The We Co roadshow is set to begin this week, perhaps as soon as today. Such corporate processionals through the ranks of blue-blooded Wall Street institutions are usually a triumph for buoyant, young companies. WeWork’s roadshow, on the other hand, will likely more closely resemble Cersei Lannister’s humiliating march to the Red Keep in Game of Thrones.
Shame! WeWork’s valuation, US$47-billion in a private funding round last January, could be set as low as $12-billion.
Shame! Shame! Investors will no doubt be distrustful of any evidence of apparent self-dealing by the CEO, Adam Neumann, such as buying properties and leasing them to the company. (WeWork took additional steps on Friday to change some of the unorthodox aspects of its governance structure and seek an independent board member.)
As the nine-year-old office-sharing start-up continues its stumble to the public markets, some prognosticators see this moment as something more significant: that a WeWork belly-flop portends the end of the unicorn era in Silicon Valley.
The argument goes like this: SoftBank, the Japanese conglomerate and its $100-billion Vision Fund, has become an engine pushing the technology market to its limit. If it’s forced to retreat on its $10-billion commitment to WeWork, SoftBank will reconsider the nearly blind sanguinity that has perverted incentives for founders and distorted valuations in the industry over the last few years.
Horns clipped
In this seductive vision of a calamitous — and cleansing — WeWork initial public offering, modesty will once again return to Silicon Valley; humbled venture capitalists will stop bidding the valuations of unprofitable start-ups into the stratosphere; and the unicorns — those magical start-ups worth a $1-billion or more — will be put out to pasture, their legendary horns clipped like the tusks of poached African elephants.
The current cycle in tech started more than a decade ago, fuelled by excitement over the iPhone, Facebook and the infusions of cash from a new generation of VCs like Andreessen Horowitz and Y Combinator. Business cycles tend to last seven to 10 years in Silicon Valley, and the resulting boom should have ended by now. But that was before the longest bull market in American history and a seemingly never-ending supply of venture capital from an array of new sources, including wealthy Chinese investors and Saudi Arabian oil money.
It doesn’t appear to be stopping anytime soon. The stocks of Dropbox, Lyft, Slack Technologies and Uber Technologies are all under their IPO prices. And yet, many investors still believe.
Uber lost $5.2-billion last quarter, dismissed more than 800 employees in the last two months and lost a policy battle with California lawmakers last week that could rock its business model. Somehow, Uber is still worth a cool $57-billion. Meanwhile, SoftBank says it’s going to raise another Vision Fund, with contributions from Apple, Microsoft and Foxconn — this one even larger than the last.
The belief underlying the persistent tech boom is that savvy entrepreneurs in vast markets with access to enough capital can engineer their way through even the most challenging issues. Witness CloudFlare, the unprofitable Internet infrastructure company that raised $525-million last week at a higher-than expected market value of $4.4-billion. Investors were able to overlook recent controversies over unsavoury former CloudFlare clients, like the forum where a mass shooter hung out, and the stock popped on the first day of trading.
What will it take to really put an end to the unicorn era? Perhaps an economic recession and an accompanying withdrawal of overseas capital from the Valley. Perhaps it will take a total collapse of a once-promising unicorn to change the risk tolerance of conservative investors like endowments, pensions and sovereign wealth funds.
If the WeWork IPO flops, technologists will try to dismiss it as an outlier, the bad fortune of a real estate start-up that was never truly a tech company. It will be viewed not as an indictment of current excess in Silicon Valley but as an exception to it. That’s not realistic, but then again, neither are unicorns. — Written by Brad Stone, (c) 2019 Bloomberg LP