There is a history of disputes and strikes with entertainment talent. The latest involves a fight with rule changes of the Writers Guild of America.

Then again, Endeavor has the benefit of a diverse platform and massive scale – so it should be in a better position to manage these problems.

Bottom Line On the Endeavor IPO

Gauging the prospects of an upcoming IPO is extremely difficult. The markets can be fickle. Hey, how many people predicted that Beyond Meat would be the year’s highest-performing offering?

Not many.

Instead, the real test for a company is not how it does on its IPO day. Its instead about the long-term.

Now with Endeavor, it’s easy to criticize the company. And yes, there will likely be a good amount of volatility when the company trades on the NYSE.

Yet Emanuel understands that the entertainment industry is undergoing disruptive changes and that he knows that doing things the old way will no longer work. More importantly, he has a clear vision for the company – and is not afraid to pull off bold moves to make it a reality.

Slack: Why Did The App Catch Fire?

“Slack provides the virtual cubicle for connecting with your colleagues and sharing your ideas, regardless of location,” said Michael Whitmire, who is the co-founder and CEO of FloQast.

This is a pretty good description of the highly popular app.

But interestingly enough, Slack almost never came to be. Founded in 2009, the company – which was initially called Tiny Speck – focused on the development of a multi-player game, Glitch. The name was apropos. Within a few years, the game had to be shut down.

Yet Glitch had something that was intriguing: an instant messaging system. So the founders pivoted and turned this technology into the Slack platform.

No doubt, the second try was the charm.  Today Slack has 10+ million worldwide DAUs (Daily Active Users), with the average minutes of active usage at 90+ minutes per workday. The market cap is over $15 billion.

So what were the right moves? Why did Slack win big? Well, let’s take a look:

Beyond Meat: The Keys To Disrupting An Enormous Market

This week’s IPO of Beyond Meat (BYND) was a flashback to the dot-com boom as the company’s shares soared 167% on its debut. The valuation: a hefty $3.8 billion.

Even more impressive is that Beyond Meat is, well, a food company (it develops plant-based meat products) and the sales for 2018 were only $87.9 million (and yes, the company has yet to post a profit).

But then again, Beyond Meat is a New Age food company that is disrupting a massive industry. Keep in mind that the global spending is roughly $1.4 trillion.

So how did the founder and CEO — Ethan Brown – pull this off? What are the lessons for disrupting an industry?

Let’s take a look:

Mission-Based Focus: In his shareholder letter, Ethan writes: “Beyond Meat’s story begins on farmland. Through my father’s love of farming and the natural world, my urban childhood was interwoven with time spent on our family’s farm in Western Maryland where we were partners in a Holstein dairy operation. As a child, I was fascinated by the animals surrounding us: the companions at our sides, the livestock in the barns and fields, and the wildlife in the woods, streams, and ponds. As a young adult, I enjoyed a career in clean energy but continued to wrestle with a question born of these early days: do we need animals to produce meat? Over the years, the question knocked more loudly and I set out to understand meat.”

Having a story is critical. It’s a way to get investors excited, inspire employees and to build loyalty with customers.

But Ethan’s story was more than just making healthy food that’s tasty. Through his research, he realized that his product has a positive environmental impact, such as with 90% fewer greenhouse gas emissions, 99% less water, 93% less land and 46% less energy. Oh, and there is also the benefit of animal welfare.

As a testament to Ethan’s vision, his company has amassed 1.2 million followers across social media and newsletters as well as 9.9 billion earned media impressions in 2018.

Market: When it comes to mission-based companies, there is always the issue of focusing on niche opportunities. For example, with plant-based meats, the market for vegetarians and vegans is less than 5% of the US population.

This is why one of the key strategies for Ethan has been to market to meat-loving consumers. Interestingly enough, he requests that his product be sold in the meat case at grocery stores.

Investors: Selecting the right ones is absolutely essential. To this end, Ethan received investments from top VCs like Kleiner Perkins Caufield & Byers and Obvious, which have deep experience with scaling startups.

But Ethan also looked to investors – like Bill Gates, Leonardo DiCaprio and Seth Goldman (the founder of Honest Tea) — who are influencers that can evangelize his story.

Product Innovation and Distribution: Getting this balance right is challenging. It’s common for companies to emphasize one over the other.

But so far, Ethan has been able to manage the process. When he founded the company in 2009, he started in a small commercial kitchen and experimented with different recipes.  He also sought the help from researchers at the University of Missouri’s Bioengineering and Food Science Department at the College of Agriculture and Natural Resources and faculty and students at the University of Maryland’s Nutrition & Food Science Department. Ethan wanted to make sure his product was amazing, which would create a flywheel with distribution.

His first major partner was Whole Foods. Then over the years, he was able to get buy-in from Target, Kroger, Del Taco, Carl’s Jr., and T.G.I. Friday.   Currently, there are about 30,000 distribution points across retail locations and restaurants.

According to the IPO prospectus: “[P]opular restaurants have approached us directly to carry our branded product, despite already carrying our competitors’ products. This type of demand for our products has been a driving force in building strong ties with customers who have been continuously impressed by the impact our brand can make on their business.”

What You Need To Know About The Slack IPO

Slack, which is a fast-growing collaboration app, unveiled its IPO filing last week. The buzz is that the deal could be on par with Zoom’s, which soared over 70% on its debut (here’s a recent post I wrote on the company for Forbes.com).

In terms of the timing, the Slack offering is likely to hit the markets in a few weeks. The shares will be listed on the NYSE under the ticker of SK.

OK, what are some of the notable details in the IPO filing? Well, let’s take a look:

The App: The founders created Slack because they were frustrated with email. So they reimagined the experience, with a focus on team-based channels — not individual inboxes. Here’s how the S-1 describes it: “Channels offer a persistent record of the conversations, data, documents, and application workflows relevant to a project or a topic. Membership of a channel can change over time as people join or leave a project or organization, and users benefit from the accumulated historical information in a way an employee never could when starting with an empty email inbox. Depending on the size of the organization, this might provide tens, hundreds or even thousands of times more access to information than is available to individuals working in environments where email is the primary means of communication.”

Growth: It’s certainly robust. From fiscal 2017 to 2019, revenues jumped from $105.2 million to $400.6 million. Although, the company continues to post losses (they were $138.9 million last year).

A significant driver for the growth has been the expansion within organizations. For example, the net dollar retention rate is 143% and 575 customers pay at least $100,000 per year, compared to 298 in the year before.

Engagement: To get a sense of this, look at the metrics for the week ended January 31st. There were more than one billion messages sent and on a typical workday, a paid customer averaged nine hours connected to the app and more than 90 minutes of active usage.

Powerful Ecosystem: Slack has built a strong community of more than 500,000 developers. They have created over 450,000 third-party applications and custom integrations, which have provided for a much richer platform. Slack is even creating a low-code system that should mean even more growth of the ecosystem.

Market Opportunity: It’s massive. Based on Slack’s own analysis, the spending on communication and collaboration tools is at about $28 billion worldwide.

Competition: It’s intense. Slack must fight against some of the largest tech companies in the world, such as Google, Cisco and even Facebook. Yet the company considers its primary rival to be Microsoft.

In fact, the Slack S-1 notes: “Moreover, we expect competition to increase in the future from established competitors and new market entrants, including established technology companies who have not previously entered the market.”

Investors: They include tier-1 players like Accel Partners (24%), Andreessen Horowitz (13.3%) and Softbank (7.3%).

As for the co-founders, Stewart Butterfield holds 8.6% of the equity and Cal Henderson has 3.4%. They both have supervoting shares. However, there is an expiration provision for this.

Unusual IPO: Most companies use Wall Street firms to facilitate a public offering. But Slack is taking a much different approach: a direct listing. This not only means not having to shell out large fees but also allows anybody to purchase shares on the debut.

Keep in mind that the direct listing will not involve a capital raise.  But then again, Slack has about $841 million in the bank.

Zoom IPO: What Can Entrepreneurs Learn From The Mega Success?

While much of the attention for IPOs this year has been on high-profile operators like Slack, Lyft, Uber and Pinterest, the standout deal has so far been Zoom. Last week the company launched its offering and the stock rocketed by 72% on its first day of trading, putting the market cap at nearly $16 billion. Now Zoom is among one of the most valuable cloud companies in the world.

All this is the vision of Eric Yuan, the company’s founder and CEO.

Here’s a backgrounder:  While attending college in China during the 1980s, he majored in Computer Science because he admired tech entrepreneurs like Bill Gates. By 1997, Eric came to America – after much difficulties with the immigration system – and joined the engineering team at WebEx. It proved fortuitous as the company would revolutionize the conferencing market.

Then by 2007, WebEx sold out to Cisco and unfortunately, the innovation started to lag. Eric tried to push for change but he was mostly rebuffed. In 2011 he started Zoom, raising a seed round from a variety of angels.

As should be no surprise, Eric was fairly unconventional in his strategy — that is, by the standards of Silicon Valley.  For example, he did not spend lavishly (the original offices were quite modest) and there was little emphasis on sales and marketing.

All in all, the formula has been spot on.  As of today, Zoom is growing at 100%+ and is profitable. There are also 50,000 corporate customers and 344 of them pay over $100,000 a year.

OK then, what are the takeaways for entrepreneurs? What are the lessons here that can help with your own venture? Well, let’s take a look:

Customer First: Eric is obsessed with making the best product possible. Keep in mind that he worked on the Zoom platform for two years before it was launched. He would also personally answer questions from customers and reached out to every customer that cancelled.

The bottom line: Zoom has a Net Promoter Score (NPS) over 70.

“Zoom succeeded when so many others didn’t,” said Roy Raanani, who is the co-founder and CEO of Chorus.ai. “When Eric started the business, he knew the video conferencing industry intimately and understood that existing products didn’t meet user needs. He had a vision that everyone should ‘Meet Happy’ and focused on creating a simple product experience that ‘Just Works,’ hiring a great team that focused on executing the fundamentals right, and putting customer and employee happiness at the center of Zoom’s culture.”

Viral: Conferencing is inherently viral and allows for the creation of network effects that can make it tough for competitors to attack. Granted, this is not easy to pull off but Eric’s focus on creating a strong product has been critical.

The Zoom S-1 notes: “Our rapid adoption is driven by a virtuous cycle of positive user experiences. Individuals typically begin using our platform when a colleague or associate invites them to a Zoom meeting. When attendees experience our platform and realize the benefits, they often become paying customers to unlock additional functionality.”

Big Market, Big Problem: When Eric founded Zoom, there was lots of skepticism. Wasn’t the market already won? How could he battle against rivals like Microsoft, Google, WebEx and GoToMeeting?

But like any entrepreneur, Eric was convinced of his vision. He understood that there was much that could be done in the industry, which was not investing enough in new technologies.

“The Cardinal rule for any startup: Solve a really big problem and solve it well,” said Jamie Sutherland, who is the founder and CEO of Sonix. “Zoom did this. While there was lots of rhetoric around the idea that video conferencing had been solved, the reality was that it wasn’t really solved well. Everyone…literally every human I knew had pains with video conferencing. And when it doesn’t work, it is a huge pain. So, couple that with an enormous global market, and you’ve got a huge opportunity.”

Uber IPO: What Can We Expect?

Within the next few months, the Uber IPO is expected to hit the markets. Keep in mind that the company has confidentially filed its S-1 with the Securities and Exchange Commission (the document is usually not made public until a couple weeks before the offering).

While we’ve seen many tech unicorns come public during the past couple years, the Uber deal will be in another league. Note that the capital raise could be over $20 billion and the valuation more than $120 billion (the company has already raised $20 billion in private markets). This would make the Uber IPO one of the largest in history.

Getting to this point has not been without its challenges and drama. In June 2017 Travis Kalanick resigned as CEO of the company in the midst of allegations of sexual harassment, trade secret theft and aggressive efforts against regulators.

Yet the incoming CEO, Dara Khosrowshahi (who was the CEO of Expedia), has wasted little time in making big changes, especially with the corporate culture. And yes, the IPO will be an important part of the process.

Although, the offering will be more than just about raising money. An IPO will provide liquid stock as currency for dealmaking as well a way to attract talented employees. Let’s face it, the effort for developing self-driving vehicles will require hiring top-notch engineers and data scientists.

“The marketplace that has the best global coverage, with the most earnings for drivers, and the lowest cost and most convenient experience for consumers will win,” said Andre Haddad, who is the CEO of Turo. “It is still early in the race towards transforming the multi-trillion dollar personal mobility space.”

It also looks like arch rival Lyft will pull off its own IPO in early 2019. But Uber may have the edge. The company has about 69% of the US market and a presence across 70 other countries. Uber also has a variety of other business segments, such as UberEats and freight. As for the growth rate, it remains solid (revenues up about 38% to $2.95 billion in the latest quarter).

But then again, Lyft still has made considerable progress. Besides, when it comes to the tech space, it can be tough to maintain a lead.  Hey, not long ago, companies like Nokia and BlackBerry dominated their industries. Now they are has-beens.

“The biggest difference between Uber and Lyft is the global effort,” said Jamie Sutherland, who is the CEO of Sonix and also the co-founder of one of the earlier players in the taxi-hailing industry, TaxiNow. “Uber is having to spend much more money entering new markets and working out issues with regulators. Once this has been paved, it makes it easier for a company like Lyft to follow. Sure Uber will get some first-mover advantages, but as we’ve seen in more developed markets like San Francisco, the switching costs for a consumer are non-existent.”

But in the end, the Uber IPO may ultimately depend on something out of the control of management: the fickleness of the equities markets. The plunge in December has been the worst since the Great Depression – and it is far from clear if things have stabilized. There remain many uncertainties like the Federal Reserve’s interest rate policies and the trade dispute between the US and China.

Granted, this is not to imply that Uber will fail in getting its deal done.  However, it could mean that the valuation will need to be revised downwards and the after-market performance could be muted.