INSUBCONTINENT EXCLUSIVE:
In the wake of WeWork’s embarrassing IPO rout, you might imagine that startups working in similar markets would cool it for a bit
Perhaps they could work on cutting spending, improving their gross margins, and, say, shooting for profitability.Not so, at least in one
Instead of doing those things, China-based Ucommune filed to go public in America this month
The WeWork competitor is mostly a co-working business
It’s also a marketing company
And it has some of the worst economics we’ve seen in a company since WeWork.Why this company is trying to go public isn’t hard to
But at the same time, the chance of it debuting at a price it likes seems slim, given the market’s recent history — as well as
Ucommune’s own.IntroductionsBefore we chat about the business fundamentals of Ucommune, a primer on the company itself.Founded in 2015,
according to Crunchbase data, Ucommune has raised over hundreds of millions
In 2018 alone the company raised a venture round and its Series Candits Series D
Prior investors include Gopher Asset Management, Aikang Group, Tianhong Asset Management, All-Stars Investment and Longxi Real
Estate.TechCrunch reported that its final private round valued Ucommune at $3 billion.All that capital was put to work
According to is F-1 filing, Ucommune operates 197 co-working facilities in 42 cities
The company also claims more than 600,000 members and nearly 73,000 workstations.The WeWork similarities continue: While discussing itself
in its IPO filing, the firm touts an “asset-light model,” which it claims helps property owners “benefit from our professional
capabilities and strong brand recognition” as well as allowing its “business to scale at a cost-efficient manner.”Let’s see.How to
lose moneyAs a primer for all you non-accountants, here’s how you make money as a company: First, generate some revenue
Next, deduct the direct costs that that revenue engendered
What’s left is called “gross profit,” and the relative total of gross profit generated from revenue is called gross margin
From there, subtract your operating costs
If there’s anything left over, that’s operating profit
Now take your operating profit and remove taxes and other costs
What remains is net income.As you can quickly see, the more gross profit a business generates from its revenue, the more money is has left
over to pay for operating expenses
So, revenues that generate lots of gross profit — called high-margin revenue — are better than those that don’t.Ucommune, our IPO
hopeful, is unique in that its revenue doesn’t generate any gross profit at all
Its revenue doesn’t even pay for itself
The company is gross margin negative. Here’s what that looks like:If your cost of revenue is higher than your revenue, your gross profit
And that means that you have no gross margin available to fund operating costs
In turn, that means that your company is super unprofitable.Ucommune is unprofitable, unsurprisingly
(If it feels like we’re overly focused on gross margins, keep in mind that software companies are worth as much as they are in part
because they have very high gross margins.)Things get a bit worse when we look further.YuckDigging in, Ucommune operates two main businesses
The first enterprise is co-working, which generated just less than half of the company’s total revenue during the first three quarters of
Its second largest business is a marketing effort
Ucommune acquired a company called “Shengguang Zhongshuo” in December of 2018, a deal that lets the company drive revenue by selling
“branding services and online targeted marketing services.”Ucommune is therefore a hybrid co-working and services business
Neither piece of the whole is attractive from a margin perspective
For example, the company’s $58.7 million in co-working revenue earned during the first nine months of 2019 was nearly entirely offset by
lease costs ($49.6 million) alone, before the company staffed and otherwise managed the locations in question.The company’s marketing
business is slightly better
Its $56.5 million in revenue from the first three quarters of 2019 was nearly offset by $51.0 million in revenue costs
Ucommune’s services arm, therefore, was more lucrative in terms of generating gross margin for the co-working company than its actual
co-working business.(Bear in mind as we go along that this company wants to go public.)Wrapping our discussion of yuck, let’s talk about
Ucommune had cash and equivalents of $23.4 million and short-term investments worth $11.0 million at the end of Q3 2019
That’s $33.4 million in total that the company can access, presuming that every short-term investment is unwindable into cash inside the
window in which Ucommune would need to access it.A window that is closing, mind
Ucommune’s operations burned through $32.4 million in the first three quarters of 2019
If the company kept consuming cash at its prior pace, we can estimate that it will not have enough cash to make it to the end of Q2 2020
Which is why Ucommune is going public.Growth?The only counterargument to the mess that is Ucommune’s business is that it is growing
The company’s revenue grew from ¥282.2 million in the first three quarters of 2018 to ¥874.6 million over the same time period this year
That’s quick!But instead of demonstrating operating leverage (losing less money as its revenue grew), the company lost more money this
year than the last, making its business appear likely to keep burning acres of cash while it grows
And you have to ask yourself if it is a good business, why are its private investors pushing it onto the public markets instead of giving it
more of their own money?They must have known, landing this close to WeWork, how this was going to look
And that’s not confidence-inspiring.
