What's going on?
Japan’s SoftBank – one of the world’s biggest startup and tech investors via its $100 billion Vision Fund – dealt a blow to coworking space rental company WeWork on Tuesday as it backed out of a $16 billion investment deal (tweet this).
What does this mean?
Founded in 2010, WeWork offers working, living, and even educational facilities to a community largely consisting of entrepreneurs and freelancers. Despite its youth, WeWork’s financials are pretty grown-up: in the first nine months of 2018, it generated revenue of $1.2 billion – but it lost around the same amount of money in that period.
SoftBank had planned to spend $10 billion on buying out WeWork’s other investors and to pump a further $6 billion into the company, thereby becoming its majority owner. But after the market maelstrom and a disappointing initial public offering (IPO) of its mobile phone unit, SoftBank had second thoughts – instead investing but another $2 billion in WeWork.
Why should I care?
For markets: Investors burked WeWork’s bonds.
In early 2018, WeWork sold bonds to investors. Private companies sometimes like to dip their toes in investors’ waters ahead of an eventual IPO (something WeWork has been putting off – and with a moneybags backer, who can blame it?). Those bonds fell in value on Tuesday as investors sold them, perhaps thinking SoftBank’s about-turn suggests WeWork is a riskier bet than they’d thought.
The bigger picture: The sun’s setting on cheap money.
Venture capital investors have been awash with low-interest-rate cash for years – but as interest rates begin to rise, there’ll more pressure on them to generate higher returns. Investors in SoftBank’s Vision Fund might therefore be getting twitchy about WeWork’s slowing growth in London and its business model based on expensive long-term property leases and short-term rentals to tenants (contrary to the old adage). It’s not all bad, though: WeWork’s fresh $2 billion values the company at a record $47 billion – good for investors’ profits (on paper, at least).