PHOTO: STEVE REMICH FOR THE WALL STREET JOURNAL
Unless you are totally outside the startup world or have been totally heads-down on your own startup for months, you have probably at least heard of WeWork, the global network of co-working spaces. As a blogger about mentoring startups I’m constantly scanning the news for lessons learned to convey to founders.
The Wall Street Journal article WeWork Surpasses JPMorgan as Biggest Occupier of Manhattan Office Space, subtitled Co-working company rents 5.3 million square feet in Manhattan; flex-space operators snatching up real estate in New York City is in today’s The Property Report section.
The headline caught my attention for three reasons: one, I helped run one of the country’s first incubators decades ago, called HyperVest; two, I’ve started four of my companies in what used to be called “executive office space” – these were small, fully furnished offices that provided services like reception, phones, copying machines, fax machines (!) and were basically turnkey offices. The big advantage, aside from being fully furnished was you could rent offices by the month, rather than having sign a lease for year, and three) I’ve been interested in co-working spaces for some time and even looked in to starting one myself.
But the most important thing about this article are the three major lessons founders can learn from WeWork:
- Find a market where customers are being taken advantage of. Because of the scarcity of office space and the fact that it is controlled by relatively few firms, these landlords could insist on leases as long as 10 years! If you are running a startup you don’t want to be tied down for 10 years. Plus the minimum of amount of space a venture can lease runs about 2,500 to 5,000 square feet – which will be way too much for a two or three person startup, at least for quite some time. WeWork (and other co-working spaces) realized that they could sign these long term leases for large amounts of space and then sub-divide and sublet them at as much as 2X the rent per square foot on a short term basis. As Jeff Bezos said “Your margin is my opportunity,” meaning that if capitalists are extracting excess profits disruptive startups can win by under pricing them, while providing services the incumbents never have provided. So if you are looking for a business to start, start canvassing business people about where they feel taken advantage of. You may discover another big market ripe for disruption, like short term office rentals.
- Expand into adjacent markets:
Co-working companies initially filled their offices primarily with startups that were eager to work alongside other young firms. Tenants welcomed WeWork amenities like comfortable lounges with cucumber water and beer on tap.
More recently, co-working companies have fueled their growth by attracting bigger firms that once expressed little interest in flexible office space. Divisions of Amazon Inc., Verizon Communications Inc.and Liberty Mutual Insurance are now taking space through WeWork and its peers.
The best way to do this is to have customers pull you into these adjacent markets, not for you to try to push into them. My guess is that is how WeWork ended up serving the very the large companies it ignored for years.
3. Understand what your value proposition really is. While WeWork and others tout free coffee, foosball, Wi-Fi and cool office mates, the real value proposition to all businesses, not just startups, is flexibility and paying only for what you use:
Granit Gjonbalaj, WeWork’s chief development officer, said that the company is positioned to accommodate large businesses shrinking their offices during a downturn because these clients will want to avoid long-term leases.
Mr. Vazquez at Verizon agreed that flexibility is important. “The benefit to co-working versus fixed space is that you only pay for the space you use,” he said.
4. Raise more capital when you can. I was taught by the VCs that the best time to raise capital is when you don’t need it. That may sound counter-intuitive, but realize that VCs can smell desperation from across the country. If you wait until you really need capital they will either ignore you or drive such a hard bargain you’ll end up giving up much more equity than you had planned. When you are riding high, like WeWork, investors like Softbank, who missed out on early rounds are eager to get in later. WeWork happens to be a very capital-intensive business between the cost of its long term leases and it’s furnishing hundreds of thousands of square feet of office space. But for all startups things always take longer and cost more, no matter how well you plan. So plan to raise capital when you don’t need it, so you’ll have it when you do.
The authors of The Journal article did a great job of understanding WeWork’s value proposition, not by talking to WeWork, but by talking to their customers. And that’s the final lesson from WeWork. If you want PR coverage provide journalists with reference customers, because their words are worth at least 10X yours when it comes to a news story.