Will the WeWork game plan work?

Those who detest reality TV shows possibly don’t know the role they played in Karan Virwani’s life. During his final year of college, inspiration struck Karan while watching an episode of Dragons’ Den, a British reality TV show in which budding entrepreneurs pitch their ideas to investors in the hope of securing funding for their businesses. But Karan didn’t woo any investors—instead he pitched his idea to the Embassy Group, his father Jitendra Virwani’s billion-dollar office space business.

What was Karan’s original idea? He wanted to rent out workspace to startups in return for equity. He then tweaked that to leverage the family’s bank of real estate to set up co-working spaces to rent to startups and small companies. As it turned out, New York-headquartered WeWork Companies, one of the world’s largest co-working space providers, also was exploring partnering options with local real estate developers to set up base in India. Around the middle of 2015, U.S.-based real estate baron and angel investor in WeWork, Marc Schimmel, met Karan, following an introduction by legal firm Khaitan & Co, WeWork’s legal representatives in India. “The Embassy team liked the idea. During my research, I read about WeWork,” Karan, 26, now chief WeWork executive officer of WeWork India, tells Fortune India, sitting in its first shared-office space building in Bengaluru.

In late 2016, WeWork announced its foray into India, in partnership with Embassy. The name of the new entity: WeWork India Management. What clinched the deal for the Virwanis was their first-hand experience of the WeWork headquarters in New York, which convinced them about what the combination of technology and real estate could achieve.

WeWork India gets all its design elements, technology, training knowhow on how to run a community set-up and backend systems to run the operations from its U.S. partner. It also uses a proprietary tool to source real estate and track deals. Embassy uses its expertise in finding and negotiating the right real estate at the right prices. Simply put, Embassy provides the real estate and funds for the business. This was a slightly different path from that of Karan’s father, who is known for constructing mammoth business parks for global corporations.

“We pay a management fee to WeWork for all the services they provide. There is no profit-sharing. It is not so different from how international hotel brands operate here with real estate developers,” Karan says, adding that the co-working company works with multiple local developers. “All our buildings are leased properties, including the ones from Embassy. Currently, we have close to about two million sq. ft. of office space, of which only 20% are Embassy properties,” he continues.

Bengaluru was WeWork’s first stop. WeWork India started operations in July 2017, with its first shared-office space comprising 2,200-plus workstations at Embassy’s Residency Road building in Bengaluru. Apart from Embassy, it has also leased properties from developers such as Prestige Group, RMZ, and Salarpuria Sattva Group, among others. And in just a year, it has built a network of nine shared working spaces in key cities such as Bengaluru, Delhi-National Capital Region (NCR), and Mumbai. “Having a partner like Embassy Group is essential in understanding the local culture and it also gives us credibility in the market,” says a WeWork spokesperson based in New York.

Founded in 2010 by Adam Neumann and Miguel McKelvey, WeWork has since raised close to $7 billion in venture capital and privateequity funding so far. In August 2017, the startup raised $4.4 billion from Japanese conglomerate SoftBank that valued the company at $20 billion. Globally, WeWork rents out office space at 283 locations across 22 countries and has more than 250,000 members.

However, the shared-office space provider is yet to make a profit. According to a Financial Times article from April, sales at WeWork more than doubled to $886 million in 2017 from the previ ous year, while it recorded a loss of $884 million during the same period. Despite these questions, WeWork is likely to raise funds soon at a valuation of $35 billion, according to multiple media reports.

In July 2017, SoftBank and Chinese private equity giant Hony Capital announced a $500 million investment to boost WeWork’s operations throughout China. The investment vehicle created an entity called WeWork China. WeWork will be responsible for the management and operations of WeWork China, while SoftBank and Hony Capital will each own a minority stake.

The India business model, however, is unique, with a real estate giant as an equal partner. But like its U.S. partner, WeWork India is facing losses. For 2016-17, WeWork India had total revenues of Rs 27 lakh and losses of Rs 8 crore. It registered total expenses of Rs 82.8 crore, according to filings with the registrar of companies. The company’s net worth was a negative Rs 5.99 crore.

And yet, according to media reports, the India entity is in talks with Goldman Sachs and Warburg Pincus to raise nearly $200 million at a valuation that could catapult it to unicorn status—a startup worth $1 billion. While Karan refuses to comment on the fund raise, he says money, as and when raised, will be used to fund WeWork India’s growth and expansion. Experts say most investors look at scalability of the business, the overall size of the market and how much market share the company is going after to derive the valuation.

Co-working space firms essentially operate a month-on-month revenue model. Revenue is based on the number of tenants at each location. On an average, it takes about three years for a property to break even, and rentals typically depend on the location of the building. WeWork India currently claims to have more than 10,000 members across the country.

Business is clearly booming in the co-working real estate space. Anuj Puri, chairman, Anarock Property Consultants, anticipates that by 2020, demand for co-working spaces is set to outgrow that of the traditional office space.

But industry insiders say the trick to successful co-working spaces lies in having medium workspaces of 40,000-50,000 sq. ft. as it is the occupancy that ultimately leads to profitability. This is probably where WeWork India is going wrong, says an industry peer, who did not wish to be identified. “It takes an occupancy rate of 50-60% to break even in this business. The larger a space is, the more difficult it becomes to find takers and have a full house,” he says

Even as it manages revenues and growth plans, WeWork India must manage another dichotomy. The WeWork global mission seeks to “create a world where people work to make a life, not just a living”. The company says that it maintains a standard ex perience for its members across its locations, stressing greatly on the twin benefits of a community experience, while being able to access a global network of entrepreneurs and businesses.

“We do all our designs in-house so our design aesthetic is consistent across the world. For every location we go into, global design elements comprise about 80% of the aesthetic and the rest is based on local sensibilities,” says Ryan Bennett, also chief WeWork executive officer, WeWork India, who joined from the global team last December to streamline operations.

Indeed, changes have been made to accommodate Indian preferences.

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