WeWork IPO Shows It's the Most Magical Unicorn
I have a bit of knowledge of the co-working industry.I’m good friends with the founder of the first and long-dominant tech/creative co-working space in my Australian city, and I served on its advisory board in the past couple years, through what turned out to be a distressed sale of the business to its landlord, after it became insolvent and unsalvageable.There are several fundamental flaws with the concept that make it very hard for this kind of business to work:1) Difficult/unpredictable/uncontrollable customer retentionMost of your customers are individual freelancers and early-stage companies up to about 20 people. If they become successful, they outgrow the space and leave (possibly after a period of tenancy on  negotiated discounted rates because “hey it would really hurt you guys if we left”). If they are unsuccessful, they go out of business and leave, possibly after a couple of months of non-payment (“oh man we’re just waiting for a big payment/financing, we’ll be able to pay next month for sure”), which is hard/impossible to recover once they’ve left. And even where people remain eligible customers, the transient nature of the customer-supplier relationship means it's easy to jump ship if a cooler space opens around the corner.So you’re running this revolving-door business, where retention is only partially within your control, and having to invest heavily on new customer acquisition (often involving free trial periods and other incentives) to keep up with churn.Your most reliable customers in terms of tenancy and payment are remote workers/teams for bigger interstate/international companies, but too many of them and the culture can become too corporate-feeling and less appealing for everyone - them included.2) High setup costs and fixed running costsRent, fit-out, furniture, facilities, utilities, cleaning/maintenance, staff, etc. Most of these costs are largely independent of occupancy levels/revenues.3) Difficulty finding/keeping good staffThe “community management” job in these places is highly specialised and demanding. All day you’re dealing with human problems that are exacerbated by people’s stresses about their business or job, as well as all the minutiae of things like the toilets/kitchens being clean/stocked, meeting room booking windows being adhered to, ensuring that the people in the space are all people who are meant to be there.Emergency calls from people who e.g. left their wallet in the space that day and “just need someone to let me in to grab it” (at 9.30pm) become routine occurrences once you reach a certain scale.Beyond these practicalities, the people in these roles set the mood for the whole space, and can make all the difference between it being a welcoming and happy place or a dull/miserable one.Finding people who can not only do this kind of work all day every day, but do it with an enthusiastic and friendly demeanour, is very difficult, and burnout/turnover is common.In general, the kinds of people who can do this job really well can get a less-stressful/better paid job elsewhere (quite possibly for one of your resident companies).4) Competition/substitutionThe market in many cities has become saturated (partly thanks to WeWork itself). This pushes market rates down, acquisition/retention costs up, expectations up (“the other place has FOUR types of kombucha on tap”), and dilutes the pool of potential residents and staff.And after all, what you’re offering is not essential for freelancers/small companies anyway. They can easily work from home, cafes, borrowed/subleased space with other companies.It seems the only way to make these businesses financially viable is by partnering with something like a startup accelerator/investment company or an R&D body backed by industry and/or academia.But this requires deep links with local community/industry, and is a huge amount of work to establish and manage.For a player like WeWork, this kind of work is hard to do as it can’t be done with a cookie-cutter approach, and local collaborators for these kinds of partnerships often prefer to work with locally-owned businesses rather than big outsiders.So, we’ll wait and see. Maybe WeWork has something up their sleeve that will allow them to build a model that works.I’ll be interested to watch it play out.