WeWork Failed

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This week we’re taking a look at WeWork because they are expected to file for Chapter 11 bankruptcy this week.

But we’re not going to detail why WeWork is failing, that’s been documented everywhere else. (hint: WeWork was loaded up with a bunch of long-term leases that it couldn’t possibly hope to service … after its founder Adam Neumann exited after making more than $2 billion from the business)

Instead we’re going to look at the coworking space business model: what works, what doesn’t, and what KPI’s need to be used when building a successful coworking company.

Finally we’ll explain why WeWork was doomed even if it solved its lease servicing problem.

?Co-working business model & history

The world’s first coworking space was founded by hackers in Berlin in 1995 , and was called ... Hackerspace. It was created to share both knowledge and space in order to collaborate on coding projects.

WeWork was founded in 2008 – by this time there were around 160 coworking spaces worldwide, and by 2010 the first International Coworking Day was celebrated on 9 August.

By 2022 Regus was the world’s largest coworking provider, by floorspace and users – but Regus was not originally a coworking space provider. It was established in 1989 to provide flexible office space to businesses. Flexible offices give the ability to rent an office for a shorter period of time than a traditional lease, with upsell possibilities such as meeting room hire, catering, reception services, and more.

Flexible offices and coworking spaces are a natural fit – they’re located in the same type of locations, and have a crossover audience. A small solopreneur might start with a coworking subscription, then upgrade to a small flexible office, and again to a larger flexible office as they hire staff. It may take years before that type of business take the plunge and signup for a fixed term standalone office lease.

Eventually larger companies ran the numbers and some determined it was better to have a smaller flexible office footprint because their staff didn’t all need to be in the office every day. Some went further and simply paid for coworking space subscriptions for their staff.

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Coworking operating model

Coworking has a relatively simple operating model:

• Fixed Lease Costs
• Fixed Coworking subscriptions of varying durations (from 1 day to a year or more)
• Variable upsell products/services (IT, Virtual Services, Meeting Rooms)

Therefore these are the levers that can be pulled to maximise profit:

1. Minimise fixed lease costs – how good are your negotiating skills?
2. Sell more subscriptions – crank up your marketing machine, and have robust pricing (because it’s a competitive space these days)
3. Upsell as much as you can – this can seem like a minor lever, but when you’re dealing with a captive audience you’ve got a lot of opportunity. For example – if a client has an important meeting they’re more likely to book a meeting room in the coworking space. If it’s easy for them to book lunch and coffees, they’ll do it!

Coworking KPI’s

Coworking space operational KPI’s are going to focus on the 3 revenue streams, being a mixture of coworking, flexible offices, meeting rooms, virtual reception services, and IT (internet, printing etc).

Flexible office space:

• Revenue per m2 – efficiency measure for use of floor space. Similar to occupancy rates used in hotels.
• Future age profile of contract revenue $ – average length of flexible office contract isn’t going to cut it here. You need to know when those locked in contract terms expire.
• Renewal rates – to forecast future revenue.

Coworking subscriptions:

• Subscription usage – efficiency measure for use of floor space. Similar to occupancy rates used in hotels.
• Future age profile of contract revenue $ – same as for flexible office space, you need to know when those subscription contract terms expire.
• Renewal rates – to forecast future revenue.

Services:

• Meeting room - occupancy and avg $/m2
• Virtual Services – average $ per customer
• IT – average $ per customer and total $ invoiced vs consumed (for prepaid packages)

There will always be variations and additions to those KPI’s due to variations in physical office (eg if it’s completely coworking or flexible office) and service offerings.

But what else do you notice?

KPI’s for Flexible Offices and Coworking spaces are almost the same.

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Regus is the world’s largest coworking provider

This is why Regus if the world’s largest coworking provider: it built a worldwide network of flexible office spaces that could be fairly simply adapted to coworking.

The Regus brand was a bit old-fashioned though, no self-respecting hacker would sign up for a wood-panelled flexible office with stuffed leather armchairs in the foyer. So they branched out, and their holding company IWG now contains these brands (descriptions are from IWG, not me):

• Regus – professional workspaces designed for productivity - small private offices & coworking spaces.
• Signature – luxurious workspaces in prestigious locations - corporate mix of private office and coworking space.
• Spaces – inspiring workspaces with a creative and entrepreneurial feel - coworking facilities.
• HQ – hassle-free workspaces where real work gets done – offices, meeting rooms, lounges and coworking.
• Basepoint – building thriving business communities – multifunctional workspaces.
• stop@work – telecommuting made easy – drop in service accessible by the hour, day or longer.
• TOO The Office Operators – flexible office space, reception services and conference products.
• The Clubhouse – business club – offices, lunge and meeting space.
• Bizdojo – coworking and collaboration network, active and collaborative culture of events.
• Openoffice – office space, virtual offices and meeting rooms – productive, self-service office environment.
• No 18 – curated business club environments – first class service and member benefits.
• Central Working – flexible, scalable spaces – access to training, networking events and a community.
• Copernico – Focus on people and creativity – not just physical space, but space for the mind.

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WeWork’s failure

WeWork’s failure was triggered by its overextension into extremely long-term leases that it couldn’t sustain when occupancy rates dropped. There are enough articles already written about the specifics of those deals that we don’t need to go into the details.

But if WeWork hadn’t failed, it was arguably already beaten by IWG.

Coworking / Flexible office spaces are pretty much the same worldwide – it’s a question of attracting enough people to purchase from your space and service offerings.

WeWork had a single offering of space and service, and tried (and failed) to make its margin on its real estate negotiations.

IWG goes to market with a really broad range of space & service offerings.

Which one had the better chance of success?

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?? Hi, I'm the founder of?Ascern Advisers . We do Strategic & CFO advisory for businesses with Growth Potential. DM me or email me at?[email protected] ?if you want to chat.