Another cash-burning company is planning an IPO.
Mega office-space rental company The We Company (formerly WeWork) is planning an IPO later this year, and just announced a plan to raise $4 billion in debt in the meantime, the Wall Street Journal reported Monday.
The debt issue serves two functions: To meet immediate cash flow needs, and also to take substantial pressure off the IPO itself. In fact, according to the report, the debt deal could allow WeWork to raise more money than their public debut could over the coming years, and prove to potential stock investors that the company has another, leaner way to access capital.
But the debt offering, which will be structured by Goldman Sachs and JPMorgan Chase (potentially among others), comes at a time when WeWork is bleeding cash. The office-space manager burned $1.9 billion on $1.8 billion revenue in 2018—even more than Uber's reported $1.8 billion for last year.
That's given some potential investors pause, as the memories of Uber and Lyft's less-than-stellar debuts are still fresh. The ridesharing companies both went public with heavy losses, and both stocks have been volatile as neither have convinced investors they have a clear path to profitability. So if WeWork is to break the mold, here are the three things the company needs to do to avoid a similar fate.
“I think there are definitely some learnings that WeWork could and should take from the Uber and Lyft filings,” Tom White, senior vice president and senior research analyst at D.A. Davidson, told Fortune.
For White, WeWork needs to emphasize a clear-cut path forward for investors to have confidence in the cash burning company—especially now that debt will be added to their balance sheet.
“The big lessons from the Uber and Lyft IPOs for these very large, unprofitable but transformational companies in many ways is that WeWork needs to provide a more detailed and granular roadmap about how it plans to achieve profitability over time," White says. He suggests WeWork provide an in-depth view on the unit economics and cohort analysis of their markets to help give investors a better picture of what they're getting themselves into.
And White isn't alone.
Kathleen Smith, principal at Renaissance Capital, a provider of institutional research and manager of IPO ETFs, thinks it will be "incumbent upon WeWork" to ensure investors understand their profit model—unlike Lyft or Uber did, Smith suggests.
This preview of how the market received Lyft and Uber is a major benefit for the workspace company, Santosh Rao, head of research at Manhattan Venture Partners, believes. "I think they’ve seen the writing on the wall, so to speak," Rao says.
WeWork's model largely focuses on short-term leases, but the company is beginning to diversify by looking to buy buildings and expand globally, Rao says. And as the company takes on more debt (WeWork already has some $702 million raised last year with a hefty 7.9% interest rate), moving into enterprise renting and long-term leases would provide WeWork with the recurring revenue that is attractive to bond holders, Rao says.
But analysts suggest WeWork's second lesson from those that came before it should be to watch the valuation.
With an estimated valuation of $47 billion heading to market, WeWork is asking a lot from investors. And to Jane Leung, the managing director and chief investment officer at Scenic Advisement, the market is already skeptical.
"I think investors are really careful around these companies with extremely lofty valuations, and they should be," Leung says. She believes WeWork needs to be transparent in order to "alleviate investors' fear" that the company is doomed to follow in Uber and Lyft's footsteps.
Both ridesharing stocks have since traded below their high IPO prices, and Leung says the hype surrounding the stocks when they first debuted may have pushed their pre-IPO valuations to "lofty" heights. With a high burn rate and now new debt, Renaissance Capital's Smith thinks WeWork's valuation will be affected.
"The issue is, they’ve got to be priced right," Smith said. "They’ve got to come at some significant discount for investors to not be so worried that they’ll break the IPO price.”
But what's the right price?
From what she's seen, Leung thinks the stock might trade closer to its value in the secondary markets—which, she says, is about half their current $47 billion valuation.
But while Rao suggests investors in the current IPO climate have an appetite for companies like WeWork, he maintains the company's business model "is kind of risky."
By nature, WeWork's industry is heavily dependent on the overall economic market—shifts in vacancy rates, company expansion and economic growth could all put a "strain on their financials" if there is a downturn, Rao believes.
WeWork's model has long been to take on long-term leases and lease them out short-term—a strategy that has proven popular in the shifting workplace landscape. But Rao believes the company will need to invest more in diversifying their revenue streams by developing more long-term revenue sources—such as buying more buildings and even leasing to hospitals or schools with more traditional leases, he says.
Still, with an increase in members (those using WeWork's facilities) to 401,000 accounting for some 88% of their revenue, it's clear the demand for their services is very much alive.
But before an IPO, WeWork needs a plan for investors to see the long-term play—then it will be up to investors to see if WeWork actually works.