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The Death of a Co-working Startup Highlights User Experience vs. Unit Economics

A few days before Christmas, I walk into the now defunct Spacious location in Brooklyn. It was 10 am. John, one of two hosts at the co-working space, greeted me when I entered. John assumes I’ve been there before and understand the check in process on the tablet. I could have probably figured it out, but I want to get the lay of the land, so I ask. John quickly gets up from behind his station to walk me through how to check in and purchase my day pass. He explains that next week the location will be running on limited holiday hours and the following week, they’ll be shutting down. I give him my apologies and ask why. 

With only the briefest look of surprise at my feigned ignorance, he explains that WeWork had recently purchased Spacious and decided to liquidate it. As a dutiful employee, he shows no disdain, and simply says, “it’s better for everyone,” which prompts me to ask if the original founders are intending to give it another try. Not that he’s aware. 

John then shows me where to hang my coat, where the coffee, tea, and microwave are, how to get to the bathroom, where the outlets are located, and tells me to sit anywhere I like. There are plenty of options. He explains that it isn’t too busy with people leaving town for the holidays. I count 10 other users sitting sporadically throughout the space at what is deemed a polite distance apart. I hang my coat on one of the wooden hangers embossed with “Spacious” and sit down. 

Spacious’ Fulton at Rockwell location is ideally situated in the base of the new Ashland development in a bustling area near downtown. It’s fairly quiet except for the sound of typing and lulled conversations. An immense sliding barn door separates the co-working space from the rest of the Gotham Market food court, and it appears to have once functioned as a sushi bar. Empty shelves, sparse décor, and an overall lack of food tell me I won’t be eating shrimp tempura once 8 o’ clock rolls around. If this were a restaurant actually open for business, my day-pass would expire at 5 pm instead of 8, lest the restaurant miss out on prime dinner hours. But like so many commercial spaces throughout the city, it’s not open for business, and the owners of this space are losing dollars. 

Stroll through any major city in the United States and you’re sure to find an excess of completely built out, potentially useful, vacant spaces. Whether it’s a restaurant only open for dinner or a vacant retailer, there is no lack of finished, usable space. Spacious saw these vacancies as opportunities and sought to occupy them by creating cost effective co-working spaces that also generated additional income for landlords. Primarily, they found restaurants that were closed during the day and converted them into co-working space for urban professionals. This business model was appetizing enough for WeWork (renamed The We Company) to acquire Spacious for $42.5 million this past August. Fast forward four months later, and as of December 31st 2019, WeWork shut Spacious down. What went wrong?

To answer that question, it’s important to understand why co-working spaces have grown into a multi-billion dollar industry in recent years. Is it possible co-working is simply a fad spurred on by office envy and lofty idealisms meant to inspire productivity? Based on trends within the American (and global) workforce, probably not. The largest online community for remote workers, We Work Remotely, explains that both “workers and companies realize the benefits of a distributed workforce” which accounts for it’s “tremendous growth over the last 5 years.” According to Upwork’s Freelancing in America study, published in September 2019, this tremendous growth translates to “57 million Americans [who] free-lanced this year, representing 35% of the U.S. workforce.” 


Upwork’s annual study indicates more workers are choosing to freelance full-time rather than do so out of necessity, with younger generations leading the pack. Both freelancers and remote employees are opting to work on their own terms from wherever they choose because of the flexibility and freedom it offers. This increase in remote working directly correlates to the rise of co-working spaces, but what do these spaces offer that makes them so popular? Many remote workers opt to work out of coffee shops and cafes, but for city dwellers, securing and keeping a table with an outlet can be challenging. For about the same price as one coffee per day, Spacious members were given uninhibited access to multiple locations throughout the city that included complimentary coffee and tea. However, these enticing external factors are not solely responsible for drawing thousands of members to Spacious. 

Research indicates innate motivators play a large role in the rise of co-working, especially for remote workers. Buffer’s 2019 State of Remote Work Report states “19% of remote workers claim their biggest struggle is loneliness,” and another “17% say their biggest struggle is collaborating and communicating.” That means over one third of the remote workers sampled are lacking the desired human interaction that a traditional work setting provides. The co-working industry, in part, is a byproduct of this struggle. By using a co-working space, remote workers still get to work on their terms, but they also have opportunities to interact, collaborate, and network with other professionals. Startups and small businesses are another large contributor to co-working’s recent growth because they prefer the flexibility it offers—no long term leases, no huge build-out expenses, and the ability to grow quickly without needing to change offices. 

Despite vast research illustrating a need for co-working spaces, recent upsets within WeWork and Knotel have people questioning if the industry has a viable future. WeWork has been one of the biggest players in co-working since 2014, when they began getting national press coverage for their growth, but questionable leadership decisions, failed IPO plans, and the liquidation of several prior acquisitions, including Spacious, have slashed the company’s former $47 billion valuation to as low as $5 billion. Moreover, a whistleblower complaint, filed with the Securities and Exchange Commission last October, claims that WeWork’s acquisition of Spacious was rubber-stamped and suggest its valuation was drastically inflated at the time of purchase. While investigating this claim, the New York Post reported they had obtained documents showing Spacious only “had 4.5 million in working capital and recorded little if any profit.” Just months prior to whistleblower’s complaint, Spacious had closed all of its San Francisco locations, claiming the SF Planning department was making it difficult to operate there. Or maybe they were just spread too thin. 

Flexday, who shares a nearly identical business model with Spacious, boasts over 50 locations—all in one city—Toronto. By concentrating on one local market, founder Justin Raymond believes they’ve created a smorgasbord for co-workers, stating, “The truth is, there is no one perfect workspace. Individuals and teams need different environments based on their preferences and what they want to accomplish. Some locations are quiet and calm for members who need a serene environment to focus, while others offer plush seating and round tables to encourage interaction and collaboration.” Workspace variety can be a way to tailor and streamline user experience. For individuals who spend the majority of their time in the same city, convenience and flexibility take precedence over global (or even national)  coverage.

“Looking to the future, co-working providers are going to have to get under the skin of their members, get personal, know what makes their community tick and encourage feedback loops.”

Gabriela Hersham, a pioneer in the UK co-working industry, understands the importance of identifying and streamlining user experience. Hersham, the founder and CEO of Huckletree, one of London and Dublin’s fastest growing co-working spaces, wrote an article about WeWork’s downfall, explaining, “It’s also not symptomatic of all co-working providers, or reflective of an industry drinking its own Kool-Aid.” She goes on to say, “Looking to the future, co-working providers are going to have to get under the skin of their members, get personal, know what makes their community tick and encourage feedback loops.” 

So what does that mean for companies like Spacious? By using spaces that are already viable, these companies drastically reduce overhead costs, slash membership prices, and generate income for their venue partners. But do these economic advantages translate to a profitable business model? Kettle Space in New York City, Switch Cowork (newly launched as Reset co-working) in Austin, and WEach Seats in Philadelphia all had similar ideas about using existing restaurant space for co-working. A source familiar with the business told us that the unit economics of Spacious did in fact work at a profit margin that meets or exceeds those achieved with real estate assets that require a hospitality operation on site. The source went on to say, “Were it not for the trouble of the parent acquirer, Spacious would likely still be putting new locations on the map, and it’s possible that the founding team may resurrect some version of the concept at some point after the capital markets have a chance to recover from being spooked by the WeWork debacle.” 

Matthew Weaver, co-founder of WEach Seats, agrees that the unit economics work. However, WEach Seats’ space-as-service business model was slightly different than Spacious’. Weaver explains, “Unlike the Spacious model, we found that to get to the price point that could essentially be competitive, at least in Philadelphia, we were using restaurants that had a second floor or side room that were unused during the day but were still open. There was no need for us to staff it, the insurance requirements were different, the price points could be reduced drastically, and the benefit to the restaurant was the potential knock on sales.” If no users showed up to work, the restaurant didn’t incur any additional expenses for being open. For WEach, the unit economics made sense and had the potential to scale, but their struggle came from sustaining critical mass use per month. 

Weaver believes the reason that wasn’t happening comes down to what the user is really trying to get out of the experience. “We had to sit down and reevaluate,” he said. “Are we trying to solve a restaurant problem, or are we trying to solve a user problem? After sitting down with dozens and dozens of our users and trying to get to their pain points, ultimately, we found they like to work from home. Their choice to go other places is really that they’re too lonely and isolated at home.”

To solve this user problem, WEach Seats has begun to pivot towards a new model: home office work shares for groups of vetted remote professionals with some kind of commonality. Those commonalities could be anything from their profession to their neighborhood, or even work from home parents whose children attend the same daycare, as is the case with Weaver. He believes organic interactions in co-working settings create a higher level of user satisfaction, stating, “I think for our users in our previous iteration, the hard part was once you got people to the space, they still ultimately felt a little disconnected, and there’s no natural way to mingle. A traditional co-working space may not solve that problem.” Weaver feels that a home office environment creates opportunities for “the kinds of water cooler conversations you’d find in an office setting,” but users still get what they ultimately want: to work from home. 

Home office co-working spaces may seem like a foreign concept, but Weaver extrapolates on some well known precedents. “I remember thinking years ago, you rent a room out of someone’s house for the night? That’s crazy. You would never do that, right? Or who would get into a stranger’s car and let them drive you around? Are you out of your mind? Everyone thought those things were crazy too, and then actually that becomes very normal,” he told me.

Weaver went on to explain that not only will the home office host be able to benefit financially, but they will also share in the same benefits as the user: those water cooler conversations that fill the void of social interaction so many remote workers are missing. He may be onto something. According to the article No Community, No Co-Working, “it’s important to recognise community as the heart of a co-working space.” The author Saidat Giwa-Osagie goes onto explain “a workspace interior can be replicated, but community cannot.” And some co-working companies seem to have found the magic formula.

With upwards of 35,000 applicants currently on its waiting list, the wildly popular women’s co-working space, The Wing, prides itself on offering “a community that fosters connection of all kinds: friendship, support circles, professional mentoring, networking, and bonding over shared experience.” Its website names “a stacked calendar of events” and “a thriving digital community” as two of its primary benefits for users. The Wing has seemingly tapped into the power of community, which just might be what people are looking for when they are choosing to pay for a space-as-service membership. For a monthly membership at The Wing in New York City, users pay $215 per month for access to one location or $250 per month to access all locations. In comparison to WeWork, where a standard office in New York City starts at $840, that’s relatively inexpensive. Stacked next to some of the restaurant based co-working spaces, it’s a hefty price point, but the Wing’s members don’t seem to mind. For them, the value of community is worth it.

New York City’s restaurant based Kettle Space offers “exclusive community events and perks,” and “unlimited guests” as a part of their memberships, which start at $49 per month. While these benefits aren’t the primary functions of their membership, Kettle Space is clearly trying to hone in on shared experience by encouraging the kinds of social interactions that remote workers are seeking. It’s website states, “we encourage collaboration at our spaces so all members can benefit from the skills and expertise that others bring to the table. Work and connect in an inspiring environment surrounded by accomplished and like-minded professionals.” Similar to Flexday, Kettle Space recognizes the value in providing users with a seamless experience by concentrating locations in one city. An open letter from its founders addressed to former Spacious members discusses their plans to absorb Spacious’ venues. Regardless of the low price and free coffee, they understand the need to market their membership as more than just space-as-service. Kettle Space’s ability to deliver on that will undoubtedly predict their future in co-working. 

As for WeWork’s future, some critics believe it doesn’t have one, at least not in co-working. The company’s original intentions were “to build more than beautiful, shared office spaces. We wanted to build a community,” yet their restructuring includes selling Meet Up, a service specifically designed to create in person community gatherings based on common interests. Is it possible Spacious could have developed a thriving community for its members? Given the right circumstances and under the right leadership, yes. If this Spacious blog post from their former Director of Brand & Community is any indication, they were well on their way—that is until WeWork acquired them.

The power of community is not derived from convenience or superficial interaction. It comes from an individual feeling valued when they are able to contribute to a group in a meaningful way.

Unfortunately for WeWork, they mistook “human-centered design” for social interaction and a “wealth of amenities” for shared experience. Their business was founded on the principle of community, yet it seems they forgot what that actually means. Under the heading “Community,” their website states, “whether it’s getting feedback on your product in real time, asking for a recommendation on a service provider, or simply grabbing a cold drink after work, the power of community is invaluable.” The power of community is not derived from convenience or superficial interaction. It comes from an individual feeling valued when they are able to contribute to a group in a meaningful way. Harnessing that power is a key ingredient for success when it comes to co-working spaces.

Clearly, there is a place in the market for the space-as-service business model, but users are wanting more than just space. Interestingly, Buffer’s report indicates that 84% of remote workers still choose to work from home with only 8% choosing to work at a co-working space. People are looking for more than just a place to plug in and work. They’re looking for meaningful interactions that add value to their lives. Gone are the days when an office filled with hammock chairs and beer on tap will suffice. While some co-working companies claim to have neatly packaged “community” within the cost of a membership, I think it requires more authenticity than that. It requires layers of connections whose meanings expand upon one another as they are built organically over time.

My experience at Spacious was convenient and productive. I walked a few short blocks from my apartment to get there and helped myself to several cups of coffee, which alone could have justified my $20 day pass. From 10 am to 2 pm, I squared away a large chunk of this article. I counted upwards of 20 patrons sharing the space at different times throughout the day. But I didn’t meet anyone new. In fact, aside from my host John, I didn’t have a single interaction with another human being. While I was productive at Spacious, I also did not gain any significant value from being there. I could have easily accomplished the same amount of work from the comfort of my own apartment. Moreover, my building, like many others throughout the city, has a business center in the common area where people can work, reserve the space for meetings, and mingle with other residents. If I felt distracted or lonely in my apartment, that space is just an elevator ride away, and it’s already included in my $75 monthly amenity package. 

The question becomes: would I (or you, or anyone) pay $99 per month for just a place to work? Personally, no, but many do. It’s clearly adding some kind of value to their lives. Would I pay $215 per month for entry into a social club, co-working space, and network of like-minded individuals? Depending on my disposable income, possibly. If this membership included regular events that sparked my interest, perks like a free lending library, or the ability to bring my dog to work, then I might even be willing to pay a premium. And if I made friends with other members who became integral figures in my life, I’d probably continue to pay that premium year after year. For co-working spaces going forward, community development is just as important as real estate investments. Demographic research matters just as much as geographic research. Membership perks are just as significant as membership costs. The future of co-working requires a symbiotic balance between people and space, where value is measured by experience and experience is measured by members’ engagement with one another.

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