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Home Coworking

Coworking And Technology – A Match Made In Heaven?

Jonathan Price explores the surprisingly under-reported spate of mergers involving two of the biggest names in flexible space – IWG and WeWork – with online brokers and tech companies.

byJonathan Price
April 26, 2022
in Coworking
Reading Time: 7 mins read
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  • Jonathan Price explains the meaning behind the spate of mergers involving IWG, Instant Group, and DaVinci Virtual Office Solutions. 
  • Online brokers have played a critical role in the development of the coworking business, and by merging with one of the largest online brokers, it may offer IWG privileged access and control over its sales prospects. 
  • These mergers are also linked with WeWork’s partnership with Yardi, with the coworking operator supposedly “not seeking to be outdone” by its larger rival, IWG. 

Something little short of a coup happened in the coworking world in March without anyone really noticing. 

What I am referring to is the merger between The Instant Group and the technology operations of IWG, the world’s largest coworking operator, a merger that was further consolidated a mere one week later by the addition of DaVinci Virtual Office Solutions, a provider of comms and virtual office solutions. 

The original IWG/Instant merger was reported by a number of news services, none of which demonstrated any understanding of the significance of what is, in my view, a very important strategic move by IWG, whose CEO, Mark Dixon has demonstrated his strategic nous more than once already. 

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So, why is this merger so important, and potentially so dangerous for IWG’s competitors? 

I offer two separate, but linked explanations.  

To appreciate the significance of the move you have to appreciate the critical role that online brokers have played in the marketing and development of the coworking business. 

When a new coworking location opens its doors, its offices and desks are all empty and the revenue is at zero, in contrast to the traditional office sector where the floors of a new office building are pre-sold during construction, so that it opens with a built-in clientele and rental income. A new coworking facility therefore needs a lot of help in getting in new customers. 

Even when a coworking centre has filled up, it requires constant marketing, because, like a hotel, there is always a certain amount of churn as customers leave and need to be replaced. 

In the early years, traditional realtors and real estate companies were completely uninterested in servicing the coworking sector, because the deal sizes were too small to make it worthwhile making any effort to find clients. The online agencies, including Instant Offices were founded to fill this vacuum and they grew rapidly, providing a vital resource to the coworking operators. Because their operations were 100% online, their costs were much lower than traditional realtors, and they could be profitable on the fees for finding customers for small offices on relatively short-term licences. 

As a result, a typical new coworking centre found its first clients from a mixture of walk-in clients, marketing through their own websites and from online brokers, with the latter accounting for a substantial proportion of those new clients, depending of course on the type of location. The way the online brokers work is that they use search engine optimisation to capture a large proportion of internet searches for office space.  

When a prospect contacts such a broker, they are asked for their details and requirements and these are then sent out to all relevant coworking centres by email. It is up to the coworking sales teams receiving these emails to ring the prospect as quickly as possible to persuade them to visit the location and to take a tour. Typically, a salesperson needs to be in the first three or four to call the prosect to succeed in arranging a tour, so quick reactions are vital. 

Control over leads and “extra incentives” 

Online brokers became so important for marketing new centres that it became commonplace for centre operators to offer extra incentives to the brokers to make sure that their centre was included in the first batch of emails sent out, as anything after that would be useless. Speed of response became one of the most important determinants of winning new business, and control over sales leads, thus a very valuable factor. 

Smaller independent coworking firms have generally felt disadvantaged against the bigger operators, like IWG, because the latter could afford to be more generous with incentives for the brokers than the smaller firms could. So, it was not a level playing field. 

Another complaint that was sometimes heard from smaller operators managing centres for big firms like IWG’s Regus, was that their central sales office favoured their own centres over those managed or franchised by smaller operators, by giving the leads to Regus centres first, giving them a head start in signing up the new clients. 

“Independent operators asked to comment on the IWG/Instant merger expressed the fear that the merged group would favour IWG brand centres over competitors.” 

Once the importance of early sales leads is understood, it is easy to see why IWG acquired EasyOffices some years ago, as this gave it privileged access to its sales prospects, and why it would seek to invest in the Instant Group, a larger, better established online broker, as well. 

Independent operators asked to comment on the IWG/Instant merger expressed the fear that the merged group would favour IWG brand centres over competitors when sales leads were being sent out.  

Whether or not this fear is realised, you can see the sense in the strategy of vertical integration that IWG is pursuing. Control over sales leads is particularly important when market conditions are difficult, and although that seems unlikely in the current boom times, a downturn is always possible. 

Enter WeWork 

Explaining the second aspect to IWG’s strategy allows me to write about my favourite subject – WeWork. 

Whether we take WeWork’s peak valuation as $47 billion, at which it was planning to IPO, or the $98 billion reportedly offered by one of the banks seeking to win the IPO mandate, it is clear that such a high sum could not be justified solely on the profits to be made from selling coworking space.  

A large part of that valuation must have been attributable to other aspects of “raising the world’s consciousness” which, as we all know, can only be done by technology. 

WeWork managed to get to such heights by convincing Softbank and others that it was a tech company. While that was largely untrue of WeWork at that time, it is the case that technology plays an ever-increasing role in the workplace and that the importance of tech has been boosted by the recent trend of hybrid working. 

The IWG group businesses that merged with Instant included meetingo.com, Rovva (pronounced Rover, a toolkit of services and programmes for small businesses) and Worka, a coworking app, as well as EasyOffices.com. Together with Instant’s consulting services and portfolio of coworking serviced and managed office products, along with coworker.com, acquired recently and DaVinci’s communications and virtual office tech, we are starting to see a true tech approach to the workspace.  

Getting all of these different businesses to work together in a coordinated fashion may not be totally straightforward, and there may need to be further acquisitions to fill gaps in the service provision, but it is clear that most of the pieces of the ‘future of work’ jigsaw are there. 

“It is perhaps ironic that in the very field in which it claimed to be different, WeWork has been overtaken by its supposedly more staid competitor.” 

As usual the investment world has not recognised the value of these deals, but one business that has, is WeWork.  

Not seeking to be outdone by its bigger and more profitable rival, WeWork announced in mid April a partnership with Yardi, a well-known property management software and solutions company.  

It was not revealed what this ‘partnership’ involves, so may be no more than a contractual arrangement, rather than a more structural deal of the sort put together by IWG, but the direction of travel is clear. WeWork must actually develop or acquire the tech capability that everyone thought it had before 2019 in order to justify a more interesting valuation.  

It is perhaps ironic that in the very field in which it claimed to be different, WeWork has been overtaken by its supposedly more staid competitor. We can expect to see more acquisitions by WeWork too before the year is out, funded by their still over-valued stock. 

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Tags: CoworkingInvestmentMergers & Acquisitions
Jonathan Price

Jonathan Price

Jonathan is a Chartered Fellow of the Chartered Institute for Securities & Investment and was responsible for the world’s first ever public fund for investment in coworking space. Today he acts as a specialist consultant and is a visiting professor at a leading French business school.

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