Read the front page of influential technology news aggregator this morning and you’d think that things are hot in startup land. , a financial technology startup focused on the African market, from Chinese and Japanese investors. There’s a . You can find as well.

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But if you started the day with a newspaper, you might have on startups looking to raise extra rounds and conserve cash, and the latest from the WeWork implosion as the coworking startup .

Both sets of news are correct, but they tell slightly different stories. We might summarize both story collections by saying that while individual actions in the startup market paint a bullish picture, sentiment in startupland isn’t as strong as it was last year; there’s more fear in the market.

Of course, we’ve been here before. There was the , and tech stocks fell off a cliff so hard in late 2018 that everyone with a slide deck and venture dreams got nervous. And you can find “startup winter” worries in , , , and, as we reported recently, 2019.

We raise all of this as a reminder that while some shrugging off macro (the global economic slowdown) and micro concerns ( implosion), there is reason to be worried. Investment patterns can shift quickly in private markets. But while all of that is true, there’s still plenty of optimism and dry powder in the market. Shake a stick, and you find a new venture fund (some recent news here, here), while private equity has .

It seems fair to say that while Nasdaq remains near record highs, there’s little chance that the constitutionally-optimistic — founders and their private backers — slow down, there’s enough concern to warrant caution from the sidelines.

Before It Closes

Some companies are taking advantage of today’s warm waters even as concerns rise and the holiday season approaches. Most recently, payment software company filed for an IPO on Friday. While the Bill.com IPO is a positive sign for startups in general, don’t be surprised if it isn’t quickly joined by other companies looking to debut; it would be surprising to see any more startups file to go public after this week, as most companies try to avoid a public market debut around the holidays.

In the meantime, startups may raise extra cash to raise their walls a bit. After all, why shouldn’t they? There’s so much money in the market, why not put it to good use if a company isn’t quite ready to go public.

But there is some real hope that the good times will last a bit longer. After all, there are still a bunch of unicorns that still need to go public (looking at you, and ). Postmates’ CEO said just last month that the company was waiting for the right market conditions to go public, as the markets haven’t been too friendly to unicorns like Uber and Lyft so far this year.

Heading into the end of 2019, there’s scant reason to expect a major correction in the short-term. So, we stay in the middle of caution and hope. How long we can stand on this particular edge, however, isn’t clear.

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Yesterday filed to go public, releasing an document and forcing every business publication in the world to scramble to figure out how its books work. Good luck.

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Now that the initial wave of posts are out (here my first, second, a third by Jason, and a with , in case you want more on the matter), I wanted to ask two questions of the company’s current situation. Here they are:

• Are WeWork’s gross margins high, or low, for its business category?
• What do public competitors say regarding WeWork’s implied value at IPO, given what we learned about its gross margins?

The latter question is something that we’ve written about together in the past, so we don’t have to explain it much. We’ll get to it shortly.

The first question might seem a bit odd, so let me explain what I’m aiming for. WeWork as a business likes to emphasize the parts of its business that aren’t the business parts. WeWork’s S-1 is peppered with stuff like “our mission is to elevate the world’s consciousness,” and “philosophically, we believe in bringing comfort and happiness to the workplace.”

Nice sentiments, certainly, but not the sort of thing that you can tot up in an accounting book. Or can you? WeWork also says in its S-1 that it is “committed to providing our members around the world with a better day at work for less.” That’s notable.

On the same theme, the company detailed on page 3 of its IPO filing how much cheaper it is to rent space at once of its facilities compared to building out office space yourself. I agree! But my curiosity then asked if WeWork is charging enough for space. The company certainly offers attractive offices. Does it price the square footage high enough to generate enough gross profit to pay for its business?

Not yet, certainly, but let’s explore the question through the lens of a competitor.

Gross Margins

WeWork has a public competitor, , formerly known as Regus. Happily, as IWG is a public shop we have access to its financial performance.

In its most recent half-year, IWG revenue of £1.302 billion and gross profit of £196.3 million. That works out to a gross margin of just over 15 percent. The company also generated operating profit (£50.6 million) in the period and strong net results thanks to a divestiture.

The 15 percent result is useful. Yesterday, during our second look at the WeWork filing, we found that using a line item similar to cost of revenue, we were able to gist out that WeWork’s gross margins a little under 20 percent:

Now that we have a way to calculate gross profit from the company’s buildings, what do the results show us? Observe the following pairings of WeWork revenue, and same-period Location Operating Expenses:

• WeWork H1 2018 results: Revenue of $763.8 million, Location Operating Expenses of $636.0 million (83.3 percent of revenue consumed by location operating costs)
• WeWork H1 2019 results: Revenue of $1.54 billion, Location Operating Expenses of $1.23 billion (80.3 percent of revenue consumed by location operating costs)

As you can quickly sum, WeWork’s kinda gross margins work out to 16.7 percent and 19.7 percent for the two half-year periods that started 2018 and 2019. Bear in mind that these are directional numbers, not absolutes. What matters is that WeWork’s nigh-gross margins are close-ish to what IWG itself reports.

We know that our WeWork gross margin estimate is generous. Therefore, WeWork isn’t much more profitable on a gross margin basis than IWG. And since IWG is net profitable, I’d hazard that it will be difficult for WeWork to argue that its revenue is worth more than that of its rival due to fundamentals.

This tells us that when WeWork prices its IPO, it will have to lean on revenue growth, and not revenue quality, as its key valuation lever; the firm won’t be able to say yes we are growing more quickly than IWG, and we generate lots more margin per dollar of revenue.

And that makes the IWG-WeWork comp all the more pertinent. Now let’s pursue our second question.

Multiple This!

IWG reported £1.3 billion in H1 2019 revenue. WeWork reported $1.54 billion in the same time period. Convert IWG’s pounds to American dollars and you wind up with very similar sums. That’s useful for us.

Yahoo Finance IWG’s market cap at $3.67 billion, giving the company about a 2.3x revenue multiple on its H1 2019 top line. Yahoo Finance itself notes that the company’s trailing price/sales multiple is a conservative 1.37x.

But let’s use our somewhat-neat H1 2019 IWG revenue multiple result as it uses the most recent financial grounding for each company. WeWork, at the same 2.3x multiple, is worth a hair over $3.5 billion. That’s about 7.4 percent of its .

Now, WeWork will not go public at that valuation. The firm’s growth rates of over 100 percent will afford it a higher price. However, IWG has profits to report while WeWork is incredibly unprofitable. How far WeWork will be able to extend its revenue multiple thanks to its growth (with scant help from its gross margins) is the big question in front of it.

We’ll know soon enough!

Illustration: .

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It’s a growth over profit market. So it’s no surprise that some companies going public are doing so on the back of revenue expansion instead of positive net income. However, the percentage of companies that are going public today toting nothing but red ink in their satchel is setting new record levels.

According to a finance professor , 83 percent of U.S.-listed IPOs that took place during the first three quarters of this year “lost money in the 12 months leading up to their debut.” The Journal goes on to note that the previous record for the statistic was “when 81% of stock-market debutantes were unprofitable.”

If you were looking another possible market top signal, there you are.

The same professor’s data does contain some good news—14 percent of tech offerings in 2000 were profitable; it’s now 19 percent—but both metrics point to an IPO climate that is more than welcoming to companies of all sorts.

No Profits? No Problem

A number of recent IPOs have featured both unprofitable companies and strong debuts. Indeed, some companies that were profit-free managed to raise their ranges and still enjoy huge first day gains. For example, Eventbrite raised its IPO price range from $19 to $21 per share to a higher $21 to $23 per share price band. Eventbrite then priced at the top of its new range and , shooting 60 percent higher.

The company didn’t report profit in any quarter it detailed in .

, another third quarter IPO, is a similar story. The company initially said it would go public at $9 to $11 per share. The company priced above that tier, selling its shares for $12 apiece. SurveyMonkey also raised the size of its offering, selling an additional 1.5 million shares through its public debut. Its shares shot 42 percent higher in its first day of trading.

SurveyMonkey reported just a single quarter of profit . Totting up its net income for the six-quarter period, the firm lost over $50 million.

The IPO cycle continues this week (more here), as it did last week (here), and the week before (here). And who can blame the companies that are getting out while the getting is good?

The last time that public investors welcomed this many unprofitable companies things ended poorly. That may happen this time, or not. No one knows. But what is plain is that standards are down and losses are up.