Now that the WeWork IPO is collapsing under the weight of mathematics and allegations of self dealing, maybe we should seriously consider a little more scrutiny of both the business plans and the business practices of startup companies:
Historically low interest rates and quantitative easing are supposed to encourage investors to take more risks, but even in this climate there are limits. WeWork is hitting one as investors conclude they’re wary of investing in Shanghai-on-the-Hudson.
That’s the main lesson of the slow-rolling deflation of the public-market listing of WeWork parent We Co., scheduled for this month but under threat of postponement. The company filed its paperwork last month hoping to achieve a valuation of $47 billion. Investors haven’t stopped laughing.
The skepticism is due in part to We’s attempts to pretend it’s a technology company that will “elevate the world’s consciousness.” It’s a real-estate company that leases office space for long terms and rents it to small businesses for short terms. Technophilia is a market staple. But We faces established—and old-fashioned—direct competitors such as IWG, owner of Regus business centers, which has traded publicly for years, is profitable unlike We, and sets a benchmark for realistic returns.
The bigger cause for We’s woes is the corporate-governance risk investors have decided they’re not willing to stomach. In this regard We resembles a Chinese more than American company, and investors have noticed.
Take WeWork’s name. The IPO listing documents revealed that company founder Adam Neumann had vested trademarks related to the “We” name in a separate company and then sold those rights to We Co. in exchange for shares worth nearly $6 million.
American investors squawked, but this sort of arrangement is almost routine in China. In one famous case, Chinese entrepreneur Huang Guangyu, jailed in 2010 for 14 years on questionable charges of illegal business dealings, held onto some of the logos and other intellectual property of his electronics retailing company and used them to establish a competing chain of stores from his jail cell. We Co. has since reversed its deal with Mr. Neumann.
Another symptom of this China syndrome is We’s extensive web of transactions with related parties. The company disclosed in its IPO filing that it leases four buildings that are owned by Mr. Neumann, and it also reportedly hired an executive’s parents to broker another of its leases. Then there’s the personal control, with Mr. Neumann’s wife Rebekah designated to pick his successor in the event injury or death prevents him from running the company. This again is characteristic of China, or a South Korean chaebol, where the goal is to keep the company all in the family.
Seriously, where are the prosecutions?
*As Anna Russell would say, “I’m not making this up, you know.”