WeWork Cos., also known as the We Company, has filed its prospectus for its initial public offering (IPO) and plans to raise $1 billion.

The flashy New York City-based startup providing shared workspaces to entrepreneurs, fledgling companies, and other groups will list its Class A stock under the symbol "WE." The share price and exchange have not been decided yet.

Valued at $47 billion during a financing round in January, WeWork shares at least one characteristic with some of the other highly-anticipated tech decacorns that have gone public this year—a high cash burn rate. The IPO will be a test of investors’ current appetite for pricey, cash-burning startups, especially in the wake of Uber’s lacklustre debut. It will also provide investors with a more detailed picture of the company’s financial situation.

$1.9 billion

WeWork lost $1.9 billion in 2018 on revenue of $1.8 billion.

Losses Increase as WeWork Expands

WeWork first began disclosing limited financial information when it started issuing bonds in 2018. The company lost $1.9 billion on $1.8 billion in revenue last year. That’s nearly double the $933 million in losses on $886 million revenue it posted in 2017, and the losing trend does not look like it will be reversing any time soon according to its prospectus. For the first half of 2019, it reported a net loss of $689.7 million on revenue of $1.54 billion.

To be fair, lots of companies exhibit significant losses while still in the early stages of growth. WeWork’s executives don’t hide the fact that growth, rather than near-term profitability, is the current priority. “We’re looking at building this business out, not just maximizing profitability over the next one to two years,” the company’s vice chair, Michael Gross, said earlier this year. 

Founded with a single Manhattan workspace nine years ago, WeWork has since ballooned into one of the largest corporate landlords in the world on the idea to provide flexible workspaces to individuals and small groups. As of the end of June, the company had 527,000 memberships spread across 528 different locations.

This “space-as-a-service” business model fills a gap in the rental market between long-term leases and overnight-room bookings via a hotel or AirBnB. Entrepreneurs and young startups looking for office space but not wanting to commit to a long-term lease can rent out one of WeWork’s spaces at a reasonable fee. Those spaces are often outfitted with trendy décor, typical office equipment and some even have coffee, beer, and kombucha on tap. 

Extreme Valuation for Unproven Model

Without a doubt, it’s a valuable service. Even skeptics would agree. The problem is whether or not it’s a $47-billion service. It’s true that WeWork fills a particular niche in the rental market, just as car leasing fills the gap between full car ownership and short-term rentals. But it’s not certain that such a business model can actually succeed, according to skeptics.

The company has yet to endure an economic downturn. If the economy goes into recession, WeWork could find itself locked in to long-term leases while the flexibility it provides allows its members to terminate their own leases sooner than they otherwise would if they had a more traditional lease. If WeWork were building a reserve of cash to draw on in difficult times, then it is more likely it could survive during difficult times. But that’s precisely what the company is not doing.

Perhaps recognizing this weakness in its own business model, WeWork’s latest idea has been to start a $2.9 billion dollar fund that will invest in outright ownership of office buildings. It’s not a bad idea, but it’s difficult to see how it’s any different from what a typical property management firm does and there are lots of those around. Boston Properties (BXP), one of the largest property management firms in the U.S. has a market cap of $20 billion, less than half of what WeWork is currently valued at.

Switzerland-based IWG, like WeWork, provides flexible-office space, but unlike WeWork, is a publicly traded company and is valued at around $4.6 billion, about a tenth of what WeWork is valued at. IWG is considered the biggest company in terms of office space with 60 million square feet globally. Meanwhile, WeWork had just 45 million square feet as of March, according to Bloomberg.

Recent events have caused some concern among the company’s investors. CEO Adam Neumann sold some of his ownership shares and took out loans against his equity stake in the company, raising at least $700 million in order to fund some of his other ventures. The decision to cash out ahead of the upcoming IPO raised additional criticism and concerns amid earlier revelations that Neumann had made millions off of WeWork as a partial owner of some of the properties the company leases.

The revelation of that conflict of interest surfaced shortly after SoftBank, the Japanese technology conglomerate and one of WeWork’s biggest investors, opted not to purchase a controlling stake in the business. Back in January, SoftBank invested another $2 billion in the company, bringing its total investment above $10 billion. But the additional $2 billion was far below the $16 billion that had been discussed in earlier negotiations. 

Some of WeWork’s major backers besides Softbank include Goldman Sachs Group Inc. (GS), T. Rowe Price Group Inc. (TROW), Benchmark and Fidelity Investments. Other investors include China Oceanwide, Hony Capital, Greenland Hong Kong Holdings Limited and Legend Holdings, all of which are based out of China.

Looking Ahead

Last month, WeWork was reported to have made plans to raise as much as $4 billion in debt over the coming months ahead of its IPO. Such a move, combined with the unexpected reduced investment from SoftBank earlier in the year, and WeWork’s surprise acceleration of its S-1 filing this month is a sign the company is desperate to secure some much needed cash.