WeWork and the Great Unicorn Delusion

The office-space company WeWork announced that it was postponing its initial public offering this week, a reaction to a sharp decline in its reported valuation from $47 billion a few weeks ago to less than $20 billion today.

In many ways, the company’s four-week tailspin has been a one-of-a-kind spectacle. Documents filed in anticipation of its public offering revealed a pattern of behavior from its founder and chief executive, Adam Neumann, that fits somewhere on the spectrum between highly eccentric and vaguely Caligulan. In one lurid example, Neumann insisted that WeWork change its name to the We Company, a title he had already trademarked, thus allowing him to charge his own company nearly $6 million for the shotgun rechristening.

But in at least one way, WeWork (as I will insist on calling it) is utterly familiar, even emblematic of this new age of unicorns: The company is bleeding unseemly amounts of money. WeWork is on pace to lose well in excess of $1 billion this year. Like so many buzzy start-ups in the consumer-tech division, the firm is popular, growing quickly, and deeply in the red.

Read: How WeWork has perfectly captured the Millennial id

If you wake up on a Casper mattress, hail a Lyft to get to your desk at WeWork, use DoorDash to order lunch to the office, hail another Lyft home, and have Uber Eats bring you dinner, you have spent your entire day interacting with companies that will collectively lose nearly $13 billion this year. Most have never announced, and may never achieve, a profit.

There are several reasons companies that have become synonymous with consumer tech and the new urban Millennial lifestyle might appear zealously averse to turning a profit. Some are temporarily keeping prices down to grow their price-sensitive customer base with the promise that they’ll easily raise prices once they’re big enough. Or they’re earning on every ride and rice-bowl delivery, but they’re losing on customer acquisition. Or they can’t raise prices, because they know that if they do, some other venture-capital darling in their market segment will undercut them—or, just as dispiritingly, the Amazon CEO Jeff Bezos, the archangel of superfluous margins, will swoop down and destroy them.

But whatever the rationale behind such colossal losses, it’s now clear that the tale private investors heard, and wanted to believe, when they poured tens of billions of dollars into these firms, is in conflict with the less exuberant reality of these companies’ precarity, spelled out in each federal filing.

For WeWork and Uber, their valuations soared thanks to private investors like the Japanese firm Softbank buying into extraordinary pitches—reinvent urban office space! reinvent urban transportation! Their initial valuations were predicated on a vision of total planetary conquest, which would require colossal capital infusions to buy real estate, or to pay drivers, subsidize riders, and lobby governments.

Derek Thompson: The age of tech is over

But both unicorns have seized up in the harsh light of SEC-compliant scrutiny. What investors and founders may characterize at conferences as an aggressive campaign of global expansion reads as something very different on a simple profit-and-loss statement: ridiculously huge losses. Since going public, Uber’s valuation has fallen nearly 50 percent. The company is on pace to lose more than $8 billion this year, due to onetime payouts to Uber employees and mounting quarterly losses. And that was before California codified a court ruling that could force the company to reclassify its workforce as full-time employees, something with the potential to transform its domestic business.

As for WeWork, the firm’s SEC filing envisioned an “addressable market opportunity” of $1.6 trillion, with nearly 300 million members. But the same documents showed massive annual deficits, no clear path to profitability, and a history of founder behavior that managed to out–Silicon Valley Silicon Valley.

Without similar documents on other consumer-tech companies, it’s hard to gauge the health of their businesses. What we can safely say is that WeWork’s and Uber’s reports confirm that too many start-ups are caught between the maybe-workable unit economics of their business—that is, the money Uber and WeWork take when you sit in their cars and chairs—and the maybe-not-so-workable extravagance of their visions, which practically require that capital infusions stay as infinitely and reliably free-flowing as a municipal water supply.

So why were investors like Softbank throwing all of this money into “tech” companies in retail, real estate, and infrastructure, if none of them has a clear path to profitability? Maybe Softbank assumed that the sheer magic of long-term thinking and limitless spending was enough to nurture the next generation of Amazons.

Read: Why Silicon Valley loved Uber more than everyone else

But a deeper reason is that the media-tech frontier has closed, and many investors are looking for the next mountain to scale. In the past two years, the so-called FAANGs— Facebook, Apple, Amazon, Netflix, and Google—have seen their price-earnings ratios collapse by more than 60 percent; big tech companies are now trading near their lowest multiples in history. Apple and Samsung may have reached the smartphone plateau, as more customers are holding onto old iPhones for longer periods of time. Software ate media, and now investors are eager for tech to chew up the city—to build a new layer of internet-enabled services through which the world’s rapidly urbanizing population will sleep, eat, shop, ride, work, and live.

It’s a nice vision. And for all the snark directed at companies like WeWork, the truth is that they have built extraordinary businesses with billions of dollars in annual revenue and hundreds of thousands, even tens of millions, of satisfied global customers. But when these companies come to market to sell trillion-dollar dreams with billion-dollar loss statements, it is right and good to laugh. The solution here is not exotic: Lower valuations, tighter margins, and expansion plans whose costs don’t resemble a land war in Asia. Not a venture-capital-backed hallucination. A business.

Too many consumer-tech companies nearing their public offerings are selling magic shows at a science fair. The unicorns aren’t doomed, even if their old valuations are. But they have to change their stories, and their businesses. Magic made them. Only math will save them.