Management Pro: Too Much Is Wrong With WeWork

WeWork's initial public offering is off to a rough start before it's even started, and for good reason, management expert Jeff Sonnenfeld told CNBC in a Tuesday interview.

What Happened

WeWork was valued as high as $47 billion during rounds of private financing, but a potential IPO would value the company at less than $20 billion, Sonnenfeld said, adding that the financials behind the company tell the true story of what is going wrong.

WeWork has raised more than $12 billion in cash throughout its history, and it is unclear how the company "pumped up" that number to its valuation of nearly $50 billion, Sonnenfeld said.

The $47-billion number shows up in WeWork's S-1 filing — but the figure represents fixed lease payments the company has to make, he said. At the same time, the company has just $3.4 billion in commitments coming in to the company, Sonnenfeld said. 

The math behind the company implies it is losing $120,000 a minute or $5,200 per customer, he said. 

"What kind of a financial model is that?" he said. "A pretty promisingly weak one."

Beyond The Numbers

WeWork CEO Adam Neumann bears some of the blame, especially after properties he personally owns are being leased back to the company, Sonnenfeld said. The CEO also personally bought the trademark "We," which he then sold to the company as part of its rebranding to The We Company, he said. 

On top of that, Neumann cashed in more than $700 million, a sign he "probably doesn't believe in the IPO himself," Sonnenfeld said.

The competitive environment for WeWork is more intense than some believe and includes 40-year old company called Servcorp, the Yale associate dean told CNBD. All it takes to compete in the environment is office space with "beanbags and Nespresso machines," he said. 

Sucker Born Every Minute

WeWork's progress toward an IPO is in partly due to the old homage that a sucker is born ever minute, Sonnenfeld said.

WeWork — backed by a charismatic Neumann — attracted not only capital from SoftBank, but from "very sophisticated people" that Sonnenfeld said he personally knows.

WeWork's valuation explosion is a "form of a Ponzi scheme," as the business loses money for each new client it gains, he said. 

"This is a huge embarrassment to SoftBank on top of Uber." 

Dean Of Valuation: $17B A Stretch

Aswath Damodaran, a professor of finance at the Stern School of Business, has earned himself the nickname of "dean of valuation," and he said he isn't even convinced the company is worth $17 billion.

WeWork's business model is "built on a knife's edge" and could be negatively impacted by even the "smallest economic perturbations," CNBC quoted him as saying in a blog post.

Valuing the company between $15 billion and $20 billion "requires stretching the assumptions to breaking point," he said.

A "whole host of plausible scenarios" exist where the equity of the company is worth zero, Damodaran said. 

"Valuation is a bridge between stories and numbers, and for young companies, it is the story that drives the numbers, rather than the other way around," he said.

"There is a danger when stories rule, and especially so if the numbers become props or are ignored, that the pricing that is attached to a company can lose its tether to value."

Related Links:

What We Know About WeWork's IPO Filing

WeWork Considers Valuation Cut As Investors Question IPO Values

Photo by Ajay Suresh via Wikimedia.