Indian co-working space provider Awfis announced in late April that it had raised $20 million (Rs 128 crore) from Sequoia Capital India. This was the biggest amount received in a single funding round by a company in this startup segment.
Co-working spaces are offices where professionals from multiple companies operate simultaneously. India’s thriving startup culture – the country is expected to have 11,500 tech startups by 2020 – has raised the need for low-cost and flexible workspaces, leading to the flourishing of this segment. In 2016, co-working space providers took on lease some 1.2 million square feet of office space, according to Colliers International, a real estate consultancy. Such is the excitement around it that even American startup WeWork has entered the market in India.
The co-working space model is straightforward. A provider leases an office space and rents it out, charging according to the number of desks and hours used. Generally, the membership fees for co-working spaces are anywhere between Rs 3,000 and Rs 10,000 a month for one desk. Prices depend on the location and the services offered. Typically, in such spaces, startup founders share the facility with independent professionals like graphic designers, writers, and app-developers.
Here are the leases signed by top co-working spaces in India in 2016-’17, according to a March 2017 report by Colliers:
So what is attracting investors to this segment?
The concept is redefining “how people and organisations engage with their workplaces,” explained Ajeet Khurana, an angel investor. “To that extent, I see the emergence of the co-working model to be as radical an innovation for businesses as telecommuting was two decades ago,” Khurana added.
Delhi-based Awfis, for one, is “playing on two significant global trends – sharing economy and communities,” Abhay Pandey, managing director of Sequoia Capital India Advisors, said in a statement. The sharing economy involves various entities sharing assets. While sharing the workspace, the regular interactions between these different companies and professionals lead to the formation of a distinct but informal community.
Cheap and hassle-free
Working out of a shared space is typically cheaper than renting an entire office. A startup with less than 50 employees, for instance, can save up to 30% in rental costs, according Colliers. Besides, there’s no long-term lease, so moving out of a co-working space is hassle-free.
In May, Navesh Dakdar, co-founder of GetSetCamp, an adventure travel startup, shifted to a co-working space in Mumbai. He has two full-time employees and the others work part-time. “The main reason is that there’s no deposit like in the case of a traditional office rental and it saves costs,” he said. “Plus there’s an opportunity to network with other startups and investors.”
Apart from the actual office space, co-working firms also offer a range of services like an internet connection, tech support, and food and coffee services. “Right now, more than a table space, what’s important for startups and professionals is coffee, internet speed, and what kind of people you meet,” explained Yatin Thakur, founder of CoworkIn, a shared-space provider headquartered in Delhi. Thakur said the model is profitable and, as is the case with any business, investors look at what value the company creates.
Bengaluru’s CoWrks offers members discounted business services. Some discounts with third-party services are as steep as 99%, according to Sidharth Menda, CEO of CoWrks. “The business already generates enough cash and the model is justifiable on the basis of revenues and profits,” Menda said. Besides Bengaluru, CoWrks operates in Mumbai and Delhi.
Co-working spaces provide opportunities to network with entrepreneurs, professionals, and in some cases, investors. Many co-working spaces have weekly events and activities in which all members can participate. Sometimes non-professional connections are also formed, Menda explained. People come together to form hobby groups and often play sports, or go hiking together.
“The value is more on community building rather than just providing space,” said Apoorv Sharma, co-founder and president of Venture Catalysts, a seed investment and innovation platform. Venture Catalysts has invested in Innov8, a Delhi-based co-working space provider incubated by Silicon Valley’s Y-Combinator. Such businesses will see a 10-fold increase in their number by 2020, expanding beyond metros, according to Sharma.
In fact, even bigger firms are taking a bite of the pie. For instance, at CoWrks in Bengaluru, firms like Alibaba and State Street share their workspace with graphic designers and startups.
However, not all are convinced by the high valuations that co-working space providers are getting based on the business model. WeWork’s valuation in the US has been criticised after it became the world’s eighth-most valuable startup.
Scaling up the business is also a matter of concern.
“I have two concerns in this space,” said Sid Talwar, partner, Lightbox, a Mumbai VC firm. “One is valuations versus scaleability of the businesses. Although co-working spaces are an important part of the ecosystem, I imagine the growth will require significant investment and time.”
Talwar added: “My other concern is on differentiation. The key reason anyone chooses a co-working space is flexibility, probably followed by location. But to truly succeed, a company (the co-working space provider) will need to show real differentiation, beyond flexibility and location, and prove that that differentiation is scaleable.”
On their part, some startups have charted out their scaling-up strategy. For Skootr, headquartered in Gurugram, tapping the demand in tier II and tier III cities will be a key focus for scaling up, founder and CEO Puneet Chandra said in an email.
Innov8, on the other hand, will focus on different client groups like corporates, startups, and freelancers to offer customised services. “Diversification of revenue channels, apart from selling traditional office on rent, is a major element of scale for us,” Innov8 co-founders Ritesh Malik and Shailesh Gupta said in an email response.
Investors, though, might need more than just diversification. “If I were to evaluate an equity investment into a co-working space, my primary concern would be around ensuring that the founder has a vision beyond being a commodity play,” angel investor Khurana said. “That way, the strategic roadmap could be somewhat decoupled from the mechanics of a real estate business.”
For now though, shared-space startups can make hay while the sun shines.
This article first appeared in Quartz.