A venture-capital insider dishes on why WeWork's original valuation was way too high

WeWork is reportedly slashing its targeted value in its upcoming IPO by as much as half.

For Manhattan Venture Partners, a merchant bank specializing in pre-IPO companies, the move couldn't have been more apt.

Santosh Rao, the firm's head of research, said in an interview that many of WeWork's practices might fly as a private company, but not on public markets.

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WeWork's lofty valuation for its initial public offering has been slashed to nearly half of the original $48 billion, according to reports by Bloomberg and the Wall Street Journal.

That's a relief for some analysts and investors watching the IPO who say the original target defied reality, especially given some of the criticisms facing the company's complex structure and appearances of self-dealing.

“Given the risk-reward in this whole business model, I think $47 billion was a real stretch,” Santosh Rao, the head of research at Manhattan Venture Partners, told Business Insider in an interview. The firm initiated coverage of WeWork last month with a $28 billion valuation.

“Maybe if WeWork had come out before Lyft and Uber, they would have got a pass. But now, seeing how the appetite for companies without a path to profitability has gone down, I don't think they will get the benefit of the doubt,” Rao said.

Both Uber and Lyft have stumbled out of the gate following their public-market debuts earlier this year. Many investors from later private rounds are now in the red, as the stocks have fallen 24% and 43%, respectively, in the months since.

Other criticisms, like the appearance of self-dealing in the $5.9 million purchase of a trademark from CEO Adam Neumann that was later canceled or a complicated corporate-governance structure, have put more pressure on WeWork to fully justify its lofty valuation targets, Rao said.

Read more: These are the unusual ways WeWork founder Adam Neumann has made millions, and stands to make more, from his $47 billion company about to go public

“When you're a private company, maybe you can get away [with these things] because you have time to explain to investors what the long-term vision is, and people look past the small things in favor of a broader vision of where the company's gong and what the future potential is,” he said.

“But when you're a public company, you have to execute and you have to perform,” he added.

Then there's the recession question.

Many companies are seen as flocking to public markets in order to raise capital before the long-running economic expansion reaches an eventual end, with WeWork proving to be no exception.

“They have to make sure the leases are rock-solid,” Rao said. “Forty percent of the base is enterprise clients, which puts a floor on that, depending on how long the downturn is. Mature markets are doing well, but they will need to venture beyond just the most major of cities.”

WeWork is expected to kick off its roadshow, when executives and bankers will travel around the world to pitch the stock to investors, as soon as next week, Bloomberg reported on Tuesday. The offering could be the second-largest this year, behind Uber.

More on WeWork's IPO:

A former Uber executive hired to clean up ousted founder Travis Kalanick's mess has joined WeWork's board after the company was criticized for having no female directors

WeWork replaced 43 million of CEO Adam Neumann's stock options with special 'profits interests,' and a compensation expert calls it 'unsettling'

WeWork has reportedly been bleeding HR managers in the last year, and some are pointing fingers at CEO Adam Neumann

WeWork gave out 58 stock awards worth at least $1 million each in February, and 94% of them went to men, according to a lawsuit