Startups Venture

Flexible Workplace Startups Clamor To Give Companies An Alternative To WeWork

For years, WeWork has brought in the majority of venture and private equity dollars invested in coworking startups. But that’s changing as an emerging new category of workplace alternatives are attracting attention from both the venture community and some of commercial real estate’s biggest players.

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Now don’t get us wrong. WeWork has still raised the most, but there’s a new generation of alternative workplace startups hoping to give the coworking giant a run for its money. (It’s worth noting that despite WeWork’s raising huge sums from a global set of investors, the company remains unprofitable, according to our own Alex Wilhelm.)

And while WeWork’s model is well known, some companies that are looking to fight for the same clients have a very different take on how to best approach the market. Here’s how the whole group’s fundraising to date has looked over the past few years:

Funding in coworking startups soared to $6.7 billion in 2017 compared to $213 million in 2013 – but, again, a significant chunk of that money ($6.16 billion to be exact) was raised by WeWork. So far in 2018, startups in the coworking sector have raised $2.8 billion but we’re seeing a different trend – $1.3 billion of that was raised by companies other than WeWork.

We talked to two such companies that have raised significant amounts of money in recent months about what they’re up to, and how their offering is different from the traditional co-working model.

Knotel

On the more professional side of the coworking and alternative space front, Knotel is focused on large clients and larger commits. It’s a space that WeWork wants to enter as well.

New York-based Knotel designs, builds and runs custom HQs for companies. It then manages the spaces with flexible terms. Currently, Knotel operates over 1 million square feet across 60 locations in New York, London, San Francisco and Berlin. It’s on track to reach 2.5 million square feet and $100 million in revenue by year’s end. Knotel has more than doubled in size in the past year, to 150 employees. Revenue growth has increased by 300 percent during that same timeframe, according to the company.

The two-year-old company describes its offering as “an alternative to a lease and far removed from coworking.” It aims to provide flexibility, give companies a home in look, feel, and operations, and allow them to evolve at will.

Customers and users and clients range from VC-backed startups Stash and HotelTonight to enterprise customers such as The Body Shop.

Knotel was founded on the premise that there’s “a huge disconnect” between lease terms and business forecasting, according to Knotel COO Jonathan Goldberg. For example, most leases in New York require a 10 or 15-year commitment, while most businesses can only forecast 24 months out, he said.

The startup has raised a total of $95 million. Most recently in April, it brought in $70 million in a Series B round that was led by commercial real estate brokerage firm Newmark Knight Frank and The Sapir Organization and included participation from The Wolfson Group, The Moinian Group, and Wainbridge Capital.

“What they’re doing is different,” said Barry Gosin, CEO of Newmark Knight Frank, in a press release, at the time of the round. “It’s a new category the industry hasn’t seen and is rapidly adopting. We’ve watched their ascent from a distance and are now thrilled to join them on the journey. It marks a shift in how owners and tenants are coming together.”

For rapidly growing companies, long-term leases can be a problem as they have to deal with the distracting process of being forced to break a lease and find new space, noted Goldberg.

“If you outgrow your space, we will find you a more suitable space quickly and easily and build it out to your specifications,” Goldberg said. “We design it with flexibility in mind, with features such as moveable conference rooms, modular desks, and phone booths so the configuration of the office can change as a business evolves.”

In coming months, Knotel plans to be entering new markets and growing in the regions it has recently entered such as San Francisco, Berlin, and London. It also recently announced a Blockchain platform, Baya, that will be rolling out soon.

Pankaj Jain, managing director at 500 Startups (an early Knotel investor), said the startup is disrupting a commodity that everyone uses: an office.

“Whenever you get veteran entrepreneurs taking on an antiquated industry, interesting things happen,” he wrote via email. “Traditional leases are unsuitable for companies given their inflexibility, and coworking really only works for small teams. Enter Knotel’s “Agile HQ” model and you have a platform that gives CEOs the freedom to work in a beautifully designed space without being chained to it. They can grow, change, or move at will.”

Looking ahead, Jain expects the industry to only get more competitive and focus on flexibility.

“There’s been little innovation in 100 years and companies like Knotel are showing how you can provide value for owners and tenants alike,” he said.

Convene

New York-based Convene is an example of a company that has also been labeled as a WeWork competitor but doesn’t necessarily consider itself as such. It has raised the third highest amount of funding (overall) in the space ($265.5 million) after WeWork and Kr Space.

Ryan Simonetti co-founded Convene in 2009 with the notion of making tenants in an office building feel more like hotel guests. By partnering with some of the largest owners and developers of Class A office buildings, Convene set about designing its own meeting, conference, and flexible workspaces. It has raised a total of $280.5 million. Most recently, it brought in $152 million in a Series D round that included participation from Revolution and ArrowMark Partners.

“We weren’t just thinking about delivering the human experience to tenants in the office buildings not just from the physical space perspective but from the hospitality and amenities perspective,” he said. “We also wanted to integrate technology into the experience.”

The concept for the company was also born under the premise that owners of growing companies didn’t want to necessarily commit to lengthy leases.

“I was a real estate investor at one point, investing in office buildings and hotels, and it didn’t make a ton of sense to me,” he told Crunchbase News.

Fifty percent of Convene’s revenue is from entities that it defines as enterprise companies with more than $1 billion in revenue. The startup is growing rapidly. Its total headcount is just under 500, with 150 workers having been hired since the beginning of the year, according to Simonetti. It has averaged about 65 to 75 percent compounded annual growth rate over the past five years and has a run rate revenue of more than $100 million that Simonetti expects to double in the next 12 months.

A big catalyst to its growth in recent years has been the fact that companies have become more open to the notion of outsourcing their real estate strategy, he said.

“We’ve kind of positioned ourselves between the best landlords and some of the largest enterprises,” Simonetti added. More than 30 percent of its existing locations operate under managed type agreements with Convene’s landlord partners.

Landlords believe so much in the concept of Convene that some have participated in a number of the startup’s funding rounds.

What also differentiates the company from competitors, according to Simonetti, is that it has also created technology products for its users.

Revolution is a venture firm that invested in Convene’s Series D round.

Revolution Partner Steve Murray says his firm recognized that there were a number of companies “doing slightly different things” in what is generally called the coworking space. While WeWork was the most well-known, and well-funded, Revolution did not believe it would take all of the market, according to Murray.

“As we got interested we became quite convinced that the way workplace operations was going, and is going, to operate is changing rapidly,” he told Crunchbase News. “An increasing percentage of the CRE (commercial real estate) market operates under a coworking shared type of arrangement. That is expected to grow to 30 percent by 2030. There will be a huge shift in this market. And with a lot of change undergoing, we saw big opportunity. We don’t believe WeWork will be the only winner in this space. It may continue to be the No. 1 player in the space but we think there are other opportunities to be successful.”

After meeting with a number of companies, Revolution decided to invest in Convene for a variety of reasons.

The firm liked the startup’s “laser focus” on enterprise and the fact that it views landlords as partners rather than competition.

“A number of its investors are some of the biggest landlords in the country,” Murray said. “They have shared objectives and outcomes around the success of the operation.”

Revolution was also impressed with the firm’s use of technology.

“They have developed a couple of technology pieces offering to help businesses move faster and more efficiently, such as an app to have food or coffee brought up when needed,” Murray told Crunchbase News. “This helps landlords allow buildings to almost transform themselves to look and feel more like a hotel than a straight office building.”

All of this should come as no surprise considering that the flexible workspace segment has been growing at an average annual rate of 23 percent since 2010 and is expected to make up nearly one-third of the CRE market in 12 years’ time, according to a recent report by Jones Lang Lasalle Inc. As the needs and demands of employers and employees continue to evolve, those companies who can offer the most flexibility at the best price point will likely emerge as the winners in this space.

Top Image Credit: Li-Anne Dias