By Adhirath Sethi Oct. 07, 2019
The end of the WeWork boom should serve as a cautionary tale to both investors and founders of start-ups. Why a company with so little to show in terms of monetary achievement would even dare to make its numbers public is a case study in hubris that needs its own wing in a psychology department.
The last decade hasn’t exactly been easy on the average Joe. It began with the crisis in 2008, which saw thousands fall headlong into the pit of financial insolvency, while those that caused the mess were shown the kind of leniency enjoyed only by an MLA’s favourite son. Then came a slow, gruelling recovery that – like your average KJo film – didn’t seem like it could end in any manner that might make sense or obey the laws of science. Along the way, just as the average Joe began to feel that things were finally coming together and that hard work was paying off, the news would announce the arrival of yet another 20-something that had spun some idea into a billion-dollar valuation.
We appear to be living through the era of Illusionist Capitalism, where anyone that dresses in jeans and a turtleneck is immediately given an unlimited supply of money to do as they see fit. Meanwhile, the sane can only stare from the sidelines, baffled at the audacity of the numbers being thrown about, simultaneously afraid to speak up, lest they be the only ones in the room that haven’t understood how it all works.
WeWork formally withdrew the prospectus for its initial public offering (IPO) after the start-up ousted founder Adam Neumann as its chief executive officer and investors raised concerns around its business model and leadership structure. The fall of WeWork should serve as a cautionary tale to both investors and founders of start-ups, who focus more on valuation than profits.
The start-up party began to bust with Uber and Lyft’s dud IPOs. Uber, which claims to be a ridesharing company, has proven quarter-after-quarter that it is in fact a vortex where profits go to die. I’d like to think that somewhere in Uber’s recent past, investors sat in a room and had a conversation something like this:
“What do we do about Uber? They’re losing so much money that Vijay Mallya’s demanding an honorary seat on the board.”
“Just pump in more money and raise the valuations further. That should keep people confused enough until we find some way to turn things around.”
“We’ve already pumped in more money than an Ambani wedding; things are going to fall apart at some point.”
“Relax. We’ll just IPO and let the public have the company. By the time they realise it’s a dud, we’ll all be chilling with Mehul Choksi on that island everyone knows he’s at, but pretends they don’t.”
The fall of WeWork should serve as a cautionary tale to both investors and founders of start-ups, who focus more on valuation than profits.
*Evil laughs all around*
In fairness to the brain trust that has been running Uber, the idea of bailing out using an IPO is not a new one. Amazon did it; as did Facebook. The share price of Netflix has shot up since it went public, so the numbers certainly do sing a soulful tune. However, with the exception of Amazon, the others were either profitable or very close to being so, when they put their shares at the mercy of the markets (we’ll give Amazon a pass, since they give me deep discounts and since they did eventually turn in profits). Uber, on the other hand, has financial statements that have consumed more red ink than all of communism combined.
However, despite their sneaky attempt to turn a decade of lost billions into someone else’s problem, the stock market was wise to their ways. A deeply underwhelming share price that continues to trend southwards like the value of Rahul Gandhi’s social media currency has shown us the first sign that the public may not be as gullible as investors hoped.
The double whammy of Uber’s failed IPO and Theranos’ decade-long scam has thrown a massive shadow on the entire start-up ecosystem. It has us finally asking whether these so-called unicorns are even real, or merely a figment of the imagination of high-stakes investors who want nothing more than to beat their chests and announce that they have backed the next big thing – the epitome of companies that “fake-it-till-they-make-it”. However, the technique is proving to have a success rate so dismal, some companies are now toying with the bizarre idea that maybe they should try and actually aim to make profits.
The most recent casualty of our collective return to our senses can be seen in the WeWork debacle. Combining the financial incompetence of Uber with the ideological misguidance of the Manson family, WeWork coughed up numbers that were horrifying to behold. It doesn’t take a genius to see that a company with committed outflows of over US $45 billion against committed inflows of only US $4 billion is doing everything wrong. Nonetheless, WeWork’s investors allowed the company’s founder – Adam Neuman – to run the business like a game of Zoo Tycoon with the funds setting locked on “infinity”. Each subsequent round of funding, rather than penalise Neuman for his mismanagement, instead rewarded him by increasing the company’s valuation.
Why a company with so little to show in terms of monetary achievement would even dare to make its numbers public is a case study in hubris that needs its own wing in a psychology department. Once the figures were shared with retail investors, it was obvious no one would want a part of the WeWork action. Within six weeks they went from a valuation of US $47 billion to suggesting that bankruptcy might be the best way forward.
WeWork’s IPO may have been suspended and Neuman may have been fired, but the truth is that he still managed to walk away with over US $700 million of investor money for doing little more than spending two dollars for every dollar he made. The money he gets to leave with is tangible wealth, not some notional value of stocks that he holds. It’s money that he put away into properties and his own bank accounts. With Neuman unlikely to face any harsh repercussions, is there any wonder that the average Joe is beginning to question the merits of capitalism?
The valuation of a company is an art that has allowed some individuals to build mountains of wealth for themselves. It used to involve an understanding of fundamentals, a sound business model, a commitment to profitability and a stable, dependable management structure. Today’s investors appear more interested in valuing companies like pieces of art – relying on perception, illusion, and the assumption that value is in the eye of the beholder. Like the man that bought the Eiffel Tower and then redeemed himself by selling it to someone even more gullible, investors keep hoping that there’s always a bigger sucker around the corner. The problem is that they’re now expecting the average Joe to take on that role and the average Joe should be having none of it.
Adhirath Sethi is a novelist based in Bangalore. When he is not writing satire, he dabbles in darkness. His latest book, Where the Hills Hide their Secrets, is a product of such dabbles..