Here's a funny headline I saw in Gizmodo today - Reports: WeWork to Delay IPO Amid Suspicion It Is Not Actually a Tech Company Worth $47 Billion. And a big part of the reason that it's funny is that it's true. WeWork is an American real estate company that provides 'co-working' spaces or flexible offices around the world, with a presence in India too. WeWork would very much like to be mistaken for a tech company and thus get the kind of valuation that tech companies get. Essentially, WeWork's business is, as Gizmodo puts it, flipping long-term leases to short-term tenants. Doesn't sound like tech at all. In fact, it doesn't sound very smart at all, being a maturity mismatch of a kind that has brought many financial companies to grief. If news is to be believed, it will now come back and try to conduct an IPO at a valuation of less than a fourth of what it was attempting earlier.
The amusing thing is that here in India, we have gone through this pretending-to-be-tech phase some twenty years ago. Or rather, we had a pretending-to-be-Infosys phase during the various IPO fevers of the 90's. Market old timers will definitely remember what I'm talking about.
To be fair, pretending to be tech is not the only thing in which WeWork resembles some Indian businesses. For example, its founder has taken large ultra-soft loans from the company, bought property with the money and leased that property back to the company. That's a neat little trick of the kind many of our Indian promoters have long perfected.
Once upon a time, one of the foundational principles of technology-centric businesses used to be that if they have to fail, they should fail quickly and cleanly so that the money, the people and other resources can move on to something that works. It should generally be obvious fairly early in the lifecycle of a business whether it's going to ever make money or not. I'm not saying that the exact degree of profitability and growth rate, etc. should be obvious - it cannot be. What I'm saying is that if a business is completely infeasible and if in fact it's not a business at all, then that should be quite obvious fairly early.
Those days are apparently gone. Now if a business can pretend to be 'tech' and its founders can draw a fanciful hockey stick graph, then the rules of the game are different. Such a business can be born into the ICU, and exist on life-support capital infusions from someone or the other for years on end, perhaps extendable to a decade or more. If you look around the Indian business landscape, it's truly shocking how many of the businesses that have ended up becoming household names are not even close to making money at the unit sale level. In fact, it's unclear if they can ever make money; so in effect they are yet to prove that they are businesses at all.
At one level, one could argue that this is not a problem for anyone but those funding such businesses. If WeWork fails, it fails. Who cares? However, I don't agree with this view. The scale at which some of these businesses are operating means that they have a huge impact on consumers as well as other businesses who might be competitors or part of the same value chain. In India, food delivery and cab services are perfect examples of this negative impact.
Both these are yet to prove that they are sustainable businesses at all. It's entirely possible that the likes of Uber and Ola will not survive. However, they will cause a great deal of collateral damage, for example, to cab operators and drivers. A lot of people have invested money in cabs but are effectively part of the same (un)economic model that the Uber and Ola are. If these cabs have to be hired at viable rates, unsubsidised by free money being supplied by Softbank etc, then there just may not be enough business. The food delivery story is the same, in fact, probably worse. Recently, someone who's part of a leading food delivery business at a senior level told me in all seriousness that food delivery will become viable when people stop cooking. I think they're going to need a lot of funding waiting for that to happen.