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.