Ashley Gardyne, Senior Portfolio Manager — International Shares – 30 October, 2019

The failed WeWork IPO provides some timely investment lessons. It also shows no shortage of opportunists trying to separate investors from their savings.

The story of shared workspace provider WeWork and its failed initial public offering (IPO) will make a great book. A charismatic CEO that didn’t let reality get in the way of a good story. A business losing money hand over fist, but plugging the gap by raising money from investors at ever-increasing valuations. A complicit board, venture capitalists and investment bankers trying to line their pockets. And ultimately the CEO escaping with over $700 million, while thousands of employees are left wondering if they still have a job.

From our prospective it provides some basic but very important lessons for investors.

An easy funding environment can hide a lot of sins

With the US IPO market kicking into high gear it is becoming easier for mediocre companies to raise capital.  [75]% of US IPOs this year have been loss-making companies, a level not seen since the dotcom bubble in 1999. At the same time, the hype surrounding well-known companies like Uber are drawing investors to the IPO market.

WeWork is a company that captured the imagination of the media. As we have seen with Uber, Beyond Meat, or even cannabis stocks, investors love a growth story. WeWork operates in a large market and the trend towards coworking and flexible office space provides a lot of growth potential. WeWork has been growing revenues at over 100% per annum and its CEO had been touted by some as a visionary.

But WeWork is a poor business, run recklessly. It has a high risk business model and there are valid questions as to whether it can ever be profitable. Its high growth has come from raising capital cheaply (both equity and debt), signing onerous leases and rapidly opening new locations. The business model involves taking on long-term leases from landlords in order and rent out short-term space to individual tenants. Those tenants may disappear in a downturn, but WeWork’s lease obligations won’t. On top of that there is lots of existing competition and no barriers to entry in the shared-office industry.