(Bloomberg Opinion) -- SoftBank Group Corp. is having second thoughts about whether WeWork Cos. Inc. should go public just yet. Having valued the heavily loss-making office space provider at as much as $47 billion, Masayoshi Son’s affiliates are doubtless reluctant to write down their more than $10 billion investment — something they’d have to consider once there’s an observable price for the shares.
WeWork, though, is apparently determined to press ahead with the listing in defiance of its chief benefactor, Reuters reports. Either way, SoftBank and its $100 billion Vision Fund will have to face reality one day. By writing an 11-figure check to a startup with no discernible path to profitability, Son may turn out to be the Victor Frankenstein of the cheap-money era. He’s helped create a monster that could do him serious harm.
Boil things down and WeWork is a leveraged real estate company propped up by a leveraged pool of late-stage venture capital (the Vision Fund), which is in turn controlled by a leveraged telecoms and technology company (SoftBank). And the unfortunate similarities between SoftBank and WeWork go well beyond their fondness for debt: In governance, philosophy and leadership, the two companies are peas in a pod.
WeWork critics chortle at its promise to “elevate the world’s consciousness,” but is that really so different from Son’s mission to deliver “happiness for everyone”? Both companies depend on their visionary leaders (something boring auditors call “key person risk”), whose power is all but unconstrained. Adam Neumann’s majority voting rights as founder, chairman and chief executive officer of WeWork give him the freedom to hire and fire board members. The Vision Fund’s investments are chewed over by various staff and committees, but ultimately Son’s decision is what counts.
Not content with raising one enormous venture capital fund, Son is raising another of similar size before we know whether the first has been an enduring success. Neumann, for his part, is demanding that IPO investors pony up $3 billion before his real estate company has been tested by a serious recession. Both men like to make big bets, often with other people’s money.
There are other echoes between the two on how they report their finances. SoftBank’s earnings might be flattered by so-called “fair value” gains on its investments, even though some of these unrealized paper profits could turn out to be the wishful thinking of bubbly private markets. WeWork doesn’t have any earnings but tries to make it seem like it does by adding back basic expenses to arrive at a so-called “contribution margin.”
WeWork’s Byzantine corporate structure is rivaled too by SoftBank’s, something that’s reflected in the often yawning gap between the value the Japanese group ascribes to its various holdings and its market capitalization. Neumann bought properties and rented them to WeWork, then got his company to pay him for inventing the trademark “We.” SoftBank, for its part, has no qualms about lending up to $20 billion to senior executives so they can buy into the second Vision Fund. It has also bought assets before shifting them on to the Vision Fund.
In fairness, WeWork only received its first investment from SoftBank in 2017, so Son is hardly to blame for the many peculiarities disclosed in the real estate firm’s prospectus. But, as my colleague Shira Ovide has argued, WeWork is what happens when you take startup and financial mania to extremes. SoftBank has been both its inspiration and chief enabler. The Japanese investor has provided the bulk of WeWork’s growth capital, and SoftBank affiliates now own about 29% of the office provider.
WeWork is now faced with a difficult choice: Go ahead with the IPO and disappoint Son potentially, or delay and fill the hole in its finances by other means (including debt tied to the equity increase, the IPO was set to deliver at least $9 billion in new funding).
There’s another option, of course, but it probably sounds like heresy to Son and Neumann, who are both about changing the world in a hurry, cash burn be damned. They could scale back the spending spree, focus on profitable growth, and adopt governance norms that investors can get comfortable with. Now that would be revolutionary.
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Chris Bryant is a Bloomberg Opinion columnist covering industrial companies. He previously worked for the Financial Times.
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