WeWork CEO Adam Neumann Steps Down Over Investor Pressure
Posted on 09/25/2019
Softbank Group’s US$ 100 billion Vision Fund, which invests on behalf of Saudi Arabia’s Public Investment Fund (PIF) and Abu Dhabi’s Mubadala Investment Company in technology ventures, is facing challenges after investors suddenly turned skittish on the lofty valuations of unproven tech companies. So-called “unicorns” have fallen short of their fantastic namesakes, disappointing early investors. Mubadala and PIF contributed over half of the fund’s US$ 100 billion in working capital. This shift in sentiment is a drag on SoftBank’s Vision Fund, which has been called a “kingmaker” for bankrolling the latest high-profile companies that have potential to follow in the footsteps of other instant successes. WeWork’s IPO delay isn’t helping matters. The We Company, WeWork’s parent company, was valued at US$ 47 billion at its peak. Perhaps as much as two thirds of that valuation could now be in jeopardy, and there is no reason why the price would stop there. On September 24th, 2019, Adam Neumann was forced to surrender his title as CEO due to unusual and unpredictable behavior. Co-CEOs Artie Minson, the former CFO, and Sebastian Gunningham, previously from Amazon, are hoping to contain the pandemonium.
SoftBank, which was instrumental in Neumann’s departure, and its Vision Fund invested heavily in WeWork, with a one-third stake. This miscalculation has caused uncertainty over the Vision Fund’s other placements. Softbank is responsible for paying back the money it spent on companies such as WeWork, with 7% interest as well. Since the Vision Fund companies are, by their very nature, untested, it is not easy to unload them at a price that will help the Vision Fund. Moreover, after weeks of headlines, it remains questionable whether investors with deep enough pockets to save WeWork would be interested in taking on the risk. Uber Technologies, another Vision Fund bet, is down 28% since listing, and Slack is down even more than that, at around 30%. It appears as though the Vision Fund, and partners Mubadala and PIF, are unlikely to exit their latest technology positions unscathed. After seeing the success of Twitter, Pinterest, or Airbnb, the market appears to be at a turning point, and a willingness to pay for companies that cannot justify their sky high valuations brings back discomforting memories of the dot-com bubble for some.
WeWork’s business model involves paying high prices for office space in desirable locations and renting that space out. A selling point for WeWork is that it is creating space for community, not just office space. WeWork is also supposed to incorporate artificial intelligence to bring members together based on their histories and interests. A total of 35 million square feet of space improvement to meet WeWork standards requires a correspondingly large fee income from clients, who are offered staggered membership options. Clients tend to sign up for temporary occupancies, and gaining long-term space renters will be critical to WeWork’s potential success. While no one can doubt WeWork’s ability to scale quickly, it is in danger of suffering the same fate that befell Starbucks after a period of overexpansion in the 1990’s and early 2000’s. Starbucks faced its first quarterly loss in 2008 after suffering a severe loss of face, causing low employee morale, closing stores due to falling traffic, and seeing its stock price reduced to the cost of a single coffee drink.
Uber, like WeWork, has very publicly struggled in recent days. In early August 2019, lower than expected revenues and higher than expected losses were reported, disappointing investors. While Uber briefly eclipsed its US$ 45 IPO price in July 2019, it has since fallen, losing 30% from its highs. Softbank was in at an average share price of about US$ 35 per share, and could count Uber a success until it broke below this level. CEO Dara Khosrowshahi failed to inspire confidence with his assessment: “We think that 2020, 2021, you’ll see losses come down.” A staggering 400 marketing agents saw the axe in a cost-cutting plan. Paradoxically, the service is remarkably successful with the public. It is estimated that 5 billion rides have been ordered through the app. Softbank did not have a position in Uber until its 7th round of venture capital funding. Firms in earlier include: Benchmark Capital for US$ 17 million, Jeffries Financial for US$ 40 million, JPMorgan Chase for US$ 150 million, T Rowe Price and Goldman Sachs for US$ 355 million, Fidelity Management for US$ 433.9 million, Hony Capital and Legend Holdings for US$ 430 million, and then Softbank made an initial investment of US$ 3.1 billion.
Softbank can’t seem to stay out of the headlines for its difficulties with WeWork and Uber, but it stands to gain from the Sprint merger with T-Mobile. The Justice Department finally approved the merger, after the cell giants made a number of concessions. The new T-Mobile will invest US$ 40 billion in infrastructure, and its long term success depends on the flourishing of its 5G technology. The Vision Fund still has US$ 30 billion of its original US$ 100 billion to place into the market.
Masayoshi Son, founder and CEO of Softbank, is known for his 300 year plan for the company. He scored high praise and billions in profits from his early investment in Alibaba, and he’s known for taking big risks. He’s also accused frequently of paying too much. Son shrugs off the criticism: “At least our return on investment is very, very good.” SoftBank is carrying over US$ 160 billion in debt, and is already raising money for another Vision Fund, although commentators now wonder whether that will proceed as planned. Son says AI will be “much much bigger” than any investment the world has seen before. “Every industry will be redefined,” he predicted. Both Vision Funds are primarily concerned with AI and the benefits it brings. What do Mubadala and PIF think of Softbank’s decision making? “Basically, we make the investment decision,” says Son. “But of course they believed in my first vision, the dream . . . they support us very well.” However, in the case of WeWork, Son admits that they did meddle “to some extent.” Son was forced to walk back some of his capital commitment to WeWork after the sovereign wealth funds both expressed reservations in the co-working company.