With startups across the world trying to ramp up their businesses every day, coworking spaces have also been sharing remarkable growth stories. Freedom and flexibility provided by these spaces to startups and new-age entrepreneurs seem to be doing the trick. From just a fad, shared spaces or coworking properties have today become the norm of the day, at least as far as startups are concerned, but their growth has also revealed the problems in the coworking sector.
According to The State of the Startup Ecosystem Report by Inc42, India has over 300 coworking spaces with over 720 centres and a total area of 15 Mn sq ft. After being adopted in Tier 1 cities, the trend is now spreading to Tier 2 and Tier 3 cities as well.
However, not everything is hunky-dory yet, which was evident when WeWork CEO Adam Neumann stepped down recently after plans for an IPO failed.
The Biggest Challenges Faced By Coworking Spaces
It has been a tough month for possibly the biggest coworking space company in the world. While experts are saying that trouble had been brewing at WeWork for months, coworking startups in India will also be looking to tackle these issues.
On the face of it, coworking spaces are tailor-made for startups as seen in the number of coworking properties sprouting up in India. Under the growth though, there are some systemic issues that are faced by nearly all coworking spaces in India.
- Mismatch in rental costs and client demand
- Data privacy and business security
- Revenue-sharing models vs long-term rentals
- Increasing competition and consolidation threat
- Insurance against owned assets
- Allied costs for community building
- Customer retention
- Higher power and security costs
Long-Term Rentals Vs Short-Term Client Base
The growth stories of some large coworking spaces cannot mask the challenges faced by smaller players such as SproutBox, myHQ, AltF CoWorking, GoHive, GoWork, Yessworks, and Ideashacks.
For instance, coworking companies get into a long-term rental agreements with buildings and landowners to ensure that the latter do not sell the space without adequate notice. Such long-term agreement gives the coworking space the right to continue operations in the building irrespective of who the landlord is. However, the reason startups or even established companies go for coworking spaces is the flexibility in terms of a small lease, which allows them the chance to manage the expansion of team as and when the need arises. This is in direct contradiction to the coworking space’s goal of securing long-term clientele thanks to their long-term lease. This often leads to a gap between demand and supply for the coworking spaces.
Growing Concerns About Data Privacy
Due to the open nature of most coworking spaces, employees from different companies often mingle with each other and socialise outside of work too. Given this, there is increasing concern about data security among companies who have employees working at coworking spaces. Startups have increasingly started checking credentials and the IT infrastructure of the shared spaces beyond just the facilities they offer, the visual appeal or the brand name of the coworking space. Coworking spaces have more complicated security needs than those of a typical office due to a wide range of users from various sectors and various stages. These places can become a target of hackers as well and loss of private data can destroy any brand goodwill. Therefore security infrastructure is a big challenge for coworking spaces and this is also a growth hurdle for many coworking startups.
Revenue-Sharing Models May Not Be Lucrative
In the early days, when the concept of coworking spaces was still gaining ground, property owners agreed to a simple business model wherein a fixed-term rent was charged. However, with time many coworking spaces are going in for revenue-sharing models with landlords. It means landlords will gain a share of the business revenue generated by these spaces, which has strained many such relationships. Despite the mushrooming of these spaces, there is a mismatch between demand and supply as seen in the high churn rate of startups at coworking spaces. This will, in turn, generate lower returns for property owners when coworking spaces deal with vacant seats, and this becomes a factor when it is time to renegotiate terms for a contract renewal.
Increasing Competition And Need For Reinvention
The coworking spaces industry is expected to reach a valuation of $2.2 Bn by 2022. These spaces are a relief for companies and startups looking to cut down on rental costs without compromising on productivity. However, the competition is going to be so severe that many coworking spaces have to go beyond free coffee, refreshments. According to Forbes India, there is likely to be increased consolidation among coworking operators in the near future due to this very reason. It predicted mergers and acquisitions (M&A) will see an uptick with market exits, and the number of coworking spaces may dwindle from its current numbers. “Most spaces may cease to operate in the next few years. Smaller players may not be able to alleviate the risk in business models, not having investor backing like bigger players to sustain a competitive environment in the long run,” it added. Not all coworking startups may be able to mitigate the risk in their business models or have deep pockets to survive for long in non-prime locations with cheaper rents. So in the long-term, the players that reinvent with changing times will be able to eventually remain competitive and sustain their models.
Insurance And Risk Cover
Besides the burden to keep the security infrastructure updated and stable, coworking spaces also have to spend on the insurance of assets. This additional burden is in case of any damage caused by startups that occupy the space. This cannot be claimed from the startups directly in many cases, nor can it be delegated to landlords. This puts coworking spaces under tricky situations as the churn rate for startups occupying seats is high and often this is accompanied by sundry losses in fixing any impact from the churn. Ensuring that businesses do not violate any law and avoiding financial loss due to property damage, is another major challenge for shared spaces.
Low Customer Retention
Due to the high churn rate and plenty of options in the market, startups tend to move around from one coworking space to another, depending on the cost savings. This causes instability in revenue and usually coworking spaces have to make sure that clients are retained through incentives and other activities which also add to the cost of running the property.
Power Consumption And Physical Security
Since most coworking spaces offer 24×7 working facilities, they need to ensure power supply and availability of security and admin personnel at all times. This increases the people cost, while also opening up risks from weak security, theft and other physical harm. Due to the need for 24×7 power supply, coworking startups have to spend more on making sure that energy is not being wasted. This is a major problem for coworking spaces with lots of seats, since it’s not always possible to know which seats are occupied and which aren’t.
After establishing big networks in Tier 1 cities, coworking startups are looking at Tier 2 and Tier 3 cities for expansion. While the opportunity is great, many new startups have to be wary of expanding unsustainably given the challenges facing coworking startups.