What WeWork Got Right!
A PROFOUNDLY GOOD IDEA: In light of the recent Chernobyl-scale meltdown of WeWork, mostly related to lack of adult supervision and an S1 that read like Alice in Wonderland, it is important to note specifically what WeWork actually got right with the basic concept of UX-optimized shared office space. The initial vision, developed for the most part by co-founder Miguel McKelvey, could have changed the way small businesses entered into and expanded in the global economy. This is not to say that WeWork executed Mr. McKelvey’s initial vision correctly, but one should not forget that there was valid thinking behind the WeWork framework that sprang from real market conditions and the needs of small business owners. It is tragic to see a business solving real problems destroyed by the staggering malfeasance of its founder, VC investors, board members, lawyers, investment bankers and just about every other professional discipline that touched the management of the WeWork business model.
ENTER THE WEAPONIZED B-SCHOOL PROFESSOR: A lot has been written about the unwinding of Mr. Neumann and Company. NYU Professor Scott Galloway and the perennial tech gadfly Kara Swisher played this script to levels unseen in tech analysis in their wacky, sometimes brutally direct podcast Pivot. From the VOX platform, Professor Galloway unleashed a torrent of critical analysis that was both deserved and unrestrained. More will likely come from Professor Galloway as WeWork contemplates bankruptcy and certainly undertakes massive downsizing. But for now enough piling on. Clearly, there are a few thousand highly capable and driven WeWork employees who deserve much better.
What follows is a discussion of the less obvious and more significant business trends that were on WeWork’s side. Given what WeWork understood and got right, it must be said that destroying such a staggering business opportunity, not to mention shareholder value is mostly without peer in the modern startup era. But it was a profoundly good idea. Here is why.
EXPERIENCE MATTERS: The following assessment is based on starting and running a successful high-tech consulting business for more than 40 years in Manhattan. Our firm has moved 7 times, rented space from the tip of Manhattan to the Upper East Side and built out and furnished at least 5 offices. We’ve also dealt with all manner of truly devious and aggressive landlords, greedy contractors, high-strung interior designers and worked sometimes for days without heat. Welcome to working in Manhattan as a small business. One can reasonably argue that such experience provides a realistic understanding of the metro area office space rental market from the perspective of a small business beginning with the startup phase in 1975 to a now mature business working for world-class clients. This is another way of saying, we have seen a lot, and a lot of what we have seen supports what WeWork got right. We know first hand the real problems Miguel McKelvey was trying to solve. Mr. Neumann…not so much.
THE TRENDS IN SUPPORT OF THE WeWork BUSINESS MODEL
SMALL BUSINESSES FIND IT IMPOSSIBLE TO SECURE WORKABLE SPACE. There was a time in NYC and other major metro areas when one could rent totally workable and in fact attractive space for $20 a square foot. Admittedly, this was a while ago, but as rates in Manhattan rose due essentially to greedy landlords, rents skyrocketed, now reaching $80-$110 per square foot for truly terrible space in the outer areas of NYC…forget most of Manhattan. Not only have rents increased to a staggering level but so have security deposits. Why is this important?
A simple security deposit turns out to be a much bigger problem than one might assume because base rents drive security deposits and cash flow, which in turn impacts who can be hired and what gets done in any business regardless of size. WeWork likely understood this problem and removed a massive barrier to entry for some types of small businesses in major metropolitan areas. Historically, if one was leasing space directly from a landlord, a 3-month security deposit was the norm. However, recently this has changed in ways catastrophic to small businesses. Landlords have begun requiring a full year or more of rent as a security deposit. In San Francisco for example, landlords routinely require over a million-dollar security deposit on workable space for small startups. This is totally prohibitive for many businesses without significant seed and/or early-round funding. This problem has led some startups in the Bay Area and high-rent areas of Manhattan to actually seek additional rounds of funding just to pay the landlord’s security deposit. Keep in mind that this capital cannot be used to grow the business, but simply sits in an escrow account earning ZIP. This is likely one reason we see far fewer startups today than even five years ago.
LANDLORDS BECOME FEUDAL LORDS: For example, in our firm, the current office is about $90 per square foot. It is frankly too small for our needs, but we have no other option without transferring to a new landlord major capital that we know is better spent on new research methods and staff. This presents a major problem for mature small businesses coming off of a long-term lease that are now faced with a 12 to18-month security deposit. It is likely that the recent trajectory of rent escalations and security deposits drove many new startups into the basements of their parents, their uncle’s garage or a decision to not proceed with a new business. More mature businesses face the decision to continue to operate, but give up major working capital to landlord deposits or move to the outer reaches of the metro area. At WeWork, a one-month deposit on space meant a new entry point for many firms. This benefit alone could have empowered significant uptick in startups. This may have also been a negative factor for the future stability of WeWork and related short-term/long-term business model. Setting up at WeWork was made transparently easy. So easy in fact, some have said, that it resulted in WeWork basically providing day-care for recent graduates whose parents wanted them out of the house and away from Starbucks. WeWork gave these new business owners workable space without having to adhere to the reigning real estate security deposit extortion. This was a big deal.
SMALL BUSINESSES HAVE FEWER FUNDS FOR BUILD-OUTS: There was a time, not that long ago when landlords would build out an entire space for a tenant (even a small tenant), including all electrical, lighting, walls, floors and AC as part of the lease deal. They did this to secure a tenant who would drive cash flow for their buildings over a lease term of 10 years. Some of these expenses had positive tax implications for landlords and landlords always had the least expensive contractors to execute the build-out. This was a huge benefit to small businesses because it eliminated the need to fund a 250K-500K construction effort during early-stage development. Our firm took advantage of this 4 times during 40 years of renting space in Manhattan, and each time it made it possible to channel funds into new technology and staff instead of the pockets of otherwise sketchy Manhattan contractors.
SMALL BUSINESSES HAVE FEWER FUNDS FOR FURNISHINGS AND DESIGN SERVICES: If one considers the cost of a major build-out and loss of capital to massive security deposits, there are even fewer funds available to design and furnish a workable and attractive space. Even though many startups utilize IKEA-style workstations during early phase development, there remains the problem of furnishing conference rooms, executive offices and common areas in a manner that will draw the acceptance of employees who can, at the drop of a hat, decamp to Google or the like where DESIGN is offered up with Kombucha and all manner of other perks. To create a workspace with some degree of aesthetic appeal and function, startups must retain the services of a design firm. Those startups that do otherwise often encounter major problems with aesthetic appeal and construction delays, not to mention code violations that require legal assistance and sometimes a major redo.
However, today in any metro area, design firms are among the most severely affected by the massive uptick in the cost of space. As a result, there are fewer competent design firms. Those that do exist routinely take on more work than they can handle and tend to bill at rates aligned with corporate lawyers. Many of these firms have a “minimum-size” for projects that determine who they work for and when. This is only part of the problem. Today, many designers working on startup spaces negotiate a portion of their fees based on what furniture they specify and install. They also frequently capture fees based on the cost of construction and build-out. It is safe to say that there is, at best, little incentive to spec IKEA when Knoll will drive fees much higher for the design firm. WeWork solved this problem by building DESIGN directly into its offerings. One can certainly question some of the aesthetic decisions of WeWork, but still the spaces have a visual design vocabulary that is hip, if somewhat like a design student’s dorm room.
SMALL BUSINESSES SOMETIMES BECOME BIGGER BUSINESSES: One hopes that with proper planning, a good product, and hard work a business owner can eventually grow a business into a viable asset. This does not actually happen that frequently, but when a firm encounters real growth opportunity, it is necessary to increase the space occupied by that business relatively quickly. Traditionally, in major metro areas such as NYC, this problem has been managed by renting more space than a startup or early-stage company needs initially and then dividing off and subletting the space to another small business. This sounds like a workable concept. However, God is in the details.
LANDLORDS ARE DIFFICULT FOR A REASON: Having done this ONCE, we can say with confidence that there are certain structural problems that arise with this approach. First, a large space means a larger security deposit, more construction costs and real estate broker fees for finding a tenant. Then there are the problems of becoming a landlord. Such issues include subletting tenants not paying their rent, damaging the space, living full-time in office space that does not allow residential living resulting in a NYC code violation, filling the sublet space with far more staff than agreed to in the lease and finally refusing to actually leave when their lease is up, thus forcing you into protracted litigation in NYC landlord’s court. This is NOT a place that you want to spend your time and legal fees. In the end, this approach is a massive pain which renting space in WeWork solves, assuming there is more space available in your current WeWork facility. The complication with expansion at a WeWork facility is creating contiguous space. This rarely happens, which can cause all manner of staffing and management issues. However, compared to slugging it out in landlord court with a sublet tenant who refuses to pay rent and/or leave, WeWork seems perfectly blissful.
SMALL BUSINESSES NEED IT INFRASTRUCTURE THAT WORKS: In the last decade, the requirement for a small business to create, manage and maintain a secure and reliable IT infrastructure has become non-negotiable. The IT needs of even a small firm that has demanding clients are the same as a large corporation, but with less scale. At the component and structural level, a small business must have highly secure networks, reliable server infrastructure, off-site backup, and robust security software. Even at the smallest startup size of a few employees, these systems easily run into major costs for IT consultants, security analysis, penetration analysis, cloud resource management, security software maintenance and straight-up computer hardware and software. If a small business has truly demanding clients, who for example require a yearly IT and system security audit (we have three such clients), the costs rise massively. In some major metro areas, basic Internet service is still a problem, a fact never admitted to by major Telco’s until one attempts to validate promised internet speeds and reliability.
MEMBERS HAVE EXPERTISE: WeWork made it possible to connect to basic IT services in a secure and quick manner without the pain of dealing with Verizon or other entities. If more advanced IT infrastructure was necessary in addition to the WeWork basics, it was often possible to obtain advanced IT expertise from fellow WeWork members. The surprising thing about WeWork is, for some unknown reason, there always seems to be a few competent IT consultants leasing space in every WeWork. As someone who has hired, fired and chased more than a few IT consultants over the past decades, there are challenges securing IT expertise. However, at WeWork, making a mess of your IT system comes with some degree of trepidation given that the IT consultant sees you every day. Our firm’s IT consultant recently decamped to WeWork. More on that later.
SUMMARY OF WHAT WeWORK GOT RIGHT: In the end, had WeWork paid strict attention to what the market needed, it would have likely produced a massive benefit for small business development in the U.S. and even abroad. However, there were certain structural problems WeWork did not get right, which aside from its recent IPO meltdown, presented a major problem for its long-term success.
WHAT WeWork DID NOT GET RIGHT ABOUT ITS SPACE OFFERINGS
EVEN SMALL BUSINESSES NEED CONFIDENTIAL WORKSPACES: Admittedly, our firm consults with some very demanding corporate clients. Still, all businesses require a basic level of security and confidential workspace. As a business grows, especially in the tech startup space, confidential workspace and totally secure access are non-negotiable. This is especially true for startups that deal with confidential client information and projects that have intellectual property (IP) components. Today, in some master service agreements, clients specify the exact physical configuration and security access that a small business must have in order to work for that client. The current free-wheeling, all one big family model of the WeWork space planning runs totally counter to maintaining confidential work. This is a problem mostly with visual access to private workstations and certain rules which do not allow tenants at WeWork to hang blinds, which WeWork feels compromises the WeWork user experience. For any firm handling confidential information and related intellectual property requirements, the WeWork space planning model is a total no-go. This issue likely limits, to a significant extent, businesses that require confidential workspace configurations. For example, we had to dramatically reduce the use of our IT consult after they moved to WeWork based on confidentiality requirements found on our master service agreements signed with clients.
PRICING BY WORKSTATION VS. BY SQUARE FOOT: To be transparent, our firm toured and considered WeWork as a possible solution for our next move. When we visited various WeWork setups in Manhattan, we asked for specific workspace layouts that would accommodate a certain number of employees. We were shown workspaces that the WeWork staff stated would be suitable for the number of employees required. The spaces were scary-small compared to our already tight office space where we are currently paying $90 per square foot. When we inquired about the square foot cost of WeWork space for staff members, we were told that WeWork prices by the desk and not the square foot. Each WeWork desk was about $1100 per employee. The total square footage consumed by such a “desk” was generously about (3 x 3) or 9 square feet. The term “postage stamp” comes to mind. A quick back-of-the-envelope calculation reveals a total square foot cost of about $150. The buildings where these spaces were located in Manhattan had listed rental costs of about $100 per square foot for tenants who wanted to lease space directly from the landlord. It is not hard to see where WeWork has likely derived its long-term valuation. The space per square foot multiple is staggering for WeWork if they can rent the space at a below-market rate of $100 and lease at something like $160. However, the model becomes even more interesting when a business owner factors in the additional costs for the common spaces, including the espresso/beer bar, front desk areas, open work areas and passage ways. It is likely that tenants are actually paying closer to $200 per square foot for the WeWork workstation space. This may sound a bit dishonest, but not so fast. (Note: This analysis is based on data from several months ago that may have changed)
THE MAGIC OF RENTABLE VS. USABLE SPACE: It turns out that hiding the true per square foot cost of office space is a time-honored shell game practiced by Manhattan landlords in ways truly antediluvian. Usual tricks include calculating the rentable square footage by taking measurements from the outside windowsill or including shared bathroom areas in your lease area calculations. This is repeated for all tenants on the same floor, which means the assigned value of two small bathrooms becomes surprisingly large when allocated to each tenant on the floor. Adding the lobby area to your square footage and common hallways to your rentable area are likewise common practice. It is important to note that the per square foot cost quoted by brokers and landlords is the RENTABLE square footage, not the USABLE square footage. This leads to the time-honored rule for all business owners to always actually measure the space and do the math. A space quoted at $80 a square foot might actually cost $110 dollars a square foot in real usable terms. WeWork simply adopted this model, but that does not diminish the true cost of a WeWork space. Have no illusion, you are paying TOP dollar.
The total cost of setup at WeWork may or may not be a good deal in light of what WeWork got right as discussed above. But what is very clear is that a small business is going to have a very expensive and small workspace for its employees compared to what can be worked out should that same small business lease directly from a landlord who will agree to build out their space. A workstation of the size offered by WeWork is very small and when tightly packed can be a real problem for some employees.
FAILURE TO SEGMENT COMPANY NEEDS IN TERMS OF SUB-SYSTEMS: One of the advantages of building out an office space is to create a set up that is highly workable for company functions. Such needs include privacy, security, storage of supplies and reference materials, staff break area, filing systems and of course workstations and executive offices suitable for private conversations. Based on initial analysis, the WeWork space planning adopts a “one design fits all” option and simply ignores the fact that all functions of a given firm must be stuffed into essentially the same glass box design solution. This failure to accommodate even the most basic space planning sub-systems means that a typical WeWork company space is visually chaotic and for the most part lacks all manner of basic internal organizational structure other than everyone has a desk and the rest of the office systems are basically piled in the corner. For some early-stage startups, this set up is understandable, but as a business matures a measure of professional aesthetics and organization is helpful and necessary.
SPACE PLANNING IS A SCIENCE NOT AN ART: This whole issue of how the design of a given workspace impacts business productivity is not a trivial matter. In the last decade, major fields of study combining social psychology, environmental human factors and collaboration research have demonstrated how important the design of workstations and workspaces are in terms of improving the profitability and productivity of a business, regardless of industry sector or size. This work ranges from the optimization of individual workstation design to large-scale workgroup environments, involving hundreds of employees. The point is that WeWork could have and should have designed its business and space allocation model on modern workplace ergonomics and collaboration research. Style is one thing business performance quite another.
TRULY VALUABLE DATA: It is likely that WeWork had available one of the most profoundly rich sources of data on workgroup collaboration ever, but failed to use its petri dish to understand how collaboration unfolds and expands when businesses of many different stripes end up sharing the same space. The potential data set would have likely advanced the field of environmental UX optimization in ways unimagined. Clearly, such research could have and would have led WeWork to develop and improve workplace collaboration in ways that would have driven vast shareholder value and even related intellectual property. It is important to note that there is a body of well-understood and validated research methodologies that could have been utilized by WeWork to determine at a core neuro-cognitive level the attributes of the WeWork workplace design that impacted high member satisfaction and collaboration. These same methods could have been utilized to optimize the UX performance of WeWork workplaces in a manner that would likely lead to truly innovative workplace solutions. It might have been a much better investment for WeWork to have spent a few million dollars on a human factors research lab instead of an indoor surfing venue.
THE FUTURE OF SPACE PLANNING? The WeWork workspace UX Optimization planning model was at the intersection of open landscape spaces, now understood to be one of the greatest productivity killers in history. Clearly, given how quickly WeWork spaces filled up, there was magic or better yet compelling social psychology in the combination of workplace attributes as envisioned by McKelvey and company. Did WeWork understand why, on a basic and important psychological level, members loved these spaces? The answer is no, even though the science behind such research was easily acquired and practiced. There would have been real shareholder value flowing from such data and related intellectual property frameworks. No one has created a truly UX-optimized workspace that rests on validated business performance and employee health and satisfaction.
WE KNOW SOMETHING ABOUT THIS TYPE OF RESEARCH: It turns out that our firm has more than passing experience in the conduct of formal research related to UX optimization of workstations, workplaces, and related ergonomics. We have conducted formal UX optimization research on systems ranging from the design of control rooms for NASA to the design of high-performance ergonomic workstations for Tiffany jewelry production. We operate frequently in the field of environmental human factors research, applying advanced neuroscience-based methods to understand user needs and optimize their experiences. The point is that WeWork had both the cash and opportunity to develop a powerful space allocation and workstation design framework that would have been not only profitable, but highly sought after by small businesses and even large entities concerned with employee productivity. WeWork had the mice and the maze, but failed to make use of either.
Simply stuffing all comers into a glass box is more art and much less science than should have been utilized to create a scalable business model for shared workspaces. This has massive business implications for WeWork and shareholder value. Had WeWork undertaken such research, it could have and should have come forward with an S1 filing that proffered extensive intellectual property rights for the design and optimization of its workspaces and, most importantly, a UX-optimized WeWork workstation. This is a missed opportunity on a massive scale.
This leads to the obvious question of where is the scale in the WeWork space planning and allocation model? As far as can be determined, WeWork does not appear to have any significant IP aside from the registered “WE” name sold to the company by the founder for several million dollars. No IP today means essentially no future. Without a clear and robust link between workplace optimization based on validated research WeWork is really nothing more than another metro landlord.
SMALL BUSINESS NEEDS ADVANCED IT INFRASTRUCTURE: As noted above, WeWork made it relatively easy to connect to basic IT infrastructure, but if one understands the trajectory of business overall, it is clear that virtual migration is the future. This means that in addition to physical locations, WeWork could have provided UX-optimized virtually migration infrastructure in ways that would have been enormously valuable to WeWork members, especially small businesses. These service areas could have included the establishment of easy-to-set-up and utilize cloud infrastructure, security audits, licensed SAAS applications, white-labeled WeWork software and all manner of sub-categories of IT infrastructure and software.
This capability would have set in place Virtual WeWork Workspaces (VW3) that would have had tremendous benefit to startups, sole proprietors and small businesses. A quick review of the growth and profitability of AWS, Microsoft Cloud and Google Cloud services reveals the nature of this opportunity space. It goes without saying that smoothing the flow of WeWork members from physical space to virtual space and back again would have been a truly staggering innovation. Again, there are likely piles of excellent IP possible here, but alas…it did not happen.
A MATURE SMALL BUSINESS MOVING TO WeWORK HAS DIFFERENT NEEDS THAN A STARTUP: This was clear once we looked in depth at the benefits and costs of staying in our current space vs. taking a setup at WeWork in Manhattan. A mature business is not going to move to WeWork without a major adjustment that will likely lead to rejection of the WeWork option. A mature small business runs on well-defined processes and systems that cannot be tossed overboard when moving into a WeWork space. For example, our firm has a research library of over 1,000 books. These are central to our business, even though some are now available in electronic form. We have file systems required by our clients and security access requirements set in place by master service agreements demanded by important clients. We have confidential projects and information that require strict access and security. All of this leads to the conclusion that WeWork may serve very early-stage companies and individual practitioners well. But this market segment is not going to deliver the growth that WeWork was proffering in the S1…not happening. Especially when the economy goes south and newly formed small businesses cancel their WeWork memberships. Therefore, one must question the viability of WeWork to create new, scaled workspace offerings for more mature small businesses that cannot and will not move into the current WeWork space planning model. Does this limit WeWork growth?… Yes, in major ways.
ENOUGH PILING ON: Other than the obvious and over-wrought focus on management stupidity, the major structural problems facing WeWork was the need to create a UX-optimized space utilization model that meets the needs of mature small businesses across a range of application areas. This is where the real growth will be in shared office space. Had WeWork done this AND offered the benefits of what it got right, it is hard to imagine it would not have been a force to be reckoned with on a global scale. SoftBank would have been right.
The current business rental market in metro areas is truly abusive to small businesses, regardless of the application area. WeWork simply missed the boat, as the money is spent on leases without a scalable implementation model and an investor community thinking mostly about the abusive nature of Mr. Neumann and Company.
IN THE END…PERHAPS: The need was huge, the problem complex and the WeWork execution deeply flawed. But, let’s be clear, WeWork saw the larger problems of small business but failed to execute based on market segmentation and workplace UX optimization. Two steps forward and one step back. Unless you are Adam Neumann and SoftBank, in which case who knows how many steps back…and apparently all steps back will be in bare feet!
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