This VC turned down an M&A offer from WeWork, and it shows how Wall Street may have wildly overvalued the coworking giant

wework

  • Krishna Gupta, the founder of early stage venture capital firm
    Romulus Capital, shared on Linkedin that WeWork tried to
    aggressively acquire one of his portfolio companies several years
    ago.
  • WeWork CEO Adam Neumann told Gupta that his bankers believed
    that WeWork could be worth $90 billion in the next two
    years. 
  • Gupta ultimately turned down the mostly stock deal, as he had
    concerns about WeWork’s sky-high valuation, and still believes it
    was the right decision. WeWork is
    reportedly now eyeing a valuation of around $20 billion in its
    IPO.
  • The following post is published with permission from
    Gupta. 

  • Read all of Business Insider’s WeWork coverage here
    .

Even in a time of widespread overvaluation and non-tech
companies masquerading as tech companies, WeWork has always struck
me as a concerning outlier. This concern became much more personal
a couple years ago when the We family aggressively tried to acquire
one of our portfolio companies.

At the time, WeWork was flying high post-Softbank investment.
They had grown to impressive scale with an equally impressive
ambition to growth further. They were wisely going around
leveraging their overvalued stock to acquire interesting companies.
Adam and his team worked hard to sell a vision of unifying the
world under the “We” platform as they put down an offer that
involved a fair amount of WeWork stock. I was cornered by Adam
1-on-1 for a couple hours; as the lead investor and board member, I
was responsible for helping the company make the decision. They
gave our company the option of taking cash, but the cash amount
wasn’t interesting enough to justify selling the business and
WeWork didn’t have much more cash.

Read more:
The CEO of coworking startup Convene is worried bad press around
WeWork’s model could taint the entire flex-office industry

So the question for all of us was: how much will WeWork stock be
worth if/when it goes public? Adam told us Goldman bankers had put
together analysis that showed the company would be worth $90B
within two years (it sounds like the most recent presentation had
Goldman pitching $65B to Softbank management), that the We platform
would dominate the world, and so on.

For a while, our company’s management team was rather enamored
by the idea of working at WeWork’s scale and seeing 4X appreciation
on the amount of stock being offered. Understandably so! WeWork has
created a category and is touching companies large and small around
the world. That kind of reach provides enticing synergies for any
startup.

But synergies need to be valued correctly – the deal has to be
right and WeWork’s stock as a currency was not as strong as they
wanted it to be. With the markets speaking truth, it’s clear now
that the decision not to sell was the right one. WeWork could
certainly still be a successful business but at a much reduced
scale/growth and certainly a reduced valuation; the path to even a
2X from where they were two years ago will take a very long time if
it ever comes to fruition. It could also go to a 0. I feel sorry
for the founders who did end up selling their companies for WeWork
stock at that valuation; they sold their dreams for depreciating
common stock of a company that has a massive preference stack.

Read more:
We got a peek at WeWork’s top landlords. Here’s who is most exposed
to the fast-growing, but money-losing, coworking company as it
prepares to IPO.

M&A is challenging for any company in any industry. Rarely
is it value-accretive. But it can be particularly complex for
early-stage companies that have management teams with no experience
in the craft. Having investors or advisors who have experience in
M&A and the capital markets can be a powerful advantage. We try
our best to help our companies be thoughtful and data-driven on the
buy-side (rolling up or merging with other startups) and on the
sell-side if necessary!

I am intellectually very curious to see where WeWork goes from
here. They have a phenomenal team of bankers from my alma mater
JPMorgan helping them. My instinct is they should have allocated
more cash toward buying true tech companies rather than toward
long-term leases; getting out of being a real estate company was
their only chance to get the valuation multiples they aspire
to.

Krishna Gupta is the founder and managing partner of early stage
venture firm Romulus Capital. 


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This VC turned down an M&A offer from WeWork, and it shows how Wall Street may have wildly overvalued the coworking giant