How Important is Honesty in Business?
It's probably the most important aspect.
SoftBank learnt a hard $6.6 billion lesson on this.
Recently, I was reading about analyzing potential investments and how a company's management can make or break the company. This is probably one of the more difficult aspects of selecting a worthwhile investment - people are notorious for being self-serving and less than honest.
The failed IPO of WeWork is a great example of where I believe it was relatively easy to tell that management was serving its own interests rather than those of shareholders. Hindsight is 20/20, but there were some definite signs that the IPO was going to go belly-up.
Conflicts of Interest and a Lack of Business Ethics
The main problem at WeWork was that there were conflicts of interest among the Board of Directors. Directors have one main purpose: To ensure the company's prosperity by collectively directing company affairs. Many of the board members were relatives or friends of Adam Neumann, the Founder and CEO of WeWork. The Board needs to be neutral enough to stand up to the CEO if he or she is not performing their job with a high level of integrity and to the best of their ability. This includes blocking any major moves that do not benefit the company or do not align with the company's vision. I believe that all of WeWork's problems occurred because the Board was not selected to benefit shareholders, but rather to benefit Adam Neumann and those around him.
WeWork bought a $60 million private plane. For a startup, and even more for a loss-making company, to own a private jet is, to put it lightly, a poor allocation of capital. The company also invested $13 million in an artificial wave generating startup - while this is a cool idea, it does not align with WeWork's vision or core business. It is clear to me that the oversight required by impartial Directors was not present at WeWork.
Before things came tumbling down, WeWork was given a hefty $47 billion valuation. For a company that in 2018 had revenue of $1.8 billion and made a loss of $1.9 billion, something was not quite right. To give you some perspective, that's a bigger market cap than half of the S&P 500 - the 500 largest companies by market cap on the US stock market. The vast majority of these companies turn a profit most of the time. This was going to be the second highest valuation for a startup after Uber, but it just didn't tie in with reality.
WeWork also branded itself as a technology company, based on its software used to pick real estate where they will open a WeWork office - all commercial real estate agents worth their salt could do the same thing. WeWork's business model revolves around renting large office spaces, transforming them and renting those co-working spaces to small businesses, startups and individuals or entire floors to larger companies - in other words, a real estate company.
The Biggest Problems Exposed
Upon filing for its IPO, WeWork was met with much criticism. It was reported that WeWork was renting offices from Adam Neumann for millions of dollars. Upon rebranding to "The We Company", Adam Neumann was paid $5.9 million for the trademarked "We". It was also disclosed that Mr Neumann sold hundreds of millions of dollars’ worth of shares right before filing for the IPO.
These are not things that Founders who believe in their companies do. They are clear signs of mismanagement, a culture that lacks ethics and integrity, as well as fraudulent and exploitative behavior. As a result, WeWork now has a valuation of just $2.9 billion.
Lessons We can Learn
- At every step of the business or investment process, there should be clear and effective checks in place to reduce risk, prevent unwanted surprises and ensure you know everything you need to know about a company (good and bad).
- If an entity is misrepresenting itself, the chances are you don't want to be involved with them. Open and honest branding is of utmost importance to shareholders, clients and the general public.
- Integrity and honesty are two very rare and expensive qualities. You would do well to invest in them accordingly.
Ultimately, the lack of responsibility taken by Adam Neumann, SoftBank and the WeWork Board of Directors led to the failed IPO and the ensuing financial repercussions. From a SoftBank perspective, losing $6.6 billion could have been avoided by correctly vetting WeWork and its Executive Committee at every step of the investment process.