In the wake of the remarkable fall of WeWork, you’re forgiven if you feel more than a little skeptical about coworking as a business model.
But Knotel is doing things differently. They may not have WeWork’s name recognition — yet — but the company is building a flexible workspace empire based on stringent market analysis.
Knotel is led by startup veteran Amol Sarva. He has a track record of growing great companies and was on the founding team of Virgin Mobile USA.
Around 2015, Amol and his partner decided to evaluate coworking as a business opportunity — they wanted to understand the hype.
“We did the analytical work that we normally do when we evaluate a company idea,” Amol says. They were pleasantly surprised to find that coworking is “actually a sensible business in a bunch of ways.”
But they found that many businesses in the space were focused on attracting small teams and hadn’t yet tapped into the enterprise market. “They were focusing on really small businesses, and spending outsized amounts of money to get them into their properties,” he notes.
Armed with the opportunity they’d uncovered, Amol and cofounder Edward Shenderovich forged ahead with their strategy. “We focused on bigger companies, and a much more capital-efficient model,” says Amol, who is Knotel’s CEO.
While WeWork continues to make layoffs, Knotel is growing. In August, Knotel raised $400 million, and is now valued at over $1 billion. “Suddenly in 2019, everyone notices, and notices the stuff we’ve been saying,” Amol says. “This has been a really interesting year of validation of our basic strategy.”
Amol called into the podcast to discuss why flexibility is key to succeeding in the coworking business and how they’re trying to overcome the challenges to further growth. Highlights from the conversation follow.
Look before you leap
Scott: Tell me about the early itch that you started to see that became Knotel.
Amol: I went to graduate school in Palo Alto, and I’m at Stanford, and I’m sort of sniffing around. Then I started getting involved with things, and the first one that got really big was Virgin Mobile. I did a bunch of other companies over the years, and I would regard myself as a member of this Silicon Valley tribe. There’s a set of ways that people do stuff that emanates from there.
Over time, the techniques of that tribe have come to bear on certain aspects of the real world as well. Office is finally one of them. But in 2015, there wasn’t that much going on. There were a few of these coworking companies that were starting to get big — there was certainly WeWork, and a bunch of other ones that were quite small, all around the world.
I was looking at that with my cofounder Edward: he and I had been working on a bunch of different companies together, and investing in a few startups. In the middle of 2015, we took a look at the trend — this phenomenon of coworking — and we asked ourselves whether it was real, because there was certainly a lot of noise about it.
We did the analytical work that we normally do when we evaluate a company idea. And the first big surprise to us was it’s actually a sensible business in a bunch of ways: people really do want to be able to just get an office, work in it, not have to worry about anything, not have to go to IKEA and buy chairs. That part seemed to make sense, and it seemed like the DIY version of it was so inefficient that it was actually more expensive than the pretty sizable fees that were being charged by the coworking companies. So people were saving money by using coworking, but the coworking companies were actually making money. They were able to charge a price that was a lot higher than what their costs were.
And so that was kind of cool. But then there were a bunch of problems with it too. It seemed to be very focused on small groups of people. There’s all these people in headphones sitting in little cubicles, or maybe sitting at a big open table. It’s tons of small groups of people. No matter how often I’ve heard some of these guys say, we focus on enterprises, it’s really about these small teams. And that was the first red flag for me, because the economy is not tiny groups of people. The vast majority of the workforce is large companies. A Microsoft or an Amazon has got half a million employees — more than all the people that work in startups in America — and that’s just in one company. So that was the first big mistake I thought they were making.
And there was a second one. They would acquire sites to do leases on these huge buildings, invest huge amounts of money. It was really clear to me they were going to lose money for a long time. So they’re focusing on really small businesses, and then they’re spending outsized amounts of money to get them into their properties.
Based on that conviction, we started building Knotel, only focused on bigger companies, and a much more capital-efficient model. I’m saying it in 2016 and 2017, and people are rolling their eyes at me. By 2018, we’re starting to get big. Early 2019, we’re the second biggest player in the world in this category, we have gone from one-thousandth the size of WeWork to almost one-tenth of their size. And suddenly in 2019, everyone notices, and notices the stuff we’ve been saying. And so this has been a really interesting year of validation of our basic strategy.
I do not wish ill upon the people that work at those companies, because that one, in particular, is going to have a really tough time. But it has been really good for Knotel, it’s been really good for our business.
The feature companies want more than free beer
Scott: As you start scaling up, where do you see this going?
Amol: The big tidal wave is flexibility in office. The tidal wave is not better parties, or kombucha. The office is a place where companies bring their people together so they can get stuff done. That’s a really practical goal.
The way you get an office — if you’re one of the biggest companies in the world — really very little has changed. They start searching for offices 18 months in advance. There is no other department in the company where you know what you’re going to need 18 months in advance. That flexibility driver, that’s the thing that I think all the big corporate heads of real estate — all the CFOs and CEOs — want, because they can’t predict the future.
What we have been working on for the last four years is how to give real companies office, but make it flexible, make it a workspace that works for them, instead of some anvil around their necks that’s dragging them down.
The real rival companies have to beat
Scott: When you started to see WeWork sucking up space that they were going to build out for other companies, what were you thinking?
Amol: Every year for the last four years, they’ve announced some high-profile program that sounds like us. And each year it gets a little closer to being like us. The version of it that they’ve been running for the last year or so borrows a lot of this stuff. I think imitation is the sincerest form of flattery, and it’s because we’re right — but the thing is that they’re not actually that big: if you add us and them together, we’re not 1 percent of the global office market. They’re bigger than us by a big chunk, but you add it together and 99 percent of the world is somebody else. And so we were very infrequently bumping into them, as a ‘dangerous’ rival.
The real work is to change behavior. If you think about the old days of the landline telephone, and how in the 90s, people started getting cell phones, and by 2000 only half of people had mobile phones. So it took some time before everybody was on mobile phones, and there’s still some landlines around, but we’re mostly on the other end of it now. The competition back then between the early mobile phone companies really wasn’t against each other, it was against this old way of doing things. It was about changing consumption. And here, that’s who we compete with.
We compete against DIY: for a lot of companies, the default is, I should just get a lease, I need my own place. I have a pal, he’ll hook me up, I know an architect. The total cost and the total time of doing that, once they pencil it up, it’s not rational. But that message still needs to spread, and that conviction needs to arrive.