The WeWork business model never worked for investors. Now the WeWork business model doesn’t work for customers. The future of coworking has changed. Entrepreneurs now have the courage and license to build their startups from home. Forward thinking venture capital and private equity investors will provide portfolio companies tangible resources, like flexible office space, in addition to investment capital. The future is now.

WeWork Experience
The WeWork business model never really worked for long-term investors. Imagine taking on long-term contractual risk with significant fixed costs in order to offer customers short-term flexibility at relatively low rates. On the surface, the business model has the appearance of a real estate investment. Take the risk and commit the capital to buy a commercial property. That property is now an asset on your balance sheet. Therein you enjoy the benefits of appreciation and certain tax advantages, like depreciation. With respect to your income statement, you find a tenant and profit from positive cash flows. That business model works for many real estate investors, but not WeWork.

WeWork never committed investment capital to buy real estate and instead became one of the nation's largest tenants, leasing prominent and expensive office space in every major city. WeWork’s revenue is generated by offering flexible and affordable memberships to entrepreneurs, startups, and growing companies. Putting the business model in perspective, WeWork has become New York City’s largest commercial tenant with almost $1 billion in annualized lease obligations. Breaking even on their income statement requires over 300,000 members paying $250 per month … in New York City alone!

Entrepreneurial Experience
WeWork provided an incredible opportunity for entrepreneurs. This spring I decided to experiment with a private office at WeWork in Downtown Los Angeles. The space was amazing and the perfect environment to grow a technology sales team. We had panoramic city views from the 35th floor, unlimited networking opportunities, and after hours distractions like corn hole or cold brew on tap. I signed a WeWork membership agreement in January, hired a team and optimized the office in February, and was shut down by the Coronavirus Pandemic in March.

The vibrant entrepreneurial ecosystem at WeWork disappeared with the onset of COVID-19. We were effectively locked out of our office space. The atmosphere that made WeWork a viable opportunity quickly evaporated. WeWork stalled on their master lease agreements and negotiated rent relief with their landlords on a grand scale. Unable to use our office space, we asked for short-term relief or a discount on a longer term membership extension. But unfortunately WeWork was unwilling to engage in that conversation. Rightfully so, because WeWork clearly couldn’t afford to offer discounts given tight margins on their income statement.

Our membership expired in the summer and moving out of the WeWork office was an awkward and eerie experience. The tenant parking garage was closed. The only signs of life were onsite property managers and co-tenants in the process of moving out. Resembling the post-apocalyptic set of Will Smith’s film I Am Legend, nearly every office and workspace had been abandoned overnight. Most of WeWork’s client base had demonstrated a new found ability to work from home. For the foreseeable future, high density coworking spaces are a thing of the past. Physical distancing, mask requirements, and confined indoor spaces with shared ventilation are incompatible with the WeWork model. WeWork no longer works for customers.

The Future is Now
The future of coworking has changed. The Coronavirus Pandemic has given entrepreneurs the courage and license to build startups remotely, from their home office with scalable software and video conferencing applications. WeWork is no longer an essential platform for entrepreneurs. The game has changed.

Forward thinking investors will fill the void and provide portfolio companies with tangible resources like office space. By creating fractional coworking spaces for portfolio companies, much like WeWork or third-party incubators, investors will be more closely connected to the entrepreneurs they support financially. Rather than just being dependent upon membership (rental) income, investors with an equity stake in the companies on premises will benefit from greater oversight, engagement, collaboration and accountability. The future of coworking starts now.

WSJ Reference: Co-Working Envisioned the Office of Tomorrow. Suddenly It Feels Like the Office of Yesterday.