WeWork’s brutal markdown saga: The big question

Foresight exists in hindsight. The Coronavirus pandemic has made strange of the times we live in. Companies which stood for as the poster child for what startups and the new sharing economy were all about, today stand reduced to tatters. The word ‘hysteresis’ from the Greek hysteros, defines a system that continues to react to a destabilising force, till long after. The noise of the pandemic will ring long perhaps for WeWork and a few other troubled startups.

From a headline valuation of WeWork by SoftBank of $47 billion a year ago to $23 billion by investors in a smaller deal to a $2.9 billion last week, the Covid pandemic has brought the future forward. And lots of learnings galore.

The 94% markdown makes for a nightmare story for WeWork and a most dramatic startup debacle of all times from Silicon Valley to the Wall Street.

The Covid pandemic has hit WeWork hard. $2.9 billion is also 63% less than what SoftBank estimated in the previous quarter while unveiling its IPO plans. The tech-fueled startup’s nosediving growth matches its meteoric rocket ship growth earlier. The absurdity of startup valuation meets its most dramatic end. The debate around what constitutes a tech company should start gathering more serious attention.

The India Story

WeWork India has more than 57,000 desks in 34 city locations. It has laid off 20% of its workforce estimated at 100 headcounts most recently.

The IPO fallout came heavy on high-profile CEO and Co-founder Adam Neumann. Global CEO Sandeep Mathrani and Karan Virwani, the CEO at WeWork India, have a tough road ahead as the coronavirus epidemic continues to push the Indian economy to the brink.

The social distancing norms, the shrinking of open plan and flexible workspaces, the questions around the comfort of working around communal tables, and the ‘work from home’ culture all point to making the WeWork business model an early casualty of the Covid pandemic across markets worldwide.

The troubled coworking giant has not much to cheer about. When and whether or not WeWork succeeds with a rent break, its tenants are already knowing the rent relief playbook and will want a ‘pass down’ leverage or else end up shunning the coworking spaces and perhaps start working from home.

Softbank’s Shifting Stance

From a time when more boldness was alluded in calling Adam Neumann “not crazy enough” by Masayoshi Son to the most recent candid public admission of “I was wrong. It was foolish of me to invest in WeWork,” Softbank’s $100 billion Vision Fund has come full circle. WeWork, from being the largest contributor to the profits last year to being the drag of this year, it has been a quick end to the story. WeWork’s contribution of 4.6 billion to the loss where Softbank has invested more than $10 billion in the company is a telling tale of the state of affairs.

To be fair, the discounted cash flow method used now by SoftBank estimates the worth by the cash the firm is likely to generate. This is surely different from an investment round valuation when the investors’ approach is more subjective to back the ‘winner takes all’ maxim to eliminate all competition.

And to be still fair to SoftBank, not all are required to publicly disclose investment status to their shareholders quarterly. So much for being high profile!

The big question

The new economy playbook has started wearing out. The signs are ominous. The big issue of what constitutes a tech company once again comes to the fore for being defined as a tech company counts. Positioning oneself as a tech company - exaggeration, outright lie or the truth - is all shades of grey now.

Views are personal.

The author is executive-in-residence at ISB and at UCLA and a global CEO coach and a C-Suite + Start-up advisor.