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24 June, 2022

What can other co-working companies learn from WeWork’s mistakes?

WeWork's mistakes are now well documented, but what can other co-working companies learn from its overambition?

By Cara Lyttle

The concept of co-working was launched in 2005, and ever since the first space was opened in San Francisco by a software engineer who wanted to combine freelancing with a community atmosphere, it has gained in popularity.

Co-working offered something new and became especially appealing to start-ups and contract workers. It offered flexibility and a more creative working environment, alongside less financial pressure when compared with signing a property lease during a company’s infancy stage. Some of the world’s most successful start-ups were created in co-working set-ups, including Uber, Instagram and Spotify, further solidifying the business model’s appeal. The following years welcomed countless new co-working companies across the globe that aimed to dominate the market. Wework was no exception.

The launch of WeWork

WeWork launched in 2010 with its first location in New York City’s SoHo district. The company’s co-founders, Adam Neumann and Miguel McKelvey, recognised a gap in the market combining unoccupied real estate from the 2008 financial crisis alongside a growing number of freelance workers in the city. The company continued to expand across the US and by 2015 had doubled its number of office spaces, with more than 50 locations in the US, Europe and Israel.

Ambitious plans to have operations in every continent by 2017 (excluding Antarctica) were backed by powerhouse investors including JPMorgan Chase and Goldman Sachs despite the company having not made a profit. WeWork’s ambition allowed it to gain a committed following and enabled it to grow exponentially from continent to continent with few questioning its business model.

WeWork deviates from the norm

The more success WeWork achieved, the more it deviated from its initial offering of shared office space. The company was no longer content to merely provide generic nine-to-five working facilities and began investing heavily to create an all-encompassing lifestyle brand. Key WeWork locations started offering Google-inspired free breakfasts, mediation classes, yoga and pilates, while Neumann announced plans for WeSail, a floating WeWork, as well as a potential WeBank venture.

On the company’s ambitions, Neumann stated: “WeWork is working to create a world where people make a life and not Just a living. Globalisation for a start-up is exciting; you have to learn so fast about the different cultures of the world. If more people follow their superpowers – and everyone has one – then we are going to be better as a society.”

The company’s notoriety grew as quickly as Neumann’s mismanagement of funds and by 2019 major cracks were starting to show.

WeWork filed paperwork for its initial public offering (IPO) in mid-August 2019 and shortly after started to face serious questions about the state of its finances. Previously, the company had raised huge funding (including $3bn from its Japanese parent company SoftBank) yet had managed to glaze over its growing losses. It came to light that in the first half of 2019 WeWork had an operating loss of $1.37bn and the company was also facing concerns about its leadership. Neumann’s unusual business ethos and exorbitant spending had made staff and potential shareholders nervous. A decision was made to pull the plug on the upcoming IPO and Neumann stepped down as CEO in September 2019 to appease growing concerns about the company’s long-term viability.

Today, WeWork is still operating under new leadership and continues to make investments. Nonetheless, Neumann’s legacy has tainted the company’s reputation, possibly irreversibly so.

Do co-working spaces still hold potential?

In spite of WeWork's problems, co-working is on the rise. As internet connectivity has become readily available and more and more companies are willing to adapt to a flexible working model, the door has widened for co-working providers.

A report from the Association of Independent Professionals and the Self-Employed reviewing Freelancer Confidence Index data showed that, following the 2008 financial recession, the number of freelance workers has been increasing, providing an ever-growing customer base for co-working companies. In the UK alone, freelancer numbers increased from 1.39 million to 1.56 million between 2008 and 2011, a rise of 12%. Numbers peaked at the end of 2019, reaching a record of five million people before the impact of Covid was felt. Meanwhile, in the US, the world’s largest co-working market, there were 17.3 million freelancers in 2017, with numbers expected to increase year on year, reaching 90.1 million by 2028. As a result of the upward freelance trend, the US has experienced a boom in co-working companies offering shared office facilities.

Flexible office space in the US has been growing at an average annual rate of 23% since 2010. Globally, it represents an 18.3% market share of co-working facilities, with more than 3,700 shared office locations available across the country. As expected, key economic hubs such as New York, Chicago, Washington, DC and the larger cities in California attract significant investment from co-working companies due to the unlimited supply of contract workers and prime real estate located in commuter areas.

The US is also home to a host of co-working companies solely operating within the domestic market. One of these companies is Make Offices, which has ten locations across three states but has yet to make an international investment. There are also several well-established co-working companies that have the bulk of their operations in the US but have made minor international investments. Examples here are SerendipityLabs, which has 28 locations in the US and one in the UK, and GreenDesk, which has eight US locations and one in Israel. Unlike WeWork, these companies have achieved success through building a solid reputation on their home turf and understanding local demands before investing heavily in other markets.

A little market knowledge

Market knowledge, or a lack of it, was one of the factors behind WeWork’s downfall. The company was so keen to expand into new territories as quickly as possible that it failed to consider if the demand was there. Market expectations vary from region to region and companies tend to have to adapt business models to a certain degree to meet those needs.

The Global Coworking Survey showed that a strong community atmosphere was more important to co-workers in North America than those in Europe (81% compared with 55%). However, Europeans place a high importance on good office infrastructure (78% in Europe, 50% in North America) and privacy at work (60% and 42%). Likewise, entry pricing structures differ greatly and will fluctuate depending on a rise or fall in demand for co-working solutions. For example, of the top ten most expensive city locations for co-working worldwide, Swiss cities account for seven, with an average price of $381 per month. Californian cities make up the remaining three places, with an average monthly price of $383. Aside from being willing to pay a similar monthly cost, a company can’t assume customer expectations in these two regions will be indistinguishable.

Co-working has also gained popularity further afield. In Asia a big player is the Hive, which was founded in 2012 and now has 20 locations across Australia, Hong Kong, Japan, Singapore, Taiwan, Thailand and Vietnam. Similarly, JustCo started out in Singapore in 2011 and now operates from nine cities in the Asia-Pacific region. These companies, although expanding internationally, are doing so at a more moderate pace and largely staying within a market they understand the needs of.

The Middle East has also witnessed an increased demand for co-working, which has caused a surge in average prices. A 2022 report from Coworking Insights shows that for the first time several cities in Middle East have ranked highly in the Top 250 Cities Price Index. Tel Aviv, Doha, Jeddah and Riyadh are now among the world’s top 30 most expensive locations for co-working spaces, illustrating the desirability for shared working in what are often perceived to be more conservative regions.

This upward trend for shared working is set to continue, and there is endless potential for both well-established and new co-working companies. According to the Global Coworking Growth Study 2020, worldwide the number of co-working spaces is expected to grow by 116% by 2024 and reach an estimated 41,975 spaces. More than five million people will be working from these locations by 2024, each with needs to meet. There is also untapped potential for countries such as India that have large workforce populations that are adapting to co-working but at a slower pace than other countries.

To be successful in the co-working industry and avoid the mistakes made by WeWork, companies must be willing to adjust their business model. It is not enough to assume a successful business in one region will work in another or that customer expectations will remain the same over time. Overpromising and accelerated growth with little experience will not be sustainable.

Co-working is more than merely offering serviced office facilities. It must provide a positive atmosphere and a sense of community alongside a reliable internet connection. People choose to pay for a co-working environment to have an aspect of sociability. It is important companies get the balance right between an all-encompassing push towards a lifestyle brand and offering the right amount of comradeship.

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