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Lately, I have been following news of the failed IPO of the We Company - WeWork's parent company.  


It initially filed the on August 14 to go public with a valuation of $47 Billion.  However, when investors, the media, and other stakeholders started examining the company, they realized that it has been losing an inordinate amount of money compared to other start-ups at the same stage in their life cycle.  The issue is a lack of profitability.  For example, the company had a loss of $690 million on $1.5 billion in revenue in the first half of this year.  This represents a cost to revenue percent of 46%.  This is a worrying trend given that the start-up has been in business for a few years.  Additionally, upon close examination, many questions were raised regarding the ability of the Founder and CEO, Adam Neumann, and his team to manage the company in a professional manner. According to many analysts and investors, if the company went public today, it would be evaluated at $15 Billion - a third of its estimated worth six weeks ago!

In the wake of the questions, the company cut its valuation by more than 50%, fired Neumann, delayed its IPO on September 17, and, according to the Wall Street Journal, will file a complete withdrawal of its IPO proposal with the Securities and Exchange Commission.  Analysts also believe that at its current burn rate, the company will run out of money in early 2020.  Thus, its new co-CEOs are in emergency mode trying to cut expenses and planning to fire at least 20% of the company's staff.


This situation leaves Softbank, WeWork's largest investor, and its CEO, Masayoshi Son, holding a company that was believed to be its biggest success and has become its biggest investment failure.  Masayoshi, born in Japan of Korean ancestry, created an investment fund (Vision Fund) that he believed would become the world leader in technology and robotics.  Although he was incredibly successful with one of the fund's first investments in Ali Baba, the Chinese internet behemoth, many investors have long criticized him for encouraging entrepreneurs to take inordinate risks and just providing cash, not direction or advice.


Unfortunately, Masayoshi never restrained Adam Neumann, the Founder and CEO, for his excesses, including buying a G650ER private jet for over $60 Million, nor for his lack of governance, including renting space from buildings he personally owned to WeWork and having his family on the Board.


So, what are the key lessons that can be learned from this disaster?


​1.  SPEND TO GROW THE BUSINESS, BUT DO NOT BE PROFLIGATE - Unfortunately, Adam Neumann treated the company as his own bank and used it for his personal gains including utilization of the funds for personal expenses such as buying drugs.  Softbank, in turn, did not put in place appropriate governance rules. This can work when the start-up founder is honest and hard-working, as Jack Ma is, but not when the Founder believes he can do whatever he wants with the company - as Adam did.


2.  THE CULTURE NEEDS TO BE SHAPED AND CHANGE AS THE COMPANY GROWS- Adam promoted a "Bro Culture" within the company.  Although many start-ups, including Uber, have created and lived with this type of culture in the initial phases, it eventually needs to change if the company is to be successful.  Adam, like many of today's sports stars, obviously was not mature enough to realize that his actions impacted the company negatively.  This is the reason Larry Page and Sergey Brin and Google investors decided to bring in Eric Schmidt as CEO and Chairman of the Board - because they realized the company needed to change and evolve.  Unfortunately, neither Adam nor his team recognized this need for change.


3.  INVESTORS NEED TO REMEMBER THAT "A HUNGRY DOGS HUNT BEST." - This well-known saying, attributed to many people including the professional golfer Lee Trevino, means that success is more likely when a person or company is never satisfied.  In WeWork's case, Adam, like many other Softbank's start-ups, received continuous infusions of cash based on the promise of a future large payoff.  Since Masayoshi and the Vision Fund usually take a hands-off approach and only provide needed capital to its start-ups, all Adam and his team had to do was ask for money and received it.  The key lesson for SoftBank is that it needs to remember that an investor needs to provide capital only when the start-up can show and justify why it needs it.  A private jet and extravagant parties are luxuries, not necessities.  This is one key lesson Adam never learned and he and WeWork paid for it. 


​One interesting coda to this situation is that SoftBank recently held a conference for its start-ups in California.  Masayoshi was present at the three-day event and his message to the attendees was very clear and can be summarized as "You can be as visionary and risk-taking as you want, but you better be prepared to show a roadwork for becoming profitable in the short-run."


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Please do not hesitate to call me at 1 (617) 391-0347 or e-mail me at mariocastaneda@bluesailconsulting.com to talk about this or any other subject.  I always like to hear from clients and readers.  

 

Also, please feel free to read my interview with BostonVoyager magazine.  To read it, click here.

 

Additionally, please do not hesitate to contact us if you need help with any business issue you might have or if you want to create a plan for your start-up or small business to ensure you have a sustainable, profitable business in the short (and long) run.  We can help you to do this.

 

I look forward to seeing you here again in November.

 

​Mario

Mario's Corner - October 2019.

Key Lessons That Can Be Learned From

WeWork's Disastrous IPO Failure.