SoftBank’s WeWork Bet Won’t Work Out Any Time Soon

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SoftBank’s WeWork Bet Won’t Work Out Any Time Soon

There may also be foosball. Photo: Luke MacGregor/Bloomberg News

SoftBank 9984 -5.37% has a problem: It isn’t easy putting nearly $100 billion to work.

The acquisitive Japanese tech conglomerate is in talks to invest $15 billion to $20 billion in shared-office-space provider WeWork, according to The Wall Street Journal. The investment would likely come via SoftBank’s Vision Fund which, combined with its Delta Fund, has some $98 billion at its disposal thanks to Middle Eastern backing. Added to the $4.4 billion it put up last year for a 20% stake, the investment would make the fund WeWork’s majority owner.

The investment would also be the Vision Fund’s largest to date, which isn’t the only reason it would be the riskiest as well.

WeWork has done a good job making its core business—taking on long-term office leases, renovating the spaces and then subletting them for the short term—seem more exciting than it really is. That its tenants are mostly startups and that it provides perks such as free-flowing cucumber water or craft beer adds a layer of hipness.

But beneath its boast of providing a “physical social network” for millennials, it is a real-estate company with the familiar landlord risk: Tenants or no, it is on the hook to pay for the space.

A big chunk of money from SoftBank will help. WeWork can quickly use any dollar it receives to expand, boosting revenue. That is likely one of its appeals for SoftBank: The Vision Fund aims to invest in the tech sector, but there are few tech companies that can readily use that amount of money.

The question is whether and when its WeWork bet can generate a positive return. The company’s revenue doubled in the first half of this year to $763 million, but its net loss widened more dramatically, to $723 million from a year-earlier $154 million. When a private technology company is valued more for growth than profitability, that’s an incentive to expand rapidly and worry about profit later.

The lack of earnings also makes WeWork hard to value. Its listed London-based peer IWG offers a cautionary example. It is profitable, with twice WeWork’s revenue in the first half, but its market value is only $2.6 billion—compared with the $40 billion for WeWork that SoftBank discussed over the summer.

IWG, then known as Regus, was the WeWork of the dot-com era. But when the bubble burst, its U.S. arm filed for chapter 11 bankruptcy protection. It is worth roughly the same now as it was 18 years ago.

The Vision Fund may be a patient capital provider. But even it will hope its WeWork gamble works out faster than that.

Write to Jacky Wong at [email protected]