“Our focus in the next two years is to scale and to grow market share. We’re not focus on profits.”
That is an increasingly common line we’re hearing. Hell it’s a line that the entrepreneur in me has used before and it’s propagated by successful Silicon Valley companies like Facebook or Amazon that have had to burn truck loads of money in its earlier years in order to reach its highly profitable and defensible positions today to make abnormal profits.
Having to burn money for a number of years before seeing money is not exactly a new concept. Traditional industries like mining for example go through the same cycle and it certainly applies for certain tech models that have very significant network effects like Uber or Lazada. The problem though is that we’re beginning to apply the Uber argument of scaling first, profits later to industries that it really shouldn’t even apply to.
I happen to exist in an industry now that is a perfect example of this: The Co-working Space Industry. Here’s how the typical co-working space pitch is like:
- The workforce is changing. There are more freelancers and startups today than anytime in history and that is going to grow even more.
- Millennials want a work environment that is community based for networking and collaboration.
If these two lines sound familiar it’s because this is WeWork’s pitch. Then it goes on.
3. Look at WeWork. It’s worth over $20 billion and is the 5th largest startup in the world. We want to be the WeWork of <Insert geographical region here>.
4. We have opened one, two or three locations now and they’re all at over 80% occupancy in a matter of months.
5. We’re not making money yet at 80% occupancy but that’s because we’re giving heavily discounted rates and free seats to first build the community and scale. Just like Uber. Once we’ve scaled we can raise our rates and we’ll make abnormal profits. Oh and we’ll probably sell to WeWork or URWork.
It’s with this (oversimplified) pitch that the co-working space industry is raising millions on and heck as a player in this space I’ve been tempted to sing the same song and serve the same fluff. There’s one problem though. This pitch, this approach and chase for occupancy gets in the way of building a sustainable business.
Here’s why:
Co-working spaces sell leases for office space it has. Selling leases isn’t like selling coffee. Not everybody needs a lease today or right now. Some might need it now, some next month, some next year. So the sales process is slow. You don’t just get 100% occupancy within a few months of launch. A typical service office takes at least 12 months to sign up enough leases to hit a monthly breakeven. After that every new lease for workstations that they sign goes into profits for them.
The only way to realistically achieve 80-100% occupancy in a matter of months is to sell seats at heavily discounted rates. Rates so discounted that people are willing to break their previous leases and pay the penalty. Or give away free seats to bloggers or influencers or… well anyone so that it makes the place look full.
The problem with that strategy though is that if you heavily discount your product, say if people are used to paying RM500 per head for an office with your co-working space, it’s going to be hard to get them to pay RM1,000 ever. So while that gives you short term occupancy, it totally kills the medium to long term profit potential of your business and location.
So here’s our strategy with Colony to make sure we’re putting in the building blocks to build a sustainable and very profitable business for the future.
- We make sure our product is good. The design of our space has to WOW (so far it does) and our location has to be PRIME (so far it is). We also have a huge focus on service levels and hospitality (this one we’re not there yet. I’ve been reading books on hospitality and learned that the Ritz Carltons of the world take decades to build the hospitality culture they have today).
- With a good product we can charge a high price. Our average price per work station in Colony is RM1,000. We don’t give heavy discounts and have had to turn away many potential customers because of that.
- With a good price, we get good people. The kind of companies in Colony are very professional and pay their rent on time so we don’t have a problem with receivables and they’re all great growing companies that are willing to pay for a great office.
- With a good price, we break even at even very low occupancy. We launched in 28th July 2017. In September we had about 30-40% in actual paid occupancy and believe it or not, with help from ancillary revenues we just about broke even (and this includes paying our full rent… not some rent-free months from the landlord). In our second month of operation. October our occupancy has grown to 40-50% and assuming our ancillary revenues keep up we’ll be in the money.
- When we make money we can afford to continuously reinvest in our product. In Malaysia we can sometimes build beautiful things but we don’t maintain them well. With Colony we’re constantly reinvesting even in the small things like maintenance. Last week for example, just two months after launch we got painters to come repaint some parts of the walls that had scruffs on them.
- When we first launched Colony I was asked by the press when I intend to reach full occupancy. My answer was that my target was 60% by December and that I would be worried if occupancy grew quicker than that because I fear not being able to scale my service levels proportionately in such a short period of time.
The truth is that I didn’t come to all this on my own. I’m a newcomer in the co-working space and service office industry. I’ve been fortunate though to speak to a lot of veterans in the service office industry and they’ve passed on the values I need to build a profitable Colony.
The modest success we’ve had in such a short period of time, I wish I could say that it was part of my plan but it wasn’t. I told my investors that I would take at least 6 months before our first Colony will hit a monthly breakeven point, so imagine my (and their) surprise when we did it in 2. I owe all this to a lot of luck, our great customers and the awesome team we have in Colony. They’ve been through thick and thin for it.
All in all though, I know that a quarter doesn’t make a year. I’ve been in business long enough to know that hey we could be doing really well at some parts of the year and then poorly in others. Business and building a profitable company is a constant struggle and a rollercoaster ride (does anyone remember how even Sunway nearly went bust during the Asian Financial crisis?).
The good thing about building a profitable business though is that you have a lot more options. Your survivability isn’t based on whether you can close the next round of funding or not. It’s secure.. and any funding rounds that come with it is a bonus.
My ambition isn’t to build a company that is valued highly on paper based on the last investment round. My ambition is to build a company that the most traditional banks would be clamouring to lend lots of money to. That’s the real acid test because if a bank is willing to lend your company money, it means it believes you have the profits and cashflow to pay it back.
So wish me luck.. and if you’re looking for office space and resonate with our mission to change the experience at work, please book a tour at Colony.
Timothy Tiah – Co-Founder of Colony, Kuala Lumpur Co-Working Space