Quick Take

Wework episode should serve as a wake-up call for analysts and investors

| Updated on September 27, 2019 Published on September 27, 2019

The trouble at the high-profile US office sharing start-up, WeWork, that is currently looking down the barrel after its IPO was postponed and its flamboyant co-founder, Adam Neumann was pushed out, should make investors re-work the manner in which they evaluate such companies.

The company was valued at $65 billion by Goldman Sachs, just few months ago and was cited be the world’s fourth-most valuable private startup at one point. But the details revealed prior to its initial public offer show that the company’s business model is unsustainable. With the company’s ability to access credit in future, dependent on it’s IPO, it is currently selling assets and has stopped signing fresh lease agreements.

The moot question here is, how did the company’s principal investor, Softbank, miss the red flags? WeWork had been losing money over the last nine years. The Japanese investor, as well as all other analysts had been shrugging aside the conflicts in WeWork’s business model, corporate governance issues and the mismatch in the value and term of leases signed for properties and the agreements entered into with users. WeWork is reported to have made losses of $690 million in the first half of this year alone.  The answer, perhaps, lies in the current practice in start-up funding wherein investors continue to pump-in funds despite the companies recording losses over many years.

In India too startups such as Paytm’s parent One97 Communications and Swiggy are recording large losses, even as private equity firms have been channeling funds in to them. Investors such as Softbank and Naspers are willing to continue investing in the companies as long as they continue to grow, in the hope that the ongoing cash-burning stage will help drive out competition, helping the business over the long-term.

But the WeWork episode should make investors take a closer look at the enterprises they invest in; their cash-flow and business models. After all private equity, venture capital and other funds have an obligation to their investors to show returns; which is not possible by throwing money at ventures with snazzy exteriors but quaky fundamentals.

 

Published on September 27, 2019
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