We Company will bring down venture capital


Photo Courtesy of Tech Crunch

Co-Founder and CEO of WeWork Adam Neumann onstage during TechCrunch Disrupt NY 2017 at Pier 36 on May 15, 2017 in New York City. (Photo by Noam Galai/Getty Images for TechCrunch)

By Fred Shoaff, Columnist

A collapse akin to Lehman Brothers in 2008 may be on the horizon for SoftBank Group, a tech conglomerate based in Tokyo, Japan. SoftBank is the largest stakeholder in debt-ridden Uber Technologies, has a large stake in DoorDash Inc. and now has over $10 billion invested into the troubled WeWork Company before they issue public shares to the market on September 23.

WeWork, which recently changed its name to the We Company, is a real estate company that specializes in leasing office spaces, redesigning them and imbuing an affluent modern flair and renting them out to tech startups. Effectively, their entire business model is a bet that (mostly) small companies will always be able to afford luxury office space.

The company operates 35 million square feet of space but has $47 billion in lease payments it is liable for. When the company signs these leases before renting out the space for a profit, it commits to an average tenant contract of 15 years. But when the company signs a customer for a space, they only commit to an average of 15 months.

The numbers get worse. On those $47 billion in long term lease obligations, We only has $3.4 billion in lease payment commitments from its customers. The company rests its hopes on closing that gap when it begins trading as a public company next week.

Some other tech startups who have issued initial public offerings recently include Lyft and Pinterest, and both of these companies are at least showing signs they can continue to cut down on costs as their revenues climb. Although it isn’t abnormal for tech companies to be unprofitable for years after an IPO, We seems like a more troubled example.

Get The Daily Illini in your inbox!

  • Catch the latest on University of Illinois news, sports, and more. Delivered every weekday.
  • Stay up to date on all things Illini sports. Delivered every Monday.
This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.
Thank you for subscribing!

Earlier this year, SoftBank gave We a private valuation of a whopping $47 billion as it highlighted the increasing revenues and the signings of some larger, long-term clients like Goldman Sachs and Lyft. However, just before it pushed We to the public, SoftBank announced it was seeking a public valuation of between $15-20 billion. That is quite a haircut from its initial value.

But of course, the executives of We know this financial atmosphere will be their final chance to cash out with their money and run before a looming recession obliterates their business model. The fact that people are going to invest in a company currently swimming in mostly unpayable debt, a lack of long-term commitments from customers and a business model built on small companies that only thrive during times of immense economic prosperity, baffles me.

Anyway, SoftBank has a terrifyingly significant amount of skin in the game, and I don’t see We as a good investment any time soon. This is partially due to the facts that it won’t be a smart business model during all parts of the economic cycle and because We has a far superior competitor before they even issue public shares.

Now, let’s not forget Amazon went public before being profitable but had effectively zero competitors. Qualcomm (a good company) and Groupon (which is admittedly not a good stock but at least they make a profit) were both examples of companies who started profitless but later earned money due to a unique business model and a steady valuation not pent up by overly  enthusiastic investor hopes.

But We on the other hand already has to compete with a company that does their job better than they can. IWG, which offers the same business model as We under the brand name Regus, is a European-based company that leases more space than WeWork worldwide and makes money doing it. But best of all, the company is valued at only $6.5 billion, excruciatingly less money than SoftBank has valued We at.

This valuation indicates to sane investors that We stock is due to collapse in price to a more reasonable market capitalization (it’s going to zero).

So, I recommend we just watch We when they come to market in a few days. It may not be evident at first, but I think this public offering of a horribly overrated company will be the start of a deadly flow of financial trauma. It will begin by the We Company blowing itself up which will cripple the financial security of SoftBank. This will eliminate funding for SoftBank’s other popular enterprises and will compromise venture capital across the globe.

Lehman Brothers’ collapse triggered a wave of financial turmoil, SoftBank’s will do the same.

Fred is a sophomore in Business.

[email protected]