October 12, 2018
Investing in a company that hasn’t turned a profit yet is hardly unusual. Yet, when the investment is on a scale that Softbank is reportedly considering for WeWork, it’s understandable that a few eyebrows might be raised.
The Japanese tech conglomerate led by Masayoshi Son is in discussions about investing $15 billion to $20 billion in WeWork, the Wall Street Journal reported. That’s on top of $4.4 billion that SoftBank put into the coworking space provider in 2017, and would make it WeWork’s majority owner.
The investment would be the largest to date made by Softbank’s $98-billion Vision Fund. The scale, though, isn’t the only reason the bet on WeWork would be its riskiest, according to the WSJ.
WeWork, the WSJ noted, “has done a good job making its core business—taking on long-term office leases, renovating the spaces and then subletting them for the short term—seem more exciting than it really is.
“That its tenants are mostly startups and that it provides perks such as free-flowing cucumber water or craft beer adds a layer of hipness,” the WSJ reported. “But beneath its boast of providing a “physical social network” for millennials, it is a real-estate company with the familiar landlord risk: Tenants or no, it is on the hook to pay for the space.”
Among other milestones, the company is now the largest commercial office tenant in Manhattan, having edged past JP Morgan Chase over the summer, according to Cushman & Wakefield. Yet with increasing revenues have come widening losses: the WSJ reported that WeWork’s revenue doubled in the first half of this year to $763 million, but its net loss grew to $723 million from a year-earlier $154 million.
“When a private technology company is valued more for growth than profitability, that’s an incentive to expand rapidly and worry about profit later,” the WSJ noted.
Writing on Bloomberg News this week, Lionel Laurent and Alex Webb summed up the eleven-figure investment that may occur in the near future. “WeWork needs cash to fund its breakneck growth; Son and his SoftBank investment fund need fast-growing startups to generate returns on their cash pile,” they wrote. “Whether the next five years will prove them right is another matter entirely.”
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