Can Smartworks’ IPO Capitalise On The Growing Flexible Workspace Trend?

When coworking space rental startup WeWork filed for IPO in August 2019, the unicorn had lofty valuations ($47 Bn), funding poured in (SoftBank alone put in about $10.5 Bn), and its global business had grown (it ran offices in 111 cities across 29 countries). But the startup had a “history of losses”, said WeCo, WeWork’s parent company, in its prospectus, and the filing showed the details.

The inevitable followed. Its colourful CEO Adam Neumann stepped down a month later and the IPO was withdrawn. The company eventually went public in late 2021 at a valuation of $9 Bn. But in November 2023, WeWork and more than 400 of its other entities (including many individual subsidiaries) filed for bankruptcy. WeWork India is thriving, though, and reportedly caters to 70K+ members. 

Ask industry insiders about the key reasons that drove WeWork (global) to the brink apart from cash burn and management issues, and most would point to a couple of crises: the disruption in office work driven by the Covid-19 pandemic and the onset of the funding winter.

Yet, coworking space providers in India are now eyeing lucrative IPO opportunities due to these factors. After the pandemic transformed how work is carried out, people are embracing remote work options, and businesses are streamlining their physical footprints, with the focus on hybrid and distributed work models. 

From agile startups to SMEs and big enterprises/MNCs, nearly everyone is drawn towards flexible workspaces for their cost-efficiency, scalability, customisation and sustainable solutions. They are the much-coveted asset-light alternatives to traditional office leases.

The successful listing of Awfis in May 2024, which came after EFC India’s listing on the BSE via a reverse merger and Kontor Space’s listing on the NSE Emerge platform in 2023, further indicates a favourable IPO market, given the rising demand for flexible workspaces (more on that later). Now, Gurugram-based Smartworks is also hoping to ride the ongoing IPO wave.

It filed a draft red herring prospectus (DRHP) with SEBI in early August for a fresh issue of equity shares worth INR 550 Cr and an OFS (offer for sale) of 67.59 Lakh equity shares by promoters. Smartworks is backed by Ananta Capital Ventures, Plutus Capital, Singapore-based Keppel and other marquee investors and has raised INR 385.6 Cr (about $46 Mn) across two rounds. 

According to its DRHP, the company may also raise INR 110 Cr via a pre-IPO placement before filing RHP.

Set up in 2016 by Neetish Sarda and Harsh Binani, Smartworks calls itself an office experience and managed campus platform, a state-of-the-art system that looks after technology aspects, operations, and more.

The startup said that while its clients benefit from efficient administration of their operations with work order management, service requests, parking solutions and meal plans, their employees are provided with multiple touchpoints, including digital cafeterias, facial recognition to access office spaces, support services and tools to book amenities like meeting rooms.

According to its DRHP, it is the largest managed campus operator among benchmarked peers in terms of total workspace stock as of March 31, 2024. 

By then, the startup managed 8 Mn sq. ft across 39 operational centres, alongside a fit-out centre (an office space fitted out for functioning) and another facility awaiting handover. It was present in 13 cities, including Bengaluru, Pune, Hyderabad, Gurugram, Mumbai and Chennai, among others.

As of August 14, operational centres had grown to 41, with one fit-out centre, while two more would be handed over.

Smartworks will now focus on fit-out projects and aims to allocate INR 282.3 Cr from the IPO’s net proceeds for fit-out capex and security deposits for new centres. Additionally, INR 140 Cr will be slated for repayment and prepayment of certain debts. 

Although fit-outs will be capital-intensive, the company thinks fit out-as-a-service is a one-stop solution for customising workspaces and enhancing teamwork, productivity and employee well-being. The fit-out market is soaring, too, says the draft filing. It is estimated to reach INR 12.5K-13.5K Cr by 2027 from INR 7.5K-8.5K Cr in 2023.

 

How The IPO Wave, Demand For Coworking Are Boosting Smartworks & Its Ilk   

Before diving into Smartworks’ recent filing and IPO prospects, it is essential to understand current market trends and investor sentiment.

After subdued public listings for nearly two years, the Indian startup ecosystem is back in the game, with valuable lessons from past mistakes and admirably better prepared. 

Among the 10 tech startups that have gone public this year, including three listings on the SME platform, most debuted at a premium over their respective issue prices. For instance, Smartworks’ direct competitor Awfis listed at a 12.8% premium; online travel aggregator ixigo soared with a whopping 45% premium on the BSE and most recently, FirstCry listed at a 34% premium.

A few exceptions like the EV major Ola Electric and insurtech unicorn Go Digit made lacklustre debuts, largely due to valuation concerns and their business fundamentals. However, these stocks gained significant momentum post-listing.

Thanks to this bullish market sentiment, Smartworks is poised to attract strong interest, especially as retail and institutional investors eagerly pursue opportunities in emerging sectors like flexible workspaces.

A CEO at a leading coworking space provider company told Inc42 that India’s growth narrative, coupled with a commercial real estate boom, is creating a conducive environment for flexi workspace startups. The top executive also pointed out that this new-age business model could help generate value for public shareholders and provide a relatively transparent and potentially lucrative investment channel for those keen to invest in the real estate space. 

As per CBRE’s India Office Occupier Survey held during March-April 2024 (it had a sample size of 70-78 respondents), flexible space operators have become a significant force in the office leasing market over the past five years and consistently captured more than 15% of the market share. The survey further indicates that the number of companies with more than 10% of their office space under the flexible category is projected to jump to 59% by 2026 from 42% in Q1 2024 (January-March).  

Almost predictably, Bengaluru stands out as the largest market for commercial office and flexible workspaces. In fact, India’s Silicon Valley accounts for nearly 31% of the flexible workspace stock in Tier I cities.

A 2024 report by Avendus Capital also forecasts that the flexible workspace sector will expand to 126 Mn sq. ft by 2028, at a 15% CAGR, and address a $9 Bn market. This is expected to attract growth capital players and noted private equity firms, HNIs and family offices, venture debt and structured credit companies, the report says. 

Given this backdrop, public market interest in coworking space providers will be pretty strong when they make their market debuts. Alongside Smartworks, industry leaders like WeWork India and BHIVE are also eyeing IPO opportunities in the coming years.

Is Smartworks’ IPO A Smart Move At The Right Time?

To analyse that, we must look at its strategic pivots over the years, which strengthened its value propositions and helped it gain a competitive edge.

Smartworks initially served startups and mid-sized organisations and managed to set up 12 centres across nine Tier I cities by the end of FY18. Around this time, the flexi workspace provider also identified a more viable opportunity – catering to larger enterprises. Their constant demand for large office spaces could provide the long-term stability that the business needed. Smartworks now leases entire or large, bare-shell properties in prime locations from landlords and transforms them into fully serviced, tech-enabled office campuses.

The startup caters to varied client needs and teams of all sizes – from under-50 to more than 4.8K seats. But its primary focus has shifted to mid-to-large enterprises requiring 300 seats or more. In fact, this segment contributed nearly 60% (59.98%, to be precise) of its rental revenue in FY24.

Unlike most startups, Smartworks’ approach to funding has been notably frugal. After securing $25 Mn in FY20, it refrained from raising a second round until 2024. Nevertheless, it has nearly doubled the number of operational centres from 23 in 2019 and maintained steady revenue growth.

Additionally, Pune, Bengaluru, Hyderabad and Mumbai are the top four locations where it operates, with rental revenue from these cities accounting for 80.07% of the total rental income in FY24. This is quite encouraging and may strengthen its growth prospects as Tier I locations like Bengaluru and Hyderabad account for at least 50% of the total demand for flexible workspace stock, per an iSprout report.

Smartworks’ topline tripled to exceed INR 1K crore in FY24. Its operating revenue stood at INR 1,039.4 Cr, a 46% YoY jump, of which INR 987 Cr came from rental income. It also earns income from software fees and ancillary services, including one-time setup, meeting room arrangement, parking, and internet and electricity connections.

That the company is still making losses can be a red flag. But its bottom line has shown signs of improvement, suggesting a viable path to profitability. Despite the public market’s inhibition towards loss-making entities, recent listings by Awfis and FirstCry indicate that investors are willing to back decently valued, new-age businesses if companies can demonstrate a clear trajectory towards profitability.

Interestingly, our discussions with several venture capitalists revealed a completely different approach to startup IPOs. Rather than waiting for a typical span of seven to 10 years, many investors are now looking at quick exits, which means growth and late stage startups may have to opt for public market listings sooner than later even though they are not profitable at that point. What will matter most is balancing the bottom line with scaling.

If the new trend surfaces soon, IPOs may become the primary exit options for startups, drawing many global investors to the ecosystem, and the traditional profit-loss dynamics may change. However, startups will do well to stay on alert, keeping the WeWork narrative in mind. 

Overall, the company must control costs and grow profitable partnerships with clients and realty stakeholders for long-term, sustainable growth. After all, these are not pure-play tech companies, and real estate nitty-gritty will determine their business outcomes instead of the valuation game.  

As Sarda said earlier in a media interaction, the real challenge in this segment is that flexible workspace providers buy long and sell short – buy commercial real estate for 15 years and rent it for a year or so. Meanwhile, market dynamics change, leading to demand drops, fall in supply, saturation, regulatory issues and growing operational risks and expenses, to say nothing about intense competition. 

According to industry estimates, India is home to nearly 450 flexible workspace operators and the top 10 by portfolio size manage 60% of the stock.    

The best way to cope with these challenges is to build a strong business moat. For Smartworks, catering to enterprise clients for comparatively long tenures, focussing on the ‘experience’ part of the business (WeWork did it on a grand scale) and staying relevant to public market investors are key differentiators.

Smartworks Vs Awfis & The Way Forward

After years of prudent scaling, Smartworks is preparing for its debut in the public market. In doing so, it is following in the footsteps of its closest competitor, Awfis, but it has a much bigger IPO size (Awfis targeted INR 128 Cr as primary capital). 

They are also positioned differently in terms of business models and underlying fundamentals, says Umesh Chandra Paliwal, cofounder and CEO of UnlistedZone, a trading platform for unlisted stocks. The CEO notes that Smartworks has carved a niche as a premium provider for large enterprises, offering standardised, tech-enabled campuses. It also runs larger centres with more super built-up areas.

Set up in 2015 by Amit Ramani, Awfis has adopted a more diversified approach and caters to a wide range of clients, thus minimising capital risks. It operated 181 centres, offered around 1.1 Lakh seats and had 5.6 Mn sq. ft of chargeable area as of March 31, 2024. 

Undoubtedly, it is working on a smaller scale in terms of office sizes and operational areas. But the company has a bigger presence with more centres and revenue channels are also more varied than Smartworks. Its operating revenue stood at INR 848.8 Cr in FY24. 

Again, Smartworks employs standardised designs using modular and reusable fit-outs, while Awfis focusses on managed aggregation and fixed-cost lease models. 

Speaking to Inc42 after its successful IPO, Ramani said that managed aggregation is one of its core philosophies that makes the business capital-light. In simple terms, real estate owners spend a considerable amount for the fit-out of new properties and take equal risk as Awfis.

“Both providers are well-positioned to benefit from the current trends and their respective strategies cater to different market segments,” said Paliwal of UnlistedZone.

As public market investors in India are maturing fast and gaining a better understanding of new-age tech startups, there will be more opportunities for coworking space providers keen to enter the IPO market. However, as experts have observed on multiple occasions, startups eyeing public listing must have clarity regarding valuations, path to profitability and corporate governance.

Navin Honagudi, founder and managing partner at Elev8, a VC fund supporting growth stage and technology-focussed businesses, told Inc42 that the critical lesson for startups aiming to go public is to manage expectations, both their own and those of the market. 

“Modest valuation can provide flexibility for growth, allowing the market to respond to actual accomplishments rather than overblown promises. Instead of running to the finish line, it is important to pace the journey,” he said. “The market continues to reward organisations with a clear and feasible growth strategy, rather than those making lofty promises but lacking the required foundation.”

Can India rewrite the growth story of a segment that was called out by sceptical investors after the WeWork crisis? We need to watch as the next chapter unfolds.  

[Edited by Sanghamitra Mandal]