The series We Crashed might be boring to some people. I am interested because I was an angel investor in the co-work vertical back in 2012. I met Sam and Pat and wound up backing into an investment in their firm Deskpass. A guy I introduced them to in Chicago screwed them over. He actually bounced a check for $350k. I made an investment to keep them afloat. In the process, we looked at options and one was to figure out a way to work with Nextspace. I made an investment in Nextspace too to help that deal close. Nextspace failed, but Deskpass is still operating. I think Covid and its after-effects will actually help them. You can click the link and see if it helps you or anyone you know.
Co-working did exist prior to We Work. Regus was a publicly-traded company.
If you have ever invested in startups, you know it is a long game. You never know if an exogenous shock will hit your startup and help it, or kill it.
Covid was a big exogenous shock.
Prior to Covid, the premise for Nextspace was that they could link all their co-work spaces via technology. This is the same thing that We Work sold. Of course, Nextspace didn’t do it underhandedly as We Work, but that was the gist of why you invested. You thought they could build a network. Regus hadn’t even contemplated that.
The other thing Nextspace had was one co-work space in San Francisco called, Nextkids. It was a place for moms to work with a daycare facility built-in next door. I always thought abandoned Tier 3 shopping malls would be excellent places for co-work combined with day care combined with pre-school and private but affordable K-4 grade school.
Nextspace was unable to build out the network. They also didn’t have anyone as dynamic as Adam Neumann leading them. Their team wasn’t diabolical either. Nextspace also didn’t have the corporate structure of We Work. Nextspace had a traditional structure. Nextspace got eaten up by costs. We even considered doing it as a franchise model, because a franchise owner might be able to pull $70-$80k per year out of it for income. The startup costs for franchising were too expensive. At the end they couldn’t generate enough revenue to break even and eventually went under.
The last “We Crashed” episode showed how much money We Work was losing per day. It was a grand scale of money, over $1MM per day. Nextspace was nowhere near that. But, it lost money so the struggle I saw in the show hit home.
During the time we were investors, my wife and I had to fill in and “manage” the Nextspace in Chicago for a short period of time. We learned quite a bit more about the co-work model doing that. We realized it’s just a real estate play when you own the spaces and manage them which is not any different than co-work companies that existed prior to the trendy startups. Tough to open the door each day when you know you are going to lose money.
Post-Covid as we open up, there might be hope for the co-work industry.
I am still an investor in Deskpass. They have been able to stay afloat, and they even raised capital a couple of times. They are different because it’s software that works with any co-work space. It allows CRE owners to convert space into co-work that otherwise might be idle. There is a better chance that Deskpass can create a network than the physical spaces, although that is not the thrust of their business.
The other reason Deskpass has a future is it works with your team. As with most startups, they have evolved. Initially, it was billing software for co-work spaces. Then they changed. They found that individuals wanted a Deskpass. But, the market was a lot larger than just one person at a time. When I look at remote work, and how companies would like to dump office space overhead Deskpass makes sense.
Deskpass makes sense in a new way we didn’t know about until Covid. Academic studies showed that when workers worked at home, their productivity fell and it took them far more hours to accomplish tasks. Work from home offered new challenges not only for the employee, but for the business.
One obtuse way to think of it is this way. You go to Costco. Costco sells you goods at cheaper prices than a mini-mart because you have to buy so much inventory. Your household is absorbing Costco’s inventory costs. With office space, when your company ditches the office, you absorb that cost at home. They might offer you a stipend, but that stipend is still cheaper than their fixed office costs and your home might not be the best place to get stuff done.
Some companies surfed the massive Covid wave. Co-working couldn’t, since Covid restrictions stopped spaces from opening. Who wants to go out of the house and have to wear a mask and go through all the protocols to enter a regular office, let alone a provisional office. Companies that had large increases in sales and valuations are showing signs of hitting the beach. Some companies, like Zoom and Instacart, benefitted from the totally misguided and misinformed stay-at-home government mandates and have seen their valuations decrease as we have opened up.
With Covid ending, my gut is that people will start to integrate co-working into their work ritual. It’s often hard to work at home. Too many distractions. If I look at urban downtowns across America, most of them are unsafe. You don’t want to go solo into a building. You might not even want to walk the streets in many neighborhoods that previously before Covid and BLM were safe. That makes a lot of room for co-working because smaller spaces can be built in your neighborhood or in the suburbs. Deskpass becomes a really nice answer to solve for a highly fragmented market.