Convertible Notes and Startup Funding
February 12, 2025
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The sharing economy has been one of the major themes when it comes to start-up investing in the past decade. Investors and entrepreneurs have woken up to the idea that resources can be utilized in a much more optimal manner if they are shared between various people. The mega-success of the co-working business model is a testament to the fact that the idea actually works. Companies like WeWork which have a multi-billion dollar valuation have been created as a result of the co-working business model.
In this article, we will have a closer look at what a co-working business model is. We will try to understand the pros and cons of this model as well.
The availability of quality office space at a cheap price has been a pain point for most companies. Also, companies want the flexibility to increase and decrease the amount of office space that they rent out. The co-working business model provides this value proposition to its customers.
Co-working spaces allow the customer to rent out office spaces in a flexible manner which they can then use to facilitate work in a collaborative manner. Co-working spaces are especially useful for companies such as start-ups since they allow these companies to use well-developed office infrastructure even though they want to operate smaller teams.
Co-working spaces also have other infrastructure such as conference rooms which can be shared amongst the various occupants so that they are not a cost burden for any individual company.
Co-working spaces have largely been preferred by smaller companies until now. Larger companies have started taking an interest in co-working spaces. However, they have not been able to build significant momentum until now. Some of the advantages which make customer prefer co-working spaces are mentioned below:
In the case of co-working spaces, start-ups have to spend very little money upfront. They operate on a pay-as-you-go basis which gives them a lot of flexibility. There are several businesses that are willing to pay a premium to have access to that kind of flexibility
Large co-working space companies have been able to obtain significant investor attention. However, the multiples offered to these companies have been significantly lower as compared to other companies. This is because investors are averse to certain specific risks that this model has to offer.
After the pandemic, the world is seeing a rise in work from home as well as hybrid business models. Hence, the demand for office space is decreasing. Also, companies which do want to have an office are relocating far away from the city centers. Since co-working spaces have locked in their leases for a longer period of time, they might end up losing money as a result of these trends.
Co-working spaces offer small cubicle spaces for rent. They may also enclose some cubicles and sell that space as a private office within the co-working space. However, customers typically have to pay a higher price to obtain any kind of privacy.
Co-working spaces have established vendors which provide this equipment to their customers. Since the co-working spaces require this equipment in bulk, they can take advantage of economies of scale. They can offer to lease the equipment at a lower price while still earning a decent profit margin on the same. Infrastructure rentals are the second most important source of revenue for co-working spaces.
Also, co-working spaces tend to offer conference rooms, storerooms, and such other rooms to rent separately. In many facilities, companies can hire these rooms by the hour. Renting out conference rooms and other conference facilities also provides a significant source of revenue.
They allow the companies to use their office address as a registered corporate address in return for a fee. They also provide other facilities such as collection and forwarding of mail to alternate addresses. The popularity of virtual office spaces has also increased making it an important revenue option.
Many co-working facilities have their own subsidiary companies which provide a lot of these services. However, even if the co-working space owner is not able to provide these services on their own, they subcontract it to a third party in lieu of a commission.
There are many different types of contracts structured between co-working spaces and third parties. Sometimes, the co-working spaces receive lumpsum payments whereas at other times they receive a percentage of the overall revenue.
Hence, co-working spaces are actually the perfect marketing venue for other companies that want to sell goods and services to start-ups that operate on the premises.
There are other companies that want to sell products to the employees that work within a co-working space. For example, credit card companies may want to sell credit card products to the employees of the co-working space.
Co-working spaces often lend out lobbies and other common areas to companies for performing promotional activities and below-the-belt marketing activities. The temporary lending out of such areas can also contribute a lot towards the overall revenue of the co-working space.
The bottom line is that co-working spaces have several revenue streams. It is possible for the co-working space to become even more creative and add new revenue streams to its revenue model. The multiple revenue streams help to enhance the basic return on investment. They also help diversify the risk inherent in having a single revenue stream.
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