WeWork isn’t quite Pets.com. It’s doubtful that posterity will lump the office-hive startup Adam Neumann co-founded in with the poster child of the late 1990s dot-com failures.
Though WeWork was forced to shelve its hotly-awaited initial public offering and Neumann has been forced out as CEO, it’s still possible to salvage a market debut. The odds aren’t great, though, if the fallout thus far is any guide.
The New York-based disruptor may be thousands of miles away from Asia, but the shockwaves from its stumble are being felt far and wide in the world’s most dynamic economic region. Especially Southeast Asia, which has outpaced the rest of Asia in the tech “unicorn” race.
Already, investors are struggling to assess the road ahead for startups from Singapore-based ride-sharing phenomenon Grab to Indonesia’s Go-Jek. There’s no telling how the last month of WeWork-related drama might’ve altered the IPO valuations of these game-changers and others.
Vision Fund’s gamble
A key source of uncertainty is how SoftBank billionaire Masayoshi Son might respond to WeWork’s stumble. Son’s US$100 billion Vision Fund – and his effort to add another $100 billion of venture-capital firepower – has done more than anything to drive valuations into the stratosphere.
Son may have a keen eye for epochal talent, but he’s also earned a reputation for overpaying for mediocre companies.
Sadly, that may include Neumann’s WeWork. Since 2017, Son has become the biggest booster of the office-sharing giant. He’s increased his stake to the roughly $11 billion the Vision Fund holds today – a bet predicated on the $47 billion valuation Son’s team bestowed on WeWork.
That valuation came crashing down over the last two weeks, forcing Neumann to scrap the IPO and the board to send Neumann packing — just as Uber did with Travis Kalanick.
This mess leaves Son with some serious explaining to do. Didn’t he, for example, notice that WeWork’s governance structure gave Neumann too much power? Or that WeWork is more of a leveraged old-economy real estate investor than industry disrupter? Or that Neumann was burning through cash and over-hiring with abandon?
Yet as Son’s Vision Fund retrenches, so might Asia’s most vital source of risk capital. As punters question the valuations of Grab, Go-Jek and others, the next wave of tech unicorns is already confronting a financing chill.
Turmoil hits sector
It started with the flops of Uber Technologies and Lyft earlier this year. The June IPO of message service startup Slack also gave the tech bulls pause. That includes Son, an enthusiastic Slack booster.
Uber, too, of course. In fact, the Vision Fund has effectively commandeered the ride-sharing space. Yet the industry is now in turmoil as fresh competitors emerge and regulators challenge the industry’s business model.
As the global trade war and investor skepticism collide, investors like Brahmal Vasudevan of private equity firm Creador are highlighting Warren Buffett’s famous observation: it’s only when the tide goes out that we learn who’s been swimming naked.
Vasudevan notes that a “crazy amount of money” has been piled into Southeast Asian startups, propelling valuations to unthinkable levels. Noting the “ridiculous” expectations applied to startups, Vasudevan reckons “there has to be a shift toward an economic model that delivers profits.”
This echoes the mindset that followed Pet.com’s implosion two decades ago. But there’s still a question about whether Southeast Asia – which recently birthed eight tech unicorns – is a startup mecca or a bubble factory. Odds are, it’s more than the former than the latter. But no one can say for sure.
The region’s success stories include online Indonesian travel site Traveloka and e-commerce giant Tokopedia. What’s more, Southeast Asia boasts more than 30 startups worth between $100 million and $1 billion. Only time will tell, of course, if those valuations are rational or just the latest examples of irrational exuberance.
Much will depend on whether the trade war slams emerging-market growth. It will depend, too, on Son’s risk appetite. The Japanese chieftain has morphed himself into the globe’s most important – and deep-pocketed – venture capitalist. Not content to run a telecommunications utility, Son has steadily assumed the role of top startup talent scout.
Yet Son is now a wildcard as he – and his Vision Fund benefactors – process the WeWork fiasco. Perhaps Son will take his lumps in stride. Or, he may assume a more “risk-off” crouch. It would be a shame, of course, if WeWork’s troubles had a broader ripple effect on the availability of risk capital.
Odds are, that dynamic is already afoot in ways sure to stymie Asia’s startup boom.