Where WeWork Went Wrong and What We Can Learn From It
One of the most anticipated IPO’s of 2019 hit enormous roadblocks and it serves as a powerful case study for us. In private fundraising rounds, Adam Nuemann, WeWork’s CEO, enjoyed incredible favor with investors. That favor finally ran out as skeptical Wall Street investors found flaws in the company’s governance, valuation, business model, and expense structure. This pushback from investors caused WeWork’s parent company to withdraw its planned IPO.
The company, whose main business involves renting real estate for co-working spaces, had been valued at $47 Billion earlier this year but recently revised that to around $10 Billion in order to court IPO investors. Investors also pressured WeWork to rewind a series of alleged conflict-of-interest transactions with its co-Founder, Adam Nuemann. Plus Mr. Nuemann had to give up some of his personal voting power. All of this wasn’t enough to alleviate concerns. The Wall Street Journal explains, “Investors have also been unnerved by deepening losses at the company, which last year bled $1.61 billion in red ink—nearly equal to its revenue of $1.82 billion.” WeWork’s woes provide a great case study in investor expectations.
Here’s what WeWork did NOT have, but you should if you hope to raise money from impact investors.
Financial terms that allow everyone to win
WeWork has raised $12.8 billion privately and if it had gone ahead with its planned IPO at the relatively low $10 billion valuation, investors from previous rounds may have suffered. Writing about WeWork, Bloomberg notes:
“WeWork has become an extreme example of the excesses afforded to technology entrepreneurs in the era of unicorns -- startups valued at $1 billion or more. Adam Neumann, WeWork’s co-founder and chief executive officer, was able to raise billions of dollars at astronomical valuations and spend freely, while retaining effective control over operations through special classes of stock.”
Many critics of WeWork have pointed out that the primary person who stood to profit from the company’s IPO was its CEO.
While this serves as a clear example of what NOT to do, finding the “right” answer requires more finesse. When it comes to faith-driven or impact investing, there isn’t a specific set of investment terms that is right for every company. Investors may choose to take a lower financial return if the expected impact is high. For example, a friend of ours provided a zero-interest loan to charity so it could acquire new land in Uganda to expand its Christian school. When asked why he would make such a risky investment with no interest, our friend replied: “the last time I did this I got nothing back. It was called a grant. If I could get even a portion of the capital back to give away again, that would be a win.” On the other side of the financial return spectrum, companies with strong economics may not provide social/spiritual benefit as strong as a charity, but are worthy of impact investing capital. Their profits can fuel further giving for investors.
There isn’t a “right” answer; the goal is to keep pushing toward sustainable impact in the context of the specific business or charity.
For more guidance on fundraising for your company, check out great resources from Y Combinator:
A strong and healthy board can provide important strategic direction, industry expertise or connections, and accountability. This was all missing from WeWork, as the WSJ explains:
“There are also concerns about the firm’s management and corporate governance standards. WeWork’s CEO and co-founder, Adam Neumann, has taken $700m out of the company before the IPO. He also owns properties that WeWork rents, a potential conflict of interest.”
A strong board could have kept We Work from conflicts of interest of this magnitude and might have allowed the IPO to stay on track.
It’s not uncommon for startups—or even older, closely-held businesses—to lack a strong board governance structure. It’s much easier to get going with just the entrepreneur in charge, but potential investors will likely expect more. Some may want the right to elect a board member or may simply insist on changes to the governing documents to provide for independent (i.e., not the CEO or her family) board members.
Kauffman Foundation offers a super practical, comprehensive resource for anyone looking for more help on this topic. Download it from their website.