WeWork’s $47 billion valuation was always a fiction created by SoftBank

When business school professors are writing their WeWork case studies years from now, one of the biggest practical lessons may be this: WeWork should have taken far less money from SoftBank’s Masayoshi Son.

The plight of WeWork over the past several months has cast SoftBank in the role of mafia boss. SoftBank invested a lot of money — $10.65 billion — in a company that it expected to go public at a valuation higher than $47 billion. As anyone who’s watched a mafia movie knows, if you take money from the godfather, you better deliver.

The irony is Neumann didn’t really fail to deliver for Son. Sure, Neumann’s quirks, and possible illegal activities, have cast him as an irresponsible CEO. But it’s not like he mismanaged WeWork between January, when he accepted SoftBank’s $47 billion valuation, and September, when WeWork readied an IPO.

Rather, Neumann failed to deliver for his employees and other investors by selling too much of WeWork to SoftBank at too unrealistic a price. By selling nearly 30% of the company’s equity to SoftBank and its associated funds, Neumann lost control of his company when Son decided WeWork’s prospects would be better without him. Son’s move against Neumann last month cost him his CEO job and will likely cost him his board seat.

But American capitalism is a little different than the mafia. Instead of disposing of Neumann’s body, SoftBank is paying Neumann up to $970 million for his equity, depending on how much he wants to sell, and an additional $185 million as a “consulting fee,” which is really just a bonus for taking SoftBank’s bailout package over J.P. Morgan’s alternative $5 billion debt package.

When Neumann took investments from SoftBank in November 2018 ($3 billion) and January 2019 ($2 billion), WeWork’s value skyrocketed from $20 billion to $47 billion. In other words, SoftBank’s investment set WeWork’s value $27 billion higher than it had been.

That could (should?) have been a warning to investment banks and WeWork’s board that other investors may not have agreed the company was worth $47 billion. Instead, J.P. Morgan, Goldman Sachs and Morgan Stanley said they could find investors willing to value WeWork between $60 billion and $100 billion. And WeWork proceeded with an ill-advised IPO that has brought the company weeks away from bankruptcy because of its aggressive expansion and outstanding lease obligations.

Even the $20 billion starting point in 2018 was set by SoftBank, which invested $4.4 billion, in conjunction with its $100 billion Vision Fund, in a 2017 Series G.

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