WeWork has been one of the trending business topics in recent weeks. The collapse of its initial public offering, followed by the ouster of its CEO and founder, and now the drama over whether (and if) the company will be rescued have provided some compelling drama. It has played out more like a TV show than an actual company. Watch for the movie shortly, I expect.
I have been watching closely, because this kind of high-profile collapse typically precedes bigger problems. At some point in the cycle, the high expectations of growth and unlimited potential run smack into the real limitations of needing to make a profit. We have seen signs of this collision already in the performance of companies like Uber, where its life as a public company has been substantially more difficult than its life as a private one. But WeWork seems to be the peak of that particular cycle.
Lessons To Be Learned
There are a couple of lessons here. First, private markets are not always smarter than public ones. The argument for venture capital, or for private equity, has been that private investors can be smarter than public ones, able to create value and then sell it for a premium to the dumb money in the public markets. Up to a point, that argument holds. But clearly some private investors, who kept putting money in at increasingly inflated valuations, were counting on public investors to be their exit strategy. The “greater fool” theory holds there is always a bigger fool who will pay a higher price, and that seems to have been the logic here. The public markets, however, proved to be wiser than expected—and left the private money holding the bag. Maybe the discipline of public markets has something to recommend it after all.
This outcome is, obviously, bad for investors in private companies who want to exit, but it is a good sign for public markets. Real technology companies have been able to go public and do well. The public markets have been able to distinguish between those companies and hybrids, such as WeWork and Uber, that use technology but are not, fundamentally, tech companies. Uber is a cab company. WeWork is a shared office space company. Valuing them as what they really are is what the public markets are supposed to do, and they are working as intended.
A Very Good Sign
One of the worries I started with is that this kind of event happens toward the end of the cycle, when things get crazy. What we are seeing, though, is that the crazy has been happening more in the private markets than in the public ones. The public ones, at least as far as these companies go, have been fairly rational. The private investors were apparently expecting the public markets to embrace the crazy, like 1999—but that has not happened.
Which is a good sign for the future. If the public markets are still being fairly rational, that means the end may be farther off—and less damaging—than people like me worry about.
If you look at the broader market, you see the same things. Based on current interest rates and recent history, market valuations are not cheap, but they are not crazy expensive either. Based on analyst expectations, earnings are expected to go down, not grow to the sky. That public market lack of crazy that is knocking down private deals may also be keeping the market out of the riskiest territory.
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