Lessons from WeWork & the Dangers of Unicorns

Investing in unicorns, privately held startup companies valued at over US $1 billion, can be an enticing prospect for many investors seeking high returns. However, these magical creatures of the business world come with their own set of dangers and risks that can potentially lead to substantial losses.

The term “unicorn” was first coined in 2013 by venture capitalist Aileen Lee, highlighting the rarity of such successful ventures, akin to the mythical animal it is named after. One of the prime examples illustrating the perilous nature of unicorn investments is the dramatic rise and fall of WeWork.

A Mythical Creature

WeWork, a prominent office-sharing company, experienced a meteoric ascent in its valuation, reaching an astounding $47 billion in 2019. However, this success story quickly turned into a cautionary tale. In recent years, WeWork suffered one of the most spectacular corporate collapses in recent U.S. history.

The company’s attempt to go public, once eagerly anticipated, failed miserably, leading to a chain of events that ultimately culminated in a Chapter 11 bankruptcy filing in New Jersey federal court.

The bankruptcy filing revealed the staggering financial challenges faced by WeWork. The company reported total debts of $18.65 billion against total assets of $15.06 billion, underscoring the vast disparity between its liabilities and assets.

WeWork’s downfall can be attributed to several factors, including overvaluation, mismanagement, and a flawed business model. These issues serve as a stark reminder of the dangers associated with investing in unicorns.

Buyer Always Beware

One of the primary dangers of investing in unicorns lies in their often inflated valuations. Investors, driven by the fear of missing out on the next big thing, may overlook fundamental financial metrics in favor of the hype surrounding these startups. As a result, they may end up investing in companies that are overvalued, making it challenging for these startups to live up to the sky-high expectations.

Additionally, unicorns are often characterized by rapid expansion and aggressive growth strategies. While these tactics can fuel initial success, they can also lead to unsustainable levels of debt and operational complexity. WeWork’s ambitious expansion plans, which involved signing numerous leases for office spaces worldwide, ultimately backfired when the company faced difficulties in meeting its financial obligations.

Furthermore, the lack of transparency in privately held companies can pose significant risks for investors. Unlike publicly traded companies, unicorns are not required to disclose as much financial information, making it challenging for investors to assess the true health of the business. This limited transparency can lead to investment decisions based on incomplete or inaccurate information, increasing the likelihood of losses.

Understand Your Loans

While investing in unicorns may seem like a golden opportunity, the cautionary tale of WeWork serves as a stark reminder of the dangers involved. Investors should approach unicorn investments with a critical eye, conducting thorough due diligence, analyzing financial fundamentals, and being aware of the risks associated with overvaluation and lack of transparency.

By being vigilant and informed, investors can mitigate the dangers and make more prudent investment decisions in the unpredictable world of unicorn startups.