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WeWork troubles give Chinese unicorns the chills

Investor scrutiny over business models and profitability scares wannabes

A WeWork shared office in Fukuoka, Japan. Several investors view the unicorn as a property leaser instead of a high-tech startup. (Photo by Daichi Mishima)

NEW YORK -- The cold shoulder the market has given SoftBank Group-backed office-sharing platform WeWork has sent chills to Chinese startups that dreamed of making it big with U.S. listings.

The decision Monday by parent We Company to push back WeWork's initial public offering planned for this month to the end of the year is seen as a watershed moment for investors fed up with money-losing unicorns with questionable discipline.

While We Company and its private investors say the startup is a tech innovator, a faction of players in the equity market see the outfit as an office leaser. Such a designation would not justify the lofty appraisal normally given to a tech company, like one that develops artificial intelligence. 

This characteristic of We Company -- being less heavy on proprietary technology than it is on offline operations -- is shared by and therefore bodes ill for other startups in real estate, including its China rival, Ucommune, which July reports said was seeking a U.S. IPO next year. The same could be said about China's slew of long-term apartment rental platforms, which have in recent years received overflowing capital from investors including those on Wall Street.

It has now been months since the last U.S. IPO of a high-growth Chinese unicorn, and even that did not fare well: Tencent Holdings-backed Douyu, which listed in July, is trading about 20% below its initial public offering price.

The next Chinese startup in the pipeline, SoftBank-backed robotics company CloudMinds, has also postponed its U.S. IPO. Having originally planned for a $500 million offering in August, CloudMinds, which touts itself as the first company to commercialize a cloud-based robotics system, has yet to set terms for its listing. 

The delay of We Company's IPO also signals a sea change among investors concerned about the dubious discipline among unicorns, or unlisted startups valued at over $1 billion.

The winner-takes-all mentality of the digital age has driven more companies to focus on acquiring customers, even if they lose money in the process, rather than worrying about turning a profit early on. A deluge of investor money has exacerbated this trend. Venture capital companies worldwide raised $270 billion last year, up nearly sixfold from 2010.

But risk-sensitive investors who focus on listed stocks are less willing to look beyond the swelling losses of some of these businesses, said Kathleen Smith, co-founder and chair of Renaissance Capital, a research company that focuses on IPOs.

Technologies with high expectations for future potential, such as artificial intelligence and self-driving vehicles, tend to draw large sums of capital, inflating valuations beyond what is merited by the fundamentals. Few companies have successfully monetized them so far.

Internet-related businesses went through a similar wave of popularity in the 1990s, but the industry's overall profits really took off only after smartphones and higher data speeds smoothed the way.

The IPO of CloudMinds faces a tough test: its profitability is highly contingent on whether robotics can take off in the use cases which it hopes to empower, but which analysts have called "nascent" and a "tomorrow story."

Among American former unicorns that listed this year, ride-hailing apps Uber Technologies and Lyft both hover between 20-30% below their offer price following their stock debuts. Business chat provider Slack Technologies is down 30% from its initial price.

Teeth-straightening startup SmileDirectClub closed 28% below its IPO price on its Sept. 12 debut. Online freelancing platform Fiverr International, based in Tel Aviv, enjoyed a sizable IPO pop but has since settled back around its offering price.

Market watchers have ceased referring to 2019 as "the year of the IPO" -- a catchphrase whose popularity has faded as new tech shares continue to disappoint.

Meanwhile in China, the second biggest producer of unicorns, "capital winter" has become a buzzword in the local venture capital scene, widely invoked since 2018 to describe an ebb in private funding. 

According to a July report by Dow Jones VentureSource, China's venture capital deal flow and investment fell for the fourth consecutive quarter, down 70% from its "bubble peak." As funding activity cools down, Chinese startups will have to start thinking in terms of profitability or be left to raise funds from a now less friendly equity market.

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