Temasek Tracking - Wework China

 

Wework was founded in 2000 and by 2019 it had opened in 86 cities across 32 countries. Growth was explosive and in its last funding round before the failed IPO in 2019, its valuation was a stunning US$47B. It was the darling of the venture capital world and media et al hailed the wunderkid Adam Neumann, the CEO and co-founder, in all his flamboyance and eccentricities. Then came the 2019 IPO which bombed and now all media are suddenly throwing stones.

Co-working space, shared rental, or desk rental is'nt a novelty. It's been around for a long time time. Adam Neumann merely polished up the space, sometimes 'wackynise' it to appeal to a younger crowd, create a culture of community at work, and target a market of hyper-charged individuals or small groups in pursuit of dreams of technology entrepreneurship. Apart from the economies of shared admin resources, the added attraction to these groups of renters are the opportunity to rub shoulders with tech-smart bed-fellows to exchange ideas.

It is all very easy to criticise a bad investment with the wisdom of hindsight as a couch potato. And how dare we suggest prior to 2019 that Wework was a dud when the champions of VC funds poured in by billions? Yet that the business model is not sustainable has long been suspected by the general skeptical public.

It is so obvious from day one that the Wework model is nothing but a huge gamble on rental cost. Wework takes wholesale long leases, as long as 30 years, and let out retail in small spaces at very short terms. For that, it receives substantial discounts from property owners. It was simply banking on the wholesale discounts to provide them with a big margin. In risk management terminology, Wework is taking a long position on wholesale rental contracts.  Any unhedged position, whether long or short, exposes the company to the cyclic nature of rental sector. Although this was not the reason that actually pulled the plug on Wework, the company would sooner or later, have to contend with this precipice that its journey would inevitably take it when real estate sector declines. This is the underlying hazard of the Wework model.

Why these seasoned investors do not see what was crystal clear to anyone with some background in risk management, is beyond belief. Why do these investors plunk valuation on Wework as a technology play. There is no tech innovation here. It is not even a real estate company. Wework has little real estate assets. Valuation is the opium of venture capitalists and the fundee companies. And who determines the valuation? Who else but the fundees and the funders. The objective is to push up the hype, the media will push it out to the public and it will resonate in the investing world to prime the IPO price where the shares can be unloaded at astronomical profits to sellers. For the VC fund managers, high valuation will keep their shareholders very happy.

Just to illustrate how ridiculous valuation is. After Softbank joined in 2012, other investors had already capped their investment. From 2012 onwards, the funding was basically a one-man show by Softbank. So the valuation was basically determined by 2 men, Neumann and Mayayoshi Son, CEO of Softbank. Do you get the drift now why a company that has never made a single $, in fact, had been burning billions every year, had a valuation of $47B? Neumann had in fact said valuation at IPO will be an incredulous US$100B!.

Why did Wework collapse at IPO? Because sane financial analysts who don't have their heads in the clouds, poured through the details and saw through the company for what it really is. It has no patents, no technology, no possible pathway to profitability in decades. It had creative accounting, a US$47B commitment in rental contracts to service. It's a business with no barriers to entry.  

Wework and a lot of ride-hailing and e-commerce models build customer or subscriber base on freebies. Come time to build profitability, they need to pull the plug on these freebies. Their base collapses when these freebies are withdrawn. Wework gave away huge commissions, often 100%, to brokers. Can a business be sustained on this basis?


Enter Temasek:

Boy oh boy, are'nt we glad Temasek's name did not appear in the hall of fame of Wework investors above. Unfortunately, Temasek's nose for finding banana skins to slip up on is legend. It could not stay away from the VC party of the century and in 2018, joined a series B funding for Wework China, a subsidiary of Wework. That round raised US$500M, but we do not know how much Temasek invested. Funds raised todate is US$1B and valuation was US$5.5B. Hey, Wework China is not a bird, it's a unicorn. Never mind that it can't fly. It's the creature that carries money bags the venture capitalists treasure.

Temasek is keen on disruptive technologies that change the way people live, work and play. Co-sharing workspace is the future, it must seem to the sovereign wealth fund. Having missed out on the party of the century at Wework, Temasek wants to come into Wework China with a vengeance. 

One year after Temasek put money into Wework China, problems in China surfaced. China was the worst performer for all Wework locations. It is struggling with very low occupancy.  The failure of the 2019 IPO did nothing to raise eyebrows at Temasek. In the midst of the coronavirus pandemic, Temasek upped the ante and wanted to take majority state. By then, Softbank's Mayayoshi Son had stepped aside to lick his wounds. He gladly passed the baton to Ho Ching, CEO Temasek. In January 2020, Temasek was in talks with Trustbridge, a Chinese VC company, to take a US$1B stake in Wework China. A unicorn needs to be fed, and it has a great appetite. It burns $, billions of them, for sustenance.

Mayayoshi Son is like a grandmaster of VC. He has investment bankers sitting at his feet, taking notes, at his TED talks. But even the great Son had to eat humble pie and admit that Wework was a foolish mistake on his part. He dropped Wework valuation to US$2.9B latest, but many analysts say it is probably zero in value. Softbank had actually wanted to go for broke with Wework, but Son faced investor rebellion, like the Saudis who threatened to pull out of Softbank's US$100B Vision Fund. Son has some powerful and sane people to check him and pull him back from the brink.

Temasek has no one to hold it back. It answers to no one. There is no risk management committee at board level to oversee the executive management. I call on MPs who sit in parliament to stand up and do something. Please, let us have the return of sanity amongst our money managers. 


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