The Co-Working Business Model

The sharing economy has been one of the major themes when it comes to start-up investing in the past decade. Investors and entrepreneurs have woken up to the idea that resources can be utilized in a much more optimal manner if they are shared between various people. The mega-success of the co-working business model is a testament to the fact that the idea actually works. Companies like WeWork which have a multi-billion dollar valuation have been created as a result of the co-working business model.

In this article, we will have a closer look at what a co-working business model is. We will try to understand the pros and cons of this model as well.

What is a Co-Working Business Model?

The availability of quality office space at a cheap price has been a pain point for most companies. Also, companies want the flexibility to increase and decrease the amount of office space that they rent out. The co-working business model provides this value proposition to its customers.

Co-working spaces allow the customer to rent out office spaces in a flexible manner which they can then use to facilitate work in a collaborative manner. Co-working spaces are especially useful for companies such as start-ups since they allow these companies to use well-developed office infrastructure even though they want to operate smaller teams.

Co-working spaces also have other infrastructure such as conference rooms which can be shared amongst the various occupants so that they are not a cost burden for any individual company.

Why do Customers Prefer Co-Working Spaces?

Co Working Space

Co-working spaces have largely been preferred by smaller companies until now. Larger companies have started taking an interest in co-working spaces. However, they have not been able to build significant momentum until now. Some of the advantages which make customer prefer co-working spaces are mentioned below:

  1. Co-working spaces support an asset-light business model. There are many companies that want to have an asset-light model. They want to utilize the limited funds at their disposal in a focused manner. This means that if the firm has access to certain funds, then they want to spend them building the right product instead of spending them on obtaining a plush office space.

    In the case of co-working spaces, start-ups have to spend very little money upfront. They operate on a pay-as-you-go basis which gives them a lot of flexibility. There are several businesses that are willing to pay a premium to have access to that kind of flexibility

  2. Co-working spaces tend to bring a lot of different companies together. For start-up companies, this often leads to networking. There are many companies that have been able to obtain sales orders or even investment funding because of the networking opportunities they got from their co-working space.

  3. Co-working spaces can be much more productive than a traditional start-up office setup. This is because co-working spaces have all the tools required to monitor the productivity of the workforce. The supervisors can use these tools to share feedback with their employees which helps further increase productivity.

Risks from an Investors Point of View

Large co-working space companies have been able to obtain significant investor attention. However, the multiples offered to these companies have been significantly lower as compared to other companies. This is because investors are averse to certain specific risks that this model has to offer.

  • Timing Mismatch: The co-working business model is based on taking possession of an entire office, furnishing it, and then renting it out to short-term tenants at a higher price. However, there is a huge problem with this business model. The model is based on taking long-term obligations in the hope that the company will always be able to find short-term tenants. This creates a fundamental mismatch in the nature of cash inflows and cash outflows. This is the reason that many investors view the entire model as being risky.

  • Work from Home Culture: Ever since the coronavirus pandemic broke out, the basic value proposition being offered by co-working business models has taken a massive hit. This is because of the fact that co-working companies generally own the top office spaces in the biggest cities of the world.

    After the pandemic, the world is seeing a rise in work from home as well as hybrid business models. Hence, the demand for office space is decreasing. Also, companies which do want to have an office are relocating far away from the city centers. Since co-working spaces have locked in their leases for a longer period of time, they might end up losing money as a result of these trends.

  • No Technological Advantage: Lastly, there is nothing very technical about the co-working business model. One can view the business model as being a “retailer” of office spaces. Since the model is not technology-intensive, it is highly commoditized. Gaining a competitive edge that allows the company to maintain its premium pricing is quite difficult in such a market.

The bottom line is that there are mixed opinions about the co-working space business model. There are some investors who believe that this business model has a high growth potential whereas there are others that believe that the business model might run into some rough weather in the near future.

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