The day of reckoning for the “flexible office space as a startup” is coming, and it’s coming up fast. WeWork’s IPO filing has fired the starting gun on the race to become the game-changer both in the future of property and real estate but also the future of how we live and work. As Churchill once said, “we shape our buildings and afterwards our buildings shape us.”
Until recently, WeWork was the ruler by which other flexible-space startups were measured, but questions are now being asked if it deserves its valuation. The profitable IWG plc, formerly Regus, has been a business providing serviced offices, virtual offices, meeting rooms and the rest, for years, and yet WeWork is valued by 10 times more.
That’s not to mention how it exposes landlords to $40 billion in rent commitments, something which a few of them are starting to feel rather nervous about.
Some analysts even say WeWork’s IPO is a “masterpiece of obfuscation.”
Ben Thompson of Stratechery recently delved into the mechanics of this subject and was more even-handed than, say, tech observer Professor Scott Galloway, who simply called the IPO filing “WeWTF” and was actually optimistic about the opportunity that WeWork appears to be offering in the shape of an “AWS for company offices.”
If WeWork can transform real estate into a variable cost any kind of company, then new companies can grow faster; already growing companies reduce their costs of doing extensive build-outs and just pay for more space as they need it; while established companies no longer need to internalize real estate expertise and can just expand to new territories with far less risk.
So far, so dandy. But the weakness of WeWork is how much capital it’s taken to get to the scale it has: $12 billion capital to achieve $3 billion in revenue, while reportedly losing $219,000 every hour of every single day. When Google raised its first $1 billion it already had many billions in revenue.
But the mistake Stratechery made was to assume WeWork has no competition.
Knotel, which has this week raised $400 million, giving it unicorn status, has done a few things differently. It’s now raised a total of $560 million, and is now valued at more than $1 billion.
It’s reversed the WeWork “co-working” model and instead of “WeWork” branding everywhere, simply leases buildings, takes a small office for its staff and then kits out the building with modular furniture a company can just move straight into and call their own. Companies can flex up or down in size as they please, all with their name on the front of the building, not Knotel.
Instead of expanding everywhere, as WeWork seems intent on doing, it’s going after only the world’s 30 largest cities, and going in as deep as possible into each one.
Its model is simpler than WeWork’s, and there’s no free beer: flexible workspaces; cheaper capital expenditures; operational flexibility.
There is also a real tech play here. Its “Baya” product is a blockchain platform used internally to facilitate data-driven acquisition decisions and reduce company costs, while “Geometry” is a subscription service to make furnishing your office far easier, faster and cost-flexible. But, interestingly, CEO / founder Amol Sarva says tech is only used to enhance the core real estate offering. If it doesn’t do that, they don’t add it to the business.
The company now has more than 4 million square feet across more than 200 locations in places like New York, San Francisco, London, Los Angeles, Washington, D.C., Paris, Berlin and others cities. Its London footprint now stands at 263,000 square feet across 63 locations and is aiming to overtake WeWork in London this year, having achieved this in New York earlier in the year, it says.
Furthermore, WeWork has not revealed the profit margins for its enterprise memberships, which offer greater customization and are sold to organizations with more than 500 employees, but these typically account for a large proportion of its revenue and are its fastest-growing type of membership.
But this enterprise membership market is precisely the target market for Knotel.
At the same time, Knotel does not provide shared spaces for freelancers and company satellite locations as WeWork does, but focuses on providing private and fully furnished workspaces to large enterprises.
Sarva asserts his company can overtake WeWork in 18 to 24 months: “It’ll be like eBay and Amazon, Myspace and Facebook,” he says.
Is he right? Will it transpire that WeWork was actually the MySpace of flexible office space? After all, Myspace “looked” like it was a tech play, but when we all eventually looked under the hood, it was closer to a GeoCities — a play to simply publish a personal page. It didn’t change the face of technology, in the way, say, Facebook did.
Despite all of WeWork’s protestations that it deserves a tech company valuation, is it in fact Knotel that is employing the technology that actually matters to the business, and growing on far less capital?
It may well be that WeWork turns out to be not a Unicorn but an Icarus.
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