Survival Kit for Indie Coworking Space

Reflection of a Coworking Operator*

*Written in 2019, in Indonesia, in the midst of coworking hypergrowth.

Recent WeWork’s prospectus has caused many intense discussions about the economic nature of coworking space business. Of course, this kind of discussion usually polarize people. I am not the biggest fan on how some companies manage to raise money based on story and projection (which needs to eventually translate into real economic reality); it is the investors’ decision to part with their money anyway. However, I want to give some thoughts that I hope might be useful of coworking operator in general. I derived my thoughts from mere four years of being in close proximity to a coworking business, and together with one of the strongest team in coworking business in Indonesia.

The profitability of coworking business is partly derived by how the owners view what the business is. Many people do not realize that coworking is a very young industry; there is no blueprint of what coworking business should be. How do we make money? How do we compete? How do we market our space? Today, if you ask me how to run a coffee shop, or start a palm oil plantation, there are so many established best practices and business models that we can learn from. We know that in coffee shop 50% margin is terrible, and yield of 21% in CPO is quite good. We know that in coffee shop, product and hospitality are prime. And in CPO, we need to have a good efficiency in order to make more money. We know that coffee shop need a good foot traffic, to be positioned close to businesses. And in CPO, we know that it is tough to make money if you pay more than $20,000 for a hectare of plantation.

When we run a coworking space, there are no established number for required capex. The capex ranges from Rp.500,000 / sqm, to Rp. 12,000,000 / sqm. In other words, there are people who spend 24x more than the lowest players. If we compete based on space alone, and that competitor open shop next door, spend 20x our budget, God helps us. Furthermore, coworking space is a versatile business. Today, we have coworking space in malls, office buildings, abandoned house, shophouses, in the middle of farm, inside the beehive, parking spaces, warehouses, coffee shops, you name it. I can tell you, each model has its own challenged and cost structure. Some needs to tackle rental problem, some has high electricity bills, internet bills, or even lack of internet (God helps them). If owners do not adapt and learn fast, it wont be a wonder why people fail at coworking space.

It is not helped by the fact that community is critical to a coworking success. Without it, a coworking space is just.. a space.

Clapham realized early that we are established in the wrong city, at the wrong time. For months, there are no one that is willing to pay for membership when they can work at the coffee shop next door, or at the comfort of their own homes. The good thing was, that challenged our initial business model that we thought was appropriate. Like many owners, initially we thought we were in business of selling space. The proposition was simple. Rent a place, invest in the infrastructure, mark it up and sell to the end user. So we have metrics like how much to spend per sqm, and how much to charge per person, or per sqm. That made sense, except.. it didn’t work. Today, we probably do part of our business that way, but that is not the reason we thrive.

Like I mentioned earlier, the profitability of coworking space is determined largely by the framework. If coworking framework is a business of selling space (which is a commodity), then we will struggle without strong financial and resources. Coworking space such as WeWork has no choice but to grow at all costs; they need to deploy the money the have raised in order to fulfill the metric for the next fund raising. Is that a wrong thing? I am arguing that it is not (this is a discussion for other time, but just like you cant blame Japanese of investing in shipping business that gives 1% return, we can’t blame investors to invest in company like WeWork. The availability of cheap funding has conceived many mythical business that wouldn’t exist in normal times. Hence, the age of unicorns).

What might be stupid is, if an owner, who can choose their battlefield, decide to go head to head and fight in the same framework as WeWork: purely based on location (and other physical infrastructure like interior). If an owner wants to compete like that, then he has to burn, because the competitions are burning. Good locations / nice office cost money. In normal time, paying high rental is okay, because we can pass the cost to the end user (who expect to pay more for better place anyway). The problem is, right now, at least in some part of Indonesia, we cannot do that due to intense competitions. The current economic landscape doesn’t allow that. So, you, like any other players, need to burn.

One day, when all players come to their senses, coworking will revert to a profitable business model. Just not today. Not in 2019, probably not in 2020. The only cure is to let the market force decides. Today, I prefer that people consider coworking space as a loss-making business. So we have less players entering the market. It is ridiculous how people overestimate coworking profitability and underestimate coworking operational difficulties. Coworking is here to stay, but the money burning mode that the mega coworking spaces is in right now, is not permanent.

So, how can we (independent coworking spaces) survive and thrive then? I believe that coworking, other than being seen as commodity business, can also be seen as a service business. If you think renting a space, putting in infrastructure, and marking it up to end user is a good business, then you have not seen coworking as a service yet. Service is inherently high margin business, but it requires different kind of raw materials, and we need to look at it differently. Instead of bricks and space, it requires human innovation, ingenuity, and servanthood. I would want to see more coworking spaces compete not on space, but on talent. I don’t think that it is a coincidence that most of the elite community managers (yes, I have a list of those superstars), reside in independent operators. It is because these people are the key for the operators’ survival. I have seen independent coworking spaces survive after they lost space; I have yet seen coworking spaces with these elite managers fail.

If coworking can be seen through the lense of service, how then, can we compete well? There are two critical factor. I already mention the first one, talent. I cannot stop emphasizing the importance of people. It is because of people, we can listen to our customers about their needs. Most of our clients in the early days do not need a space. That is why, one of our earliest lesson in selling coworking space is not about product pitches, it is about listening and asking the right question. Furthermore, in order to create strong communities, we need someone who has a big heart and genuine interest in people. We have to minimized time dedicated for paperwork (not neglecting it, but finding more effective way to finish that soul-crunching works), and maximize time dedicated creating meaningful relationships.

The second key of successful coworking as service, is retention. In startup world, there are important metrics like Customer Acquisition Costs, Life Time Value, and Churn. These three metrics are sacred to the business economics. We cannot control the second one, it is still changing. We cannot compete based on Customer Acquisition (the big players will outspend you, unless, well, if we are the big players.) So, that leaves the last part, churn. Surprisingly, churn, (or retention on the other side of the coin) is the most underestimated weapon we can utilized to do this business well. There are many articles about the importance of churn, but it seems that it is still being ignored.

In many mega operators, sales department reigns supreme over community managers. Again, if you want to have high retention rate, the key is people, people, people. Today, if new space opens up right next door giving out free passes, there are things that will prevent our members to move over. I have run the exercise internally, so we can prepare for that to happen. You know why people will stay with us? We know. Each of our people know all the names of our members (you will be surprised at how many don’t even recall simple name) and what they do. Our CS will help them buy snack when they are hungry at 3pm. We will play with the babies of our members and keep them entertained. We introduce them to far more business deals that they can get from coffee shop. We say thank you and happy weekend to them.

Coworking is much more about human than space. If we are to enjoy the service margin in this business, then it is all about infusing humanity in the space. These are the things that mega operator won’t focus on. They might say they care about it, but I am pretty sure, they do not put them in the driving seat. You know why? Because these things do not show up in the metric. How do you measure humanity? I leave it to you to answer that. Oh, another thing, it is very hard to scale this. One of the successful person in doing this is Danny Meyer.

If we start to make the space human, there are two tools that are essential. Culture and story. It is about what we encourage and discourage. It is about the member we take in, and the people we prevent to join. It is about how we treat our team, member, and community. And these things will generate unbelievable stories that we can use (there are many ways to utilize this). I believe that story is the most effective way to scale up culture.

For this reason, I believe that it is easier for a space to survive in smaller cities rather than in big city where traditionally big spaces open shops. When we are the first space in the city like Medan (4 years ago), or in Malang, or in Semarang, it is easier to thrive compared with opening a coworking space in Jakarta today. Sure, the market is much smaller, but we have less competition for space and talents. And there is never a rule that says that you have to charge less if you are in secondary cities. That rule makes sense when we see coworking space as a space / commodity business. If we see coworking as service business, it actually makes sense to charge higher, since not only we are selling space, but also times and other things. That is why it is essential for local coworking space to invest in the best team, build local communities, and create sticky ecosystem.

I told you before that Clapham was established in the wrong city at the wrong time. Now you know why we still exist. It is because we are born with the right people. At the heart of our business, is the people. And we are thankful that today, we have been able to take part in shaping this city. It is the people that incessantly believe that coworking can do good to the city. And in turn, we are blessed with the community that has given back, many times than we have given. Yes, we have made economic profit, but above that, we have created a massive value. That is probably the most important thing we have achieved.