WeWork's aborted IPO may come to mark the end of the current "unicorn" bubble the way the scuttled merger between Yahoo and eBay signaled the start of the dotcom crash in 2000. Having become CEO of Nasdaq in 2003, I saw up close the damage caused by the growth-over-profits philosophy in that earlier era, and WeWork's spectacular fall — from the year's most anticipated IPO to a company with a speculative-level credit rating that may run out of funds within a year —rings many bells.
Back in the late 1990s, tech CEOs bragged about innovative user interfaces, millions of eyeballs and empowered cultures; what they lacked were business models that could deliver returns for shareholders. WeWork has similarly put a flashy "user interface" on a mundane activity — sub-leasing office space — and wrapped itself in the jargon of world betterment and community to cover a corporate vision that lacks fundamental credibility.
Need more parallels? Consider:
In the late 1990s, venture capital firms competed to shower dotcoms with millions based on little more than three-page business outlines. The resulting valuations had little connection with realistic expectations of returns. Today, huge private equity and venture funds are similarly chasing a limited pool of investment opportunities, but their bets have ballooned to billions. SoftBank, WeWork's top investor, has plowed more than $10 billion into the company, which fits snugly into its model of putting rapid scale above profit. WeWork, which lost $4.2 billion since 2016 but boasts of 200%-plus "member" growth in that time, could be a posterchild for SoftBank's philosophy. As now-deposed WeWork CEO Adam Neumann told Forbes in a 2017 profile, "Our valuation and size today are much more based on our energy and spirituality than it is on a multiple of revenue."
"We want to change the consciousness of the world," Neumann proclaimed in WeWork's IPO filing. That objective would seem a stretch for a company peddling shared workspaces, but Neumann seems blind to the hubris. WeWork has ventured to transform everything from education (with a start-up aiming to unleash kids' "superpowers" by teaching them entrepreneurship and farming) to homes (through co-living apartments) to diet (the company banned meat from its office menus) to, perhaps more modestly, surfing (investing in artificial wave company Wavegarden).
As ESG (environmental, social and corporate governance) investing gains prominence, the focus tends to fall on sustainable practices on the "E" and "S" fronts. WeWork shows why "G" is the most important element of that formula: good governance may not assure a superior return but bad governance pretty much assures disaster. A litany of governance no-nos have come to light in recent months, from the CEO acting as his company's landlord by leasing it real estate he owns to putting friends and family in executive positions. But none rankles more than the board agreeing to pay Neumann's personal company almost $6 million for the "We" trademark — hardly a novel term.
In the dotcom era, startups gained colossal valuations by simply adding ".com" to a product category. WeWork likewise hasn't invented anything. It's not even the first: Belgium's IWG (formerly Regus) has been in the same business for decades. Unlike Airbnb or Uber, which introduced genuinely innovative businesses, WeWork became a unicorn by packaging a commonplace offering in fancy décor and language. Its trademarked Physical Social Network is known to the rest of us as… a workplace. Even its office accouterments hark back to the '90s startup culture, with arcade games, skating ramps and napping couches.
Perhaps the biggest parallel to the Internet bubble is a lack of business model that makes sense. WeWork essentially signs long-term leases, then sublets space for shorter periods at higher price. If commercial real estate values drop or the anticipated recession finally hits, this model may collapse. As billionaire real estate investor Sam Zell told CNBC recently, "They should have just changed the name of the company to 'saving and loan.' That's really what you're talking about, creating long-term liabilities and short-term assets. Every other time in history when they create that, results are predictable. Why is this any different?"
I hope the market's decisive rejection of the WeWork story marks new skepticism about modern-day unicorns. If you are profitable and growing, WeWork's fate won't affect your value. If you have a clear path to profitability, this will be a blip. But if you're losing billions with no end in site, the window of opportunity has shut. So try to score an invite to WeWork's bash opening its European headquarters — and party like it's 1999.
Robert Greifeld is a co-founder of Cornerstone Investment Capital LLC and chairman of Virtu Financial, Inc. Author of MARKET MOVER: Lessons from a Decade of Change at Nasdaq (Grand Central Publishing, Oct. 8), he previously served as CEO of Nasdaq from 2003 to 2016, and chairman of the board of directors of The Nasdaq Stock Market LLC ("Nasdaq") until May 10, 2017.