Is the Shared Office Space Industry Profitable?
A popular analogy for all the money, hype and optimism that has come amidst the Silicon Valley startup boom is the California gold rush of the 1800s. As any student of history knows, one of the biggest legacies of the gold rush was the entrepreneurial ventures that sprouted up to serve the needs of gold rushers. It’s where the phrase “selling pickaxes during the Gold Rush” came from.
Today’s startup boom is no different. When it comes to considering the biggest pickaxe-like idea serving the needs of entrepreneurs, and the growing class of freelancers and gig workers, the answer is clear: co-working. While co-working may have started as a rather organic phenomenon—people without offices need to work, but they don’t want to do it from home—these days it is big business. The co-working behemoth WeWork is now worth $21 billion after its most recent round of fundraising, where it raised an additional $760 million in new capital, giving it the fifth highest valuation among private companies according to the Wall Street Journal.
As WeWork is really the pinnacle of what co-working has to offer, it’s useful to take a close look at its business model and ask the question: How can a company that merely offers shared office space ever be worth that astronomical sum of money?
The most basic question of course is whether co-working spaces generally make money. The answer is, frustratingly, yes and no. According to responses to the Global Co-working Survey, 60% of co-working spaces aren’t profitable. While it’s true that not all co-working spaces are created equal, it’s also true that the basic model of all these spaces isn’t that different: offer space (and a few extras like coffee and events) in exchange for money. While that statistic doesn’t necessarily spell doom for the entire industry, it does raise questions about how risky an endeavor it is.
Startup founder and tech influencer Pieter Levels recently wrote a post outlining why co-working as a business model is based on some shaky economic ground. He pointed out that there are two main stumbling blocks for co-working spaces when it comes to long term viability: “In terms of economics, coworking spaces have a low barrier of entry. That means it’s relatively easy to rent a space, put some furniture in it, call it a coworking space and get people in the door. That means it’s relatively easy for people to compete with you. To compare, an industry with a high barrier of entry would be chemical engineering. You need a chemical plant (expensive), top talent staff (hard to get and expensive) etc. Coworking spaces are the opposite. Coworking spaces are also low in differentiation. That means most look, feel and are the same. It’s hard to distinguish yourself, or at least nobody is really differentiating right now at all. Low differentiation means people can easily copy what you’re doing.”
Which brings us back to WeWork. While the company undoubtedly has more scale and fancier offerings than most other co-working spaces, it is still subject to the same forces that Levels explained. For now, WeWork is getting around those barriers with large investments. Those investors are allowing it to grow, open new locations, and create a powerful brand that is ostensibly worth $21 billion. This brand-building exercise is self-perpetuating cycle: the more money they have from investors, the more they can amplify their brand, the more money they make. But as Levels goes on to point out in his post, that model may not look so attractive to those investors in a few years: “It’s not a business that’s scalable enough for venture capital. It’s a business with a low barrier of entry, low margins, low differentiation and high competition. Unless VC-funded coworking spaces can figure out how to change that … they will disappear as fast as they came.”
The truth is that there are many people who believe it’s unlikely that a company offering office space can ever be worth a sum of money as big as WeWork’s valuation. But only time will tell if WeWork is able to adapt its offering and scale up its earnings to please investors.