Whichever way you look at it, massive changes are taking place across the world and it’s shifting the ground beneath our feet. Today’s business landscape is extraordinary, it’s fast-paced, it’s on-demand, it’s transparent, and the experience is only set to intensify further.
It’s an exciting place to launch or grow and business, and with record numbers of new startups hitting the scene every day, the opportunities are endless. The engine room of this dynamic marketplace is powered by flexibility, and the place it matters most is your choice of workplace.
Gone are the days of long, rigid property leases and high-risk financial commitments. Businesses want flexibility, and they’re getting it. As a result, the flexible workspace industry — comprising serviced offices, coworking, accelerators, incubators, and virtual offices — is growing, and fast.
Here, entrepreneur Andrew Berkowitz, founder of The Global Startup Movement podcast series, is joined by Alliance CEO Frank Cottle for a candid discussion on the global flexible workspace industry. To check out our other podcast appearances, please visit our podcast page.
- The origins of the industry, from its early years as ‘executive office suites’ to the mainstream and diverse flexible workspaces available today;
- Frank’s journey, from building business centers in the 1980s and 1990s through to his thoughts on the market today;
- From startups to listed companies, the 5 key occupiers of flexible space by size;
- The role of accelerators and incubators in the industry;
- The hottest investment markets, and dissecting WeWork’s astronomical $20bn valuation.
The Global Startup Movement is a Washington, D.C. based media publisher and consulting firm.
As the executive producer of The Global Startup Movement, Andrew Berkowitz oversees media coverage efforts of innovation and tech industries in emerging economies around the world and is the chief steward of a portfolio of established media offerings in that space— including The Global Startup Movement podcast.
Our team has developed a penchant for extracting and delivering candid insight and play a key network mapping role which helps stakeholders gauge the nature and strength of the often indistinct interpersonal and inter-organizational relationships at play within any given ecosystem.
Every Tuesday, we bring on a different guest to discuss the most pertinent news, headlines, and events taking place in the global startup ecosystem.
Andrew Berkowitz: Frank, tell us a little bit about you and your business journey.
Frank Cottle: I’ve been in the serviced office industry in one form or another since 1979, that’s about 38 years now, since we started the predecessor to the Alliance company. We started as a commercial property company, buying land and building our own buildings, which we did for about 10 years. We would then plug in what were then called executive suites into those buildings — which is the same concept as the serviced office — and we developed quite a portfolio. We built a new building from the ground up every 110 days, for 10 years.
We sold that portfolio in 1990, and then we started building a portfolio of what were called business centers. Our industry really created an entirely new product. We combined 3 elements: people, place and technology, and bundled it into a single product, and delivered that product with a highly flexible service agreement. So, it allowed for a tremendous amount of flexibility and a tremendous amount of cost-saving for all companies, from startups right on up to the global Fortune 1000.
So that’s who we are as an industry and we’ve gone under the name ‘serviced offices’, ‘executive suites’, ‘business centers’, ‘coworking centers’, ‘incubators’, ‘accelerators’ — all those different sectors are part of our overall industry. From 1990-2000, myself and a couple of buddies built 195 more projects across North America and we sold that portfolio right at the height of the dot.com era. Today the Alliance group encompasses 12 companies, in a network model we operate 700 locations in 52 countries, and we also operate a number of tech companies that service our industry, and that’s really where we’re most interested right now.
We operate ‘the Expedia for real estate’, if you will. People come to us and we manage their account, it could be a startup, or a corporate that needs to operate in 10 or 20 countries at a time, and it’s quite enjoyable because we get to see the full spectrum, what’s going on in the industries and economies of the world, we can see who’s hiring and who’s not, where startups are growing and where they’re not, how they’re being funded, all those things. It’s really quite an eye-opener.
AB: From your perspective, how has the globalization of the workforce and the startup scene changed your industry over the past 5-7 years?
FC: I think our industry has actually changed the way startups work, candidly. I think we are as much of a change agent as anything else, because we created that flexibility factor that all startups need.
If you think about it, what 3 things does every startup need? Access to capital; Customers; and Flexibility. They don’t know what tomorrow’s going to bring. So our industry created that flexibility factor that’s going through so much of today’s business.
Look at the gig economy as a good example — look at contracting and outsourcing in employment models — if you were to pick any global Fortune 1000 company, and you looked at their annual report 5 or 10 years ago, they would have had, say, 300,000 employees worldwide. Look at that same company today, and they would say they have a workforce of 300,000. A workforce, not employees.
So, the entire structure of employment has shifted dramatically. It allows startups to become contractors, and contracting groups to service large companies, like governments, all over the world. Today, immigration is a huge topic of conversation, and yet what we’re able to do with technology is we’re able to work without borders, we’re able to work anywhere in the world, and that has a massive impact on the concept of starting a business. You don’t have to move to a city or a country with capital in order to start a business today; you can start a business and that company can bring capital to you, wherever you are. So, we’re redistributing wealth through restructure of employment, without borders, on a globalized basis, and that’s a phenomenon that’s never occurred before.
AB: Is the majority of your customer base large corporates, or smaller tech companies in need of more flexibility?
FC: Well if you looked at the global stock prices over the last 10 years you’d say that large corporates need the flexibility more than the startups!
If I look at the client mix in our industry, it’s really broken in almost equal 20% categories. Top to bottom by size of user, the government is actually a major client to our industry. People don’t think of government as a typical client for flexibility but if you think about it, most government offices, agencies etc. all work on annual budgets. They don’t have a 5-year budget, they have a 1-year budget. The flexibility our industry brings for small offices and serviced spaces in government is pretty substantial.
Below that would be the global Fortune 1000, 2000, and publicly listed companies — the big guys, they represent about 20% or so of our industry’s customer base. After that we have legal, accounting, financial service professionals; that’s a very important group to our industry. And thereafter we have branch offices, smaller offices, consulting offices, media companies, sales offices, distribution companies, what you would think of as small entrepreneurial companies. They might not be startups but they’re very local companies.
And then you have startups, which represent around 20% of the industry’s customer base. The goal for us is that we want to see them as a startup but we want to handle their entire lifecycle, so we want to watch and help them mature into that regional or local company, and then hopefully mature into that listed company with status, and help them worldwide. It’s a full company lifecycle approach to business and it’s very important — no-one has ever taken that approach. It’s always been fragmented, someone services startups, someone else services big companies, someone services governments — and we think that our industry and our own company, Alliance, should service the entire lifecycle of that client.
AB: Tell me a little bit about the incubators and accelerators that you guys have in your portfolio. How have you been able to differentiate your own programs within such a saturated marketplace?
FC: First, I don’t think our marketplace is saturated, I’ll get to that in a minute. As I mentioned, our industry combines people, place and technology, delivered with a highly flexible service agreement. Think of it like the automotive industry — you’ve got luxury cars, sports cars, SUVs, pick-up trucks — and they all have one thing in common: they all move people around. That’s the automotive industry. In our industry, we share a combination of people, place and technology, with flexible service agreements, but we have brand sectors too. We have classic business centers, and we have coworking centers — that’s the rage these days, and the fastest-growing sector in our industry — and they take people, place and technology with a slightly different twist. They combine that with a brand promise of business growth through a collaborative community.
An incubator only takes either of those two — a business center or a coworking center — and all an incubator does is add mentoring to either one of those models. It could be through community, or it could be professional. An accelerator would add access to capital to an incubator. If you really break it down as to what they do and the operating models.
So, the differentiation of accelerators is the ease of access to capital. In an accelerator run by Microsoft, everybody goes into that accelerator and applies, and they get a stipend of benefits and they’re hopeful that Microsoft will like their product, and invest further in it. That’s one type of accelerator. Another type of accelerator is the type that we’re more familiar with, referenced by your “small and local” comment, and that’s people, place and technology, mentoring, and access to capital. So, all I have to do is take a coworking center, add mentoring, and then have 2 or 3 venture capital companies or angel groups come in once a week, twice a week, on a regular basis and review business plans. And now I have a freelance accelerator.
In fact, venture companies and angel groups that are large enough to be organized work with us and others in our industry, quite closely, because they can come in as a capital resource. They’re not familiar with running our type of facility and businesses, but they’ll come in and say, we’re going to invest in these companies we want them to physically be in your space, because we don’t want those startup entrepreneurs worrying about hiring receptionists, or planning furniture, or office layouts — we want them doing what they said they were going to do during their pitch. We don’t want them doing all the other administrative things that have to do with office and facility management. It’s expensive and it bogs them down. VCs come to us because they know their investment dollars go further. So, there are a lot of models in the accelerator process, not just the large funded ones, that co-ordinate capital resources.
AB: Within your worldwide portfolio, what are some of the hottest markets for you all?
FC: Asia! Right now, Asia is very hot. Valuations in China… If I were to build a tech company in the US and call in a software-as-a-service company, and if I were to have a certain pro forma on that, I might have a valuation of 8 times forecasted revenue 12 months after a period of time. If I were to do the same forecast in China, a Chinese company being funded by a Chinese venture group, that group might value it at 12 or 14 times. Asia’s a very hot market and there are actually quite a number of companies from different parts of the world looking to enter their business models through Asia and through China, as opposed to traditional markets here in the US.
AB: Why do you think there’s such a disparity with those valuations?
FC: Excess capital. It’s real simple! Companies that go out in their markets, trade at higher values more quickly. Now, is that the medium for a burst bubble at some point? Very possibly. Is there an inevitable slowdown in the balancing-out? Absolutely. But today, you asked me where’s the hot market, and that’s the hot market.
AB: That leads nicely into my next question. With Softbank’s massive $4.4billion investment into WeWork, what do you think that signals for the direction the coworking market is headed in? And what do you think is one of the biggest things that WeWork has gotten right?
FC: I’m going to become very contrarian… what’s that old saying, a fool and his money is easily parted? WeWork is not a technology company. It’s a business process outsourcing company, like everything else in our industry. It’s basically Regus with a paint job, in my opinion. They’ll probably be angry to hear that or they’ll say ‘Who cares what Frank says?’ but if you really look at their business model, they lease space and they carve that space up and they re-let it to others. That’s what they do.
They do so with a very excellent marketing approach, because they’re very appealing to sharing economy companies, as well as Millennial entrepreneurial spirit, and like I said, it’s Regus with a paint job. It’s a cool paint job, it’s sexy, but that’s really what it is. If you were to analyze the floor plans of the spaces and the ratios of office-to-public space, compare WeWork to Regus’s ‘Spaces’, they’re about the same.
What’s amazing to me is that when you talk about valuations, Regus has a 25+ year track record, it’s profitable, it has 3,600 locations in over 1,000 cities, they’ve been there, done that, got the t-shirt. They’ve been in a variety of up-and-down markets through a number of economic cycles on a global basis. WeWork has only been in one market, one upswinging market, one half of one cycle. So it’ll be interesting to see how they stand a downturn, an economic recession, how their model around going after sharing economy corporates — like Uber and Airbnb versus Regus going after the likes of IBM and Cisco — how that blends out.
If Regus were to not grow a single center in 2017 (and they just bought a single company and picked up over 1 million sq ft, but let’s assume that didn’t happen), and WeWork were to hit 100% of all of their very ambitious growth projections for 2017, WeWork would still be about one-twentieth the size of Regus. Now, Regus trades at a valuation of about $4billion, maybe a little more, but people are valuing WeWork at $20billion? Think about that. WeWork’s value per customer is $580,000, per workstation customer! Nobody has valuation like that. So, I think that WeWork has been incredibly successful at amazing marketing skills, mostly to financial institutions.
AB: I do think it will be interesting. A lot of the hottest companies in Silicon Valley right now were born out of the financial crisis in 2008 and since then, they haven’t really seen a big downturn in the market, which personally in my opinion is coming pretty soon, possibly the end of this year into 2018.
FC: I agree with you. But one thing to think of, when you look at those companies, most of them have a tremendous degree of scalability — take Facebook as a good example — but what does their balance sheet look like? They’ve got a little of this, a little of that and a lot of goodwill. But they’ve still got a lot of negatives on their balance sheet.
What holds the valuation of business outsourcing companies, which lease space and re-let it to others, and lease long-term against new re-let short-term, is their balance sheet. Every time you open a new business center — this is why we got out of that business and went to the tech side and the customer side — every time you open, you have a certain amount of capital that has to go in to build it, and sustain it through a startup period, perhaps 6-24 months depending on the market location and timing. Then you have this thing called a lease, which is fixed, and it goes up every year for 10 years, or 15 or 20 years, and that’s a debt instrument, which sits on your balance sheet. When the market goes down, what happens is you still have to pay your increase in your lease payment but the guy next-door can open a new center in the downmarket, and his lease is lower. So you’ve just lost all your profitability.
Taking a lot of space and growing in the real estate business is based on fixed leases that have escalators in them, which over time, is a lot different than scaling Facebook friends. Totally different financial models. When Regus first went out it was the darling of the markets, and it went out at a very high price, about 6-7 times what it’s trading at today, after it’s been seasoned. So, it will be interesting to see if WeWork goes out — if they’re able to, they’ve been talking about it for a while now — they might have an explosive value but after about a year or 18 months, probably, unless something happens that changes their balance sheet structure and maybe if we go into a little recession as you suggested, I’m buying them short.
AB: Interesting. OK, so we’re going to finish on a quickfire round. 4 questions, up to 60 seconds each. First, what CEO do you admire the most right now, and why?
FC: Boy that is a hard one. Thomas Edison, because of his continuous inventive capabilities in business, and his capacity to deal with government at the same time as create products that had a material change in the world. Elon Musk hasn’t proven that yet. He’s creative, he’s cool, for sure I’d love to have dinner with him, but for sustainability I’m going to go with Thomas Edison.
AB: What’s your favourite business book?
FC: I don’t read business books generally. I do spend 1 – 2 hours per day diligently pursuing information that I think impacts our industry. Most business books have been written by people that have done some research 2 or 3 years ago and have come up with some clever things to create a bestseller, but they don’t impact the thinking of the future so much as they codified the thinking of the past. So I’m very much a current events guy.
AB: Where do you get your sources of news? What are your must-reads?
FC: The net! It’s where the news is today. Everything that has to do with our industry, about startups, hiring practices, movement of economies… There’s never any more or less money in the world, it’s just that different people have it. It moves around in cycles. So, always looking to where the money is, to where the opportunity is, that’s a big part of what we do as a company and what I do on a daily basis, and have done for decades.
AB: What are your thoughts on the future of storefront real estate, and how long until Amazon eats up all of it?
FC: The sooner the better in my opinion! That’s probably not what people want to hear, but I think that ‘just in time everything’ is the way we should go, there is so much waste in the world of property in particular. 90% of all the problems with humanity could be dealt with by repurposing wasteful real estate. All of our housing problems in the world could be dealt with on that basis. So much productivity is just wasted. So I say the sooner the better, let’s just get it over with. Let’s do it.
AB: Finally, what’s your favourite thing about living in Newport Beach?
FC: Surf! I surf, windsurf, ocean kayak, I like to be on the water every day or every other day if I can, I’ve always lived on the ocean, in fact I’ve lived on a little island, so I could not survive without the ocean around me.
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