Softbank loses its appetite for a WeWork IPO

CLXXIX

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WeWon’t.

Softbank is having a hard year. The bet it made on Uber looks less prescient than disastrous. In January 2018, the Japanese conglomerate plowed $9.3 billion into Uber through a mix of direct investment (25.6 million Series G-1 shares at $48.77 per share) and secondary share purchases (242.8 million shares from existing stockholders at $32.97 per share). Uber, which went public at $45 in May, closed yesterday at just over $32, valuing Softbank’s stake at roughly $600 million less than it paid to begin with.

Another Softbank investment, Slack, has also struggled as a public company, with its share price yesterday falling below its $26 reference price for the first time. Unlike with its Uber holding, Softbank at least still stands to profit from its Slack investment, since it bought shares in private rounds for well below their current trading price.

Then there is WeWork, the office-space rental company in which Softbank is by far the largest shareholder. Softbank is reportedly now urging WeWork to shelve its IPO after a frosty reception from investors that could value the company at $15 billion to $20 billion, a staggering discount to its last private valuation of $47 billion. Softbank has invested more than $10 billion in WeWork through its $100 billion Saudi-backed Vision Fund, including $2 billion earlier this year.

WeWork’s year isn’t going any better. Despite cutting all mentions of “community adjusted EBITDA,” the IPO documents it unveiled last month received withering criticism for WeWork’s substantial losses and weirdly close relationship with co-founder and CEO Adam Neumann. Last week, WeWork added a woman to its all-male board and said Neumann (“Adam”) would return the $5.9 million he charged the company to acquire the trademark to “We” when it rebranded as the, er, We Company.

The stakes for WeWork are high. The Financial Times reports WeWork would lose access to a $6 billion loan from a group of banks if it didn’t go public, not to mention the $3 billion to $4 billion in new capital it had hoped to raise through the offering. WeWork, which lost $900 million in the first six months of this year, needs investor financing to pay the bills while it pursues loftier goals, like elevating the world’s consciousness, that seem to require operating at a loss. “We do not lose money, we invest money in the future,” Neumann told Business Insider in May.

For Softbank, the fate of WeWork and underperformance of its other investments could affect its ability to win new money from investors as it aims to raise a second Vision Fund of $108 billion. On a call with investors in August, Softbank CEO Masayoshi Son defended WeWork’s $47 billion valuation. “I don’t think that it is overvalued as an enterprise,” he said. “It is a wonderful company.”

And in case you were wondering, “Is there precedent for a lease-based real estate company pulling its hotly anticipated IPO on valuation concerns,” Wall Street Journal reporter Eliot Brown has the thread for you.

Bill time.

Uber and Lyft are desperately seeking a way around Assembly Bill 5, which would rewrite the rules of the gig economy. With the Sept. 13 deadline for the California state senate to vote fast approaching, Uber and Lyft are reportedly circulating a 19-page bill that would create a new category of worker, a “network driver,” and explicitly state that they are not employees.

The bill offers benefits, each with a catch. For instance, it would guarantee drivers “1.27 times minimum wage” but only once the driver has accepted a trip. That means the effective hourly wage would be much lower, as Uber and Lyft drivers spend 33% to 43% of every hour waiting for a fare. The bill would also create a “Driver Advocate Program” to represent workers in discussions with companies, but bar the program and its members from discussing employment status or participating in labor strikes.

The gig economy was always an arbitrage, and a gamble: hire workers as contractors to do jobs through a platform, eliminating the costs associated with traditional employment. The immediate threat of AB5 is that the bill for these employment-based costs finally comes due. That includes payroll taxes, workers compensation, and training costs for employees, higher wages once workers are protected by minimum wage laws ($12 an hour in California and $15 an hour in some cities including San Francisco), and assorted other benefits like health care. An open question is when and how AB5 would be put into effect, and whether the law could be applied retroactively, compounding its costs to companies.

The longer-term threat is that California inspires other states to pass similar legislation, until the gig model is unwound on a national scale. Analysts at Morgan Stanley estimate global ride-hail bookings could fall by 5% to 9% if something like AB5 were adopted across the US. Analysts at investment firm Cowen made a similar observation in a research note sent last week:

California is both the 5th largest economy in the world and a policy Petri dish for other "blue states." The ABC test is on the books in approximately a dozen states, though is more focused on unemployment and worker compensation claims. Massachusetts has very similar legislation in law similar to AB5, which is where the Dynamex decision pulled from (Massachusetts ABC test went live in 2004). With passage in California, we would expect other states like New York, New Jersey, Washington, Oregon and Illinois to be next in the queue. We also expect the U.S. House to push similar legislation at a national level this fall via the PRO Act (Protecting the Right to Organize Act).

AB5 passing is a nightmare scenario for the gig economy because it proves that such legislation is possible and politically viable. Even if a company-sponsored ballot initiative to keep drivers classified as contractors prevailed in 2020—and that’s a big if—California would still have given other states a roadmap to reining in the gig economy, which is something no amount of lobbying can undo.

Service disruption.

Here is a story from CBC about Bonavista, a Newfoundland town with an unusual approach to getting Airbnb hosts to pay taxes at the local business rate based on the assessed value of their properties:

[Bonavista mayor John] Norman said there is a town staff member who monitors Airbnb consistently looking for new accommodations. When there are new listings, the information is recorded and a staff member will make a house visit.

"We have gone to some pretty serious measures to collect. We have literally dug up driveways and turned off water sewer service until the bill is paid, cutting them off completely from all municipal services."

Yes, you read that right. If Airbnb hosts don’t pay Bonavista, Bonavista will dig up their driveways and turn off their water.

The goal is to put Airbnb hosts on a level playing field with local bed-and-breakfast owners, who collect taxes upfront and pay other fees such as the provincial tourism registration fees. Airbnb told CBC it doesn’t know of any other Canadian municipality that taxes Airbnb hosts as businesses based on their property values.

The mayor said the taxation method has been successful, but he acknowledges not all Airbnb owners are pleased.

"I don't think some are happy about it, but it is what it is."

Scooters!

The head of a German physicians group would like to see them banned:

"E-scooters should be completely banned," Andreas Gassen, head of the KBV, told regional newspaper, the Neue Osnabrücker Zeitung (NOZ). "That’s the only thing that would help to avoid injuries. From a medical point of view, they're just too dangerous, so get rid of them."

Gassen said his "worst fears" have come true. "Wherever these vehicles are now riding around, we have significantly more injured people,” he said. 

Germany legalized electric scooters in June. Users don’t have to wear a helmet, but are supposed to stick to cycle paths. There’s no single good data set on scooter incidents, but scattered studies and news stories have reported many serious injuries—often involving head trauma—as well as a few dozen deaths, which tend to involve the rider being his by a car or truck. The typical reaction to such incidents has been for local officials to call for a crackdown on scooters. Safety is certainly good, but you also have to wonder at what point the political focus will shift to tackling the root cause of the problem: developing infrastructure that is safe for vehicles other than cars.

This time last year.

Please ride your toy scooters on the sidewalk

Other stuff.

Porsche ups stake in Croatian electric carmaker to 15.5%. Uber plans bus system for Lagos. Getaround raises $200 million at a $1.7 billion valuation. Mexican property-tech startup Flat raises $4.6 million. Amazon makes Fresh available to Prime members for low fees in the UK. Uber Eats pulls out of South Korea. Starship delivery robots land on Purdue University. DoorDash heading to Australia. WeWork invests in furniture-rental startup. WeWork’s conflicts of interest list keeps getting longer. Uber hiring 2,000 people for Uber Freight in Chicago. Uber getting into small loans business. Lyft adds new safety measures after barrage of sexual assault allegations. Airbnb leads $20 million investment in Atlas Obscura. San Diego at war with scooters. Co-warehousing. The first foreign ambassador to Silicon Valley. The Great Breakup of Big Tech Is Finally Beginning. How to Major in Unicorn. “Founders are always killing it.”


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