WeWork's $47 billion valuation was always a fiction created by SoftBank

Masayoshi Son

Alessandro Di Ciommo | NurPhoto | Getty Images

When business school professors are writing their WeWork case studies years from now, one of the biggest practical lessons may be this: WeWork should have taken far less money from SoftBank's Masayoshi Son.

The plight of WeWork over the past several months has cast SoftBank in the role of mafia boss. SoftBank invested a lot of money — $10.65 billion — in a company that it expected to go public at a valuation higher than $47 billion. As anyone who's watched a mafia movie knows, if you take money from the godfather, you better deliver.

The irony is Neumann didn't really fail to deliver for Son. Sure, Neumann's quirks, and possible illegal activities, have cast him as an irresponsible CEO. But it's not like he mismanaged WeWork between January, when he accepted SoftBank's $47 billion valuation, and September, when WeWork readied an IPO.

Rather, Neumann failed to deliver for his employees and other investors by selling too much of WeWork to SoftBank at too unrealistic a price. By selling nearly 30% of the company's equity to SoftBank and its associated funds, Neumann lost control of his company when Son decided WeWork's prospects would be better without him. Son's move against Neumann last month cost him his CEO job and will likely cost him his board seat.

But American capitalism is a little different than the mafia. Instead of disposing of Neumann's body, SoftBank is paying Neumann up to $970 million for his equity, depending on how much he wants to sell, and an additional $185 million as a "consulting fee," which is really just a bonus for taking SoftBank's bailout package over J.P. Morgan's alternative $5 billion debt package.

When Neumann took investments from SoftBank in November 2018 ($3 billion) and January 2019 ($2 billion), WeWork's value skyrocketed from $20 billion to $47 billion. In other words, SoftBank's investment set WeWork's value $27 billion higher than it had been.

That could (should?) have been a warning to investment banks and WeWork's board that other investors may not have agreed the company was worth $47 billion. Instead, J.P. Morgan, Goldman Sachs and Morgan Stanley said they could find investors willing to value WeWork between $60 billion and $100 billion. And WeWork proceeded with an ill-advised IPO that has brought the company weeks away from bankruptcy because of its aggressive expansion and outstanding lease obligations.

Even the $20 billion starting point in 2018 was set by SoftBank, which invested $4.4 billion, in conjunction with its $100 billion Vision Fund, in a 2017 Series G.

You have to go back to 2016 to find a valuation of WeWork not affected by SoftBank — a $690 million round led by one of China's largest hotel companies, Shanghai Jin Jiang International Hotels. That Series F round valued WeWork at $16.9 billion.

If WeWork had topped out at a private valuation of $16.9 billion instead of $47 billion, the company almost certainly would be trading publicly today. Even if public investors had rejected a $17 billion valuation, WeWork probably would be in the same boat as Uber and Slack (other SoftBank investments!) — large technology companies that made it out the gate before stumbling. Neumann might still be CEO, and his company would have the luxury of public proceeds to either continue expanding or finding a quicker path to profitability.

Now, SoftBank is going to control WeWork after purchasing up to $3 billion more in equity and accelerating a $1.5 billion equity commitment. Softbank and its syndicates are also providing $5 billion in debt for WeWork to help push it toward profitability and, it hopes, to go public in the future. And Neumann, the company's visionary, is out.

But it's impossible to put a lot of faith in WeWork's new post-money valuation, which will be about $10 billion to $12 billion, according to sources familiar with the matter. Why? Because it's once again based on a SoftBank-only investment.

Follow @CNBCtech on Twitter for the latest tech industry news.

Read More