A venture capital insider dishes on why WeWork's original valuation was way too high

Adam Neumann speaks onstage during WeWork Presents Second Annual Creator Global Finals at Microsoft Theater on January 9, 2019 in Los Angeles, California.WeWork CEO Adam NeumannMichael Kovac/Getty Images for WeWork

  • WeWork is reportedly slashing its targeted value in its upcoming IPO by as much as half.
  • For Manhattan Venture Partners, a merchant bank specializing in pre-IPO companies, the move couldn't have been more apt.
  • Santosh Rao, the firm's head of research, said in an interview that many of WeWork's practices might fly as a private company, but not on public markets.
  • Visit Business Insider's homepage for more stories.

WeWork's lofty valuation for its initial public offering has reportedly been slashed to nearly half of the original $48 billion, according to reports by Bloomberg and the Wall Street Journal.

That's a relief for some analysts and investors watching the IPO, who say the original target defied reality, especially given some of the criticisms facing the company's complex structure and appearances of self-dealing.

"Given the risk-reward in this whole business model, I think $47 billion was a real stretch," Santosh Rao, head of research at Manhattan Venture Partners, told Business Insider in an interview. The firm initiated coverage of WeWork Friday with a $28 billion valuation.

"Maybe if WeWork had come out before Lyft and Uber, they would have got a pass. But now, seeing how the appetite for companies without a path to profitability has gone down, I don't think they will get the benefit of the doubt," Rao said.

Both Uber and Lyft have stumbled out of the gate following their public market debuts earlier this year. Many investors from later private rounds are now in the red as the stocks have fallen 24% and 43%, respectively, in the months since.

Other criticisms, like the appearance of self-dealing in the purchase of a trademark from chief executive Adam Neumann for $5.9 million that was later canceled or a complicated corporate governance structure, have put more pressure on WeWork to fully justify its lofty valuation targets, Rao said.

Read more: These are the unusual ways WeWork founder Adam Neumann has made millions, and stands to make more, from his $47 billion company about to go public

"When you're a private company, maybe you can get away [with these things] because you have time to explain to investors what the long term vision is and people look past the small things in favor of a broader vision of where the company's gong and what the future potential is," he said.

"But when you're a public company, you have to execute and you have to perform."

Then there's the recession question.

Many companies are seen as flocking to public markets in order to raise capital before the long-running economic expansion reaches an eventual end, with WeWork proving no exception.

"They have to make sure the leases are rock solid," Rao said. "40% of the base is enterprise clients, which puts a floor on that, depending on how long the downturn is. Mature markets are doing well, but they will need to venture beyond just the most major of cities."

WeWork is expected to kick off its roadshow, when executives and bankers will travel around the world to pitch the stock to investors, as soon as next week, Bloomberg reported Tuesday. The offering could be the second-largest behind Uber this year.

More on WeWork's IPO:

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