262. 5 Reasons Coworking Spaces Fail
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262. 5 Reasons Coworking Spaces Fail
00:00:03 Welcome to the Everything Coworking podcast, where every week I keep you updated on the latest trends and how-tos in Coworking. I owned and operated coworking spaces for eight years, and then served as the executive director of the global workspace association for five years. And today I work with hundreds of operators and community managers every month, allowing me to bring you thought-provoking operator,
00:00:29 case studies and inspirational interviews with industry thought leaders to help you confidently stay on top of what's important and what you can apply to your own role in the Coworking industry. Welcome to the Everything Coworking podcast. This is your host. Jamie Russo. Thank you for joining me. So today we are going to talk about five reasons why coworking spaces are not profitable.
00:00:59 So the title is why coworking spaces fail and that's because titles are important, just like subject lines are important. So I used it, but as I was working through this, I thought, you know, there are lots of reasons that businesses, well, the term fail can mean fail to create a community, fail to deliver on members' needs and a space could be profitable if it does those things fail to make members feel welcome,
00:01:28 you know, lots of different things. I hear feedback on co-working spaces that aren't doing well, and it doesn't mean they're not profitable. So today's focus is really about coworking spaces that are not profitable. And most of these problems, I would say really let's say all five of them are problems that are created by you before you even open. So if you're working on a first location or an expansion location,
00:01:55 these are things that you absolutely must get, right. In order to be profitable. If that's your goal also want to be very appreciative of the fact that people start coworking spaces for many different reasons. Sometimes they're designed to be a not-for-profit. Sometimes they're designed to be a test. So there may be reasons why it's okay if your space breaks even, or just makes a little profit that you have otherwise for your business.
00:02:23 But most of the folks that I work with in my programs want to create a sustainable, a financially sustainable Coworking business. So I focus on helping those folks. And I have been running my Coworking Startup School program. Now four years since let's see maybe 2018 was the first year. So this episode, actually, is an update of episode number 82,
00:02:51 which was from 2018. I'm kind of updating it to the 2022 environment. A lot of the items are fairly similar. I think it's an important topic to revisit. So we're going to dive in and just a reminder for those of you who don't, who think maybe I'm just podcasting for a living. I am not podcasting for a living. I run programs that help operators,
00:03:18 landlords and community managers run better. Coworking spaces start and run better coworking spaces. So we run the Coworking Startup School. We run an accelerator program with that, for those that want one-on-one coaching. We also run a management agreement course. We run a course that teaches brokers how to sell flex and understand the flex market. And we help community managers get certified as community managers and have access to ongoing training and development.
00:03:48 I think that's all the things we do. And we have our Everything Coworking academy, which is a membership for existing operators that are ready to work on their business and want to be connected to other operators and learn what's what, and what's behind the scenes. So you can find all that info on our website at Everything Coworking dot com, but I bring it up because I talked to a lot of operators every single month,
00:04:13 lots of different geographies and all sorts of shapes and sizes. And I see these common threads in terms of challenges. So let's dive into number one. Number one showed up on number 82, which was in 2018, but I think this is even more relevant than ever before. Number one is that the location and or product mix don't align with the demand in your market and they don't align with your ideal customer avatar.
00:04:44 Now, if you're like, what's an ideal customer avatar, you need to sign up for a Coworking Startup School. That is module number one, because it's super, super critical. So before even choosing a location, you want to do the work to get to know who are you going to serve? Who's your ideal customer, or what will they buy and how much will they pay for it?
00:05:06 So a common mistake that gets made kind of without doing this due diligence is you install too many flex desks. And we just covered that in the two episodes ago. So if you haven't listened to that yet, you can go back and listen to that. And that's really just about not aligning your supply with the demand for that product in your market. So actually coming up on a very future,
00:05:30 very close in future episode, we are interviewing a gentleman who is in a neighborhood near London, who was doing very well with flex desk. So he reached out and said, I sell Fluxus like crazy. Why is it working for me and not for others? And I said, let's get on the podcast and talk about that. So my hypothesis is that he just happened to do a good job of aligning his supply with the type of consumer and what they want in his neighborhood.
00:05:59 So it's not really about the fact that there's a right or wrong product mix. Although oftentimes there's one that works pretty well, which is more private space than less, but it's really about your market and lining up with the demand in your market. So we do a thorough process of understanding who is in your market. Who's going to buy your product. What they're looking for.
00:06:25 Do you want to ask questions like who will consume Coworking in your market? What do they do for work? Does their work pay for workspace or pay for them to get out of their house? Are they paying for it out of pocket? They own their own business. They're a freelancer, or they're a remote employee that doesn't have a budget allocated for Coworking.
00:06:45 How do they manage their schedule? Like, do they need to get out of the house a couple of days a week, every day of the week? Never. What are their use cases for using a coworking space? Do heads down work? Do they go to do a meeting? Do they go to drink coffee and socialize? It's like, what is it that they want out of a coworking space?
00:07:04 And actually that third one, I might've used a tone that made you think I was sort of poking fun at that. And I actually don't think that we should poke fun at that because I think that that is a real use case that is becoming more and more popular for folks who have nice home offices and they don't need an office out of the home,
00:07:23 but what they really need is a place of belonging and a place to connect with others. So what do your members need? Do they know about Coworking or already, or do you have to educate them? Are they happy with their home office or are they looking for an alternative? What type of space do they need to support their use cases? Do they need meeting rooms?
00:07:43 Do they need cool brainstorming spaces? Do they need photo studios? Do they need podcast studios? Do they need an amazing coffee bar with gorgeous booths? Then what level of space do they want? So this is becoming, I think even more of an important discussion. It always has been because you're creating a space that meets the needs of a certain segment of the population,
00:08:08 not everyone. Right? So, you know, Giovanni is my new co-host on the flex uncensored podcast. And we just released an episode and joked about having a drinking game every time somebody says Bonvoy, but I think it's such a useful analogy. So does your member want a residence in, do they want an, a loft or do they want a Ritz Carlton?
00:08:32 And I don't think Ritz Carlton is a bond. Actually, it might be initially it is. I'm pretty sure it is. Or if we go with coffee brands, do they want a Dunkin donuts? Do they want to Starbucks or do they want to Fills? And for those that you don't know Fills, they only do pour overs is very fancy schmancy and they have lots of different varieties of coffee.
00:08:54 So those are very different offerings, right? Like when we talk about restaurants, sometimes somebody will use that kept thinking of this phrase for some reason, cheap and cheerful, right? So your coworking space might be cheap and cheerful. Is that what your market wants or do they want something higher end? I actually have to thank you to Amanda who reached out and requested a session on what will happen to shared workspace in a recession.
00:09:21 And I was reading a post from another somebody else that I follow. And he was talking about the fitness industry. And he said that, you know, in terms of CrossFit, we should have a drinking game about how many times I've mentioned CrossFit. The consumer wants coaching, which is a high-end product, right? It's not, one-on-one, it's often group,
00:09:41 although lots of CrossFit gyms also offer personal training, but it's very different from a 24 hour fitness, right, where you're going to go in and you're going to do your own thing, but you're paying $49 a month, most CrossFit gyms, or at least $150 a month, much more than that if you live in the bay area. So he argues that in a recession folks that are in a category where they're purchasing high-end services are less likely to pull back on those because they have jobs that don't get as impacted during a recession.
00:10:13 So I would be curious to hear I'm organizing a group to talk about that topic, but it's something to think about. If you have a cheap and cheerful coworking space and your members get impacted by a recession, then you will struggle. If you're running the Ritz Carlton, then you may have a group of members who are not as impacted by a recession.
00:10:34 So you are more resilient. Okay. And then your ultimate success is based on getting the supply and demand equation, right? So we talked about this specifically around flex desks a couple episodes ago, but it's really about everything. Every decision you make about your business model and what you offer. And this is all before you even open your doors, there are a lot of very big decisions that get made.
00:10:59 And I am clearly biased because I run a program to help people make all these decisions. I think that it is very challenging to get, go through this process on your own without a framework. And I think it's very dangerous. So you don't have to go through our programs, but make sure you get support from somebody who understands the business model. I often hear people say they use score mentors,
00:11:20 and I'm all for that to support your business plan. But if they don't know the business model and they can't look at your plan and give you advice on it, aside from sort of like technical advice, you need somebody who really knows the industry and can give you helpful advice. Okay? So when you do choose a location, you have to choose one that aligns really well with your ideal customer that you've identified has demand for the product that you will sell.
00:11:53 So you've decided how you're going to serve this customer. You've decided whether it's a Dunkin donuts or a Philz and you have done all the work to figure out like what their use cases are going to be. This is not easy. You have to do market research. You have to talk to a lot of people, not just your best friend. You have to really understand the market and do you do the work?
00:12:12 So you've done all that work. And now you have to find a location that aligns with that and the size and the cost of build-out and the lease terms must also work for your business model. So I kind of combined two reasons that spaces aren't profitable into one. So bear with me. We're kind of on one B right now. Okay. So location don't choose it because it's the only one that's available.
00:12:39 Don't choose it because it's the least expensive. Don't choose it because it's the smallest. And we'll talk about that later. Also don't choose it just because it's a second-generation space, which I am a huge advocate of, but we run into challenges with office sizes that are too big for a profitable coworking space in second-generation space. Nobody said this business was easy.
00:13:00 It is now actually really not easy to start because there's so many things you have to get, right. And they're kind of contradictions in here. So I love the second generation space. I see this over and over again from folks who, if you haven't lived the model yet, it's really hard to understand the nuances. So if you have a second generation space,
00:13:23 then you have offices that are already built out. Those offices are probably much bigger than what a coworking space office would be. So a coworking space office for one person, you know, could be 36 square feet. That's a WeWork size or micro office size. It might be 57 square feet. It might be 80 square feet. Once you get to 80,
00:13:45 you might be able to fit 2 24, sorry, 48 inch wide desks in an 80 square foot. 90 is for sure, a two person office in Coworking in many markets. So if you have preexisting offices that are 140 square feet, that's could be for a four person office in Coworking terms, right? So all of a sudden, if that's the size of all of your offices,
00:14:12 you're sitting on a huge inventory of four person offices, which most of us will not build. If we start from scratch, you would only choose those. If you have to live with them in a preexisting space, the challenge with those is if you started from scratch and you were going to build your offices, then you would fell a four person office for say $2,000,
00:14:34 say each seats, $500 a head, but you don't have enough demand for all these four person offices. And so two people don't want to pay for that $2,000. They want to pay $1,000. And so you have to sell those offices for half of what you could sell them for if they were the right size. That might be hard to understand, but basically,
00:14:56 you know, if it's too big, but somebody doesn't value all that extra space, they're not going to pay the per square foot price for it that you need to get for it on your proforma. So what you really need is instead of, you know, four, four person offices, you need 16 two-person offices. So when we use second-generation space,
00:15:17 we love reusing walls and it tends to be much more manageable to get into, but we might need to make some adjustments. We can't just like walk in and plug and play. And I think a lot of folks assume that's going to work and they have very low expectations about what it costs to start a co-working space. So second-generation doesn't mean move in ready.
00:15:41 It means less work than starting from scratch. So that's super important. I don't want to, we could do a whole episode on that. I don't want to go down a rabbit hole on that, but that is a, you know, a challenging mistake that folks will make when they're choosing a location. So people get very like emotional and want to move quickly and want to go with something that's on the market today when they decide to open a coworking space.
00:16:03 And if you're listening, you know, that's you, cause I've talked to lots of those people in the last few months and sometimes, you know, fate intervenes and things move too slowly. And so you're forced to wait until more things are on the market. And that turns out to be positive. So you don't want to make a choice on a location that is not the right fit because it's the only one available or because it's the cheapest,
00:16:27 you have to run the model and it has to align with the demand of your consumer. If you build a Dunkin donuts for a Phil's consumer, they won't come. And so it doesn't matter if it's the cheapest, right. Does that make sense? So we'll talk about the smallest smallest we talk about in number three, spoiler alert. So I'm not going to spend too much time on that quite yet.
00:16:51 So do choose a space because you've looked at several options and you've waited for the one that is the right size. And you've negotiated an LOI on more than one space so that you have truly negotiated and gotten, you know, the best deal that you can get out of one or two locations. And you're getting the right deal terms that align with your financial goals.
00:17:14 And you've confirmed this with a proforma. So I think the challenges I see the mistakes I see people make are they have a budget. And so they create a space that meets their startup budget, but it doesn't actually align with their financial goals. So their financial goals are much bigger than what they can accomplish with their startup budget. So it's okay if those two things align and your expectations are set appropriately,
00:17:44 but if you were trying to achieve a meaningful profit, you have to put money into a space generally to do that. At least your first space, we are seeing some very exciting deals getting done by landlords who are highly motivated. And I've gotten several calls in the last couple of weeks from landlords who are interested in doing flex and exploring and folks that are getting.
00:18:06 And then on the operator side operators that are getting opportunities to do creative deal structures. And I've seen my Coworking Startup School folks get amazing deals. Their lease rates are reasonable and the landlord is paying for the build-out so that stuff can happen. So you want to hang in. And these are the two that build as they were getting paid for were first spaces for these operators.
00:18:31 So it just happened to be that they're in markets that are giving them favorable terms, so it can happen. So you want to wait for the right option. So number two kind of gets into the more into the deals deal structure. The second reason that spaces are profitable is because the real estate deal is bad. So again, this is something, this is,
00:18:54 these are decisions that you make before you even open. You cannot out-market or out operate a bad real estate deal. If you don't sign a good lease with good terms, you can't fix that. You just can't. This is fundamentally, the business model is very real estate driven. You have to get that right. And so if you're going through this process and the putting all the pieces together is not making sense to you,
00:19:21 and it's not crystal clear how all the pieces play together and how the real estate deal impacts your proforma. You want to get some help from folks who can help you sort of see really clearly the entire picture. So if you sign a bad real estate deal, you could have a space that's a hundred percent occupied, but not be cashflow positive. So you've done all the things,
00:19:44 right? In terms of creating the right product, creating the right price marketing, you've attracted your ideal customer and your space is full, but your real estate deal was not good. And you're not cashflow positive. You could have a hundred percent occupied space and not be able to pay your build-out costs back in a reasonable amount of time. And what's a reasonable really depends on the length of the lease,
00:20:09 the upside in the deal, all sorts of things. So we won't go into that, but you might be saying on a five, I've seen people sign five-year leases and then take them three years to pay back the build out. So two years is not very much time to generate profit, to make this project worth doing. If you care about, you know,
00:20:28 return on investment and profit, Hey, I just wanted to jump in really quickly before we continue with our discussion. If you're working on opening a coworking space, I want to invite you to join me for my free masterclass three behind the scenes secrets to opening a coworking space. If you're working on opening a co-working space, I want to share the three decisions that I've seen successful operators make when they're creating their Coworking business.
00:20:56 The masterclass is totally free. It's about an hour and includes some Q and a. If you'd like to join me, you can register at Everything Coworking dot com forward slash masterclass. If you already have a coworking space, I want to make sure you know, about Community Manager, University, Community Manager, University is a training and development platform for community managers.
00:21:18 And it can be for owner operators. It has content training resources, templates from day one to general manager. The platform includes mini courses that cover the major buckets of the Community Manager role from community management, operations, sales, and marketing, finance, and leadership. The content is laid out in a graduated learning path. So the Community Manager can identify what content is most relevant to them,
00:21:45 depending on their experience and kind of jump in from there. We provide a live brand new training every single month for the Community Manager group. We also host a live Q and a call every single month so that the community managers can work through any challenges that they're having or opportunities get ideas from other community managers build their own peer network. We also have a private slack group for the group.
00:22:12 So if you're interested in learning more, you can go to Everything. Coworking dot com forward slash Community Manager. Your lease required you to start paying full rent two months after you opened. And you ran out of working capital before you turned cashflow positive. So I see folks do this all the time. They work with a broker who doesn't understand that this business model requires a lot of free rent.
00:22:38 Now I will say if you're getting a free build-out, then you're probably not also going to get a year of free rent. It can happen. I know of a couple of instances, but that's like a unicorn scenario. So go ahead and have high expectations. But if you don't have to use the capital that you have raised or saved to build this business for the build-out,
00:23:00 which is amazing because you don't own that building, you just lease it, then you probably will have to use it to support your, your other startup costs and getting to an occupancy that will make you profitable. It's very hard to know what occupancy will be profitable for any given space. It might be 50%. It might be 80%. So you might have to be pretty full in order to break.
00:23:23 Even. It depends on so many factors, but if you have a really strong proforma and you've been conservative with that proforma, and all of the assumptions are conservative and accurate, then you should be able to tell what your profitability level is. So if your lease requires you to start paying full rent immediately, or you only two months of free rent, that's not enough time to fill up.
00:23:48 It might take you 18 months to fill up. It depends on the size of your space, right? So it's really hard to know. And we're going to talk about that later, but that's kind of a preview into another reason that spaces are not profitable. You want to make sure that you have a 25% margin with your conservative assumptions with your real estate deal.
00:24:09 So a couple of other challenges I see your triple net lease includes really high op ex making your total rent obligation, really high given the model that you've built and the pricing power that you have. So it's really hard to say like what rent level is too high? Well, it depends. Are you in a market where you can price your office is really high,
00:24:31 right? So if you're in a market where folks want Dunkin donuts and they want cheap and cheerful, then your lease rate and you're all in expenses have to reflect that, right? So you have to be able to put that into the model and put your pricing into the model and your floor plan into the model. And you need to get a 25% margin without assuming that you're overselling your flux desk three times.
00:24:54 So that's another mistake that I see folks make is that they're not kind of looking at the all-in obligations that they have and that they just can't price the offices high enough to make it work. So if you're in a smaller market, you have to get a really good deal on rent. It can work. I mean, that's the advantage. If you're in a smaller market,
00:25:14 usually your rent is cheap, but you have to then have those smaller offices because your office prices are going to be like reflect market rent, basically in terms of like relative strength. So if your rent is low, then it's generally easier for individuals to get their own space. If rent is really high, like, so I operated in Palo Alto and it was almost impossible for an individual to get commercial space because it's so expensive,
00:25:44 huge barrier it's expensive. And nobody wants to commit to that type of expense for such a long term. And so our office prices were very high. The other mistake I see people make, which is kind of related to the things we're talking about. You aren't working with a broker or you're working with a broker who does not understand the model at all.
00:26:04 And I realized these folks are hard to find. I've gotten emails from folks saying, I simply cannot find a broker at all, period in my market who will give me the time of day, much less understands the model. So those folks get very tempted to negotiate on behalf of themselves with a landlord who has negotiated hundreds of deals in his or her life.
00:26:24 And this is your first. So I know we all think we're brilliant and we are all brilliant in our own ways. But a commercial lease is a very, very big deal and a very big liability. And so you need to have a professional on your team. So we cover that in our Coworking Startup School as, okay. So just to review our first two reasons that coworking spaces,
00:26:49 aren't profitable, number one is the location and our product mix. Don't align with the demand in your market and your ideal customer avatar. Number two is that your real estate deal is bad. Now realize you have not put up a website yet. You haven't even done anything for the business and you have made two mistakes that will completely impede your ability to be successful.
00:27:12 So number three is your space is too small. And I know a lot of you listening have small spaces. So take this all with a grain of salt, because you might start a small coworking space for many reasons that work for you, but being meaningfully profitable is not one of those reasons. A small coworking space just doesn't have enough inventory to create enough revenue to drive profitability on the less you have some other revenue stream that's doing it.
00:27:41 So maybe you're killing it on meeting rooms or events, or you have a social membership and you're just overselling the heck out of it. You know, it's a great example of this is orange theory. I had a friend from business school who had the orange theory license in Palo Alto. And that place was like a thousand square feet. And she said she had a thousand members paying,
00:28:03 I don't know, 200, $250 a month. That's crazy. So there are models that work without needing a lot of space. Generally coworking is not one of them because generally you don't have an offering that you can sell that many times. Like she was basically selling memberships and people weren't showing up, right? So it worked when people with enough disposable income that they just,
00:28:28 they didn't cancel. That is not common in Coworking. So if you want to be meaningfully profitable and you don't have some other why behind your coworking space, maybe you start your coworking space as a test. Maybe you're kind of inching into it. And you're simply not willing to commit to the liability of a larger space. Totally get it happens all the time,
00:28:46 but don't expect to be meaningfully profitable, maybe not profitable at all, because you just don't have enough inventory to create revenue, to drive profitability. You might be profitable if you're going to own and operate it. If you're trying to hire staff, that's going to take all your profit. It's going to be very, very hard. So again, you may have your reasons for wanting to do that,
00:29:08 but if you want meaningful profits, you can't start small. So you might also believe that you're going to oversell your seats enough to drive a small profit, but the other challenge with really small spaces, and it's hard to build the type of space that people want to spend a lot of time in, in a small space, right? Think about why we leave our home offices.
00:29:28 If they're too small, they're not designed well, they don't get a good enough light or the dog barking, or the kids are yelling. You know, those kinds of reasons, there's something like, but the sort of, it's challenging to have a small space that can knock it out of the park in terms of consumer experience, because you just can't have the variety.
00:29:45 You don't have the square footage to create the variety of types of spaces that your end users probably want. And when I say that small, I mean less than 2000 square feet, once you start kind of itching above that, you'll have more room to kind of put things together. I have seen beautiful designs. I have startup school students who do small spaces or are working on small spaces that are gorgeous and that I would join.
00:30:08 So it's not all of them. You have to be really intentional, really, really intentional. And you have to hire a designer professional designer. So, you know, you have to just have to be really careful if you're going to DIY a very small space, you may just not have the outcome that compels people to join. Again, it goes back to cruise your consumer,
00:30:27 what will they buy? Will they buy space in a small space that is not very well diversified in terms of, of what they're offering. You know, when does a small space work, if you don't need to drive significant profit, if you have another revenue source, we talked about that. I love like the work club concept, the social club concept where it's work plus other things,
00:30:49 you know, we're seeing concept with cafes and them with smaller workspace and other amenities. I think that's really interesting if it has amenities that are desirable to today's consumer and I'm, as I mentioned, it's intentionally designed to do super intentional on small spaces, just like tiny homes, right? Tiny homes can be totally amazing, but you have to be so thoughtful about where does everything go and how does it fit and how does it create a good experience for the person who lives in it?
00:31:17 What is too small? So I don't even really want to give a number because it's hard to know until you run a proforma and you use that proforma to build out a model that is based on the type of business you're going to deliver. And then you have to measure it against your profit goals, because everyone has a different goal for their business. So it's really hard to say I had a broker just send me an email.
00:31:43 Someone had referred them to me. So thank you if you're listening. And he said, he had some space in Sacramento that is about 3,400 square feet. And he said it has 13 offices, which is pretty good density for 3,400 square feet. But I suspect not stackable. I suspect if you ran a proforma on that, it would feel like a lot of offices that you could do well with.
00:32:06 But if you're paying rent, I bet you can't staff it because it's too small. So you'd have to have an unstaffed space, which is happening. So there's a group that was my very first, some of my very first members in my Chicago co-working space. They are starting a suburban model of Coworking starting in the Chicago area. I hope I can get them on the podcast that is not staffed.
00:32:28 So I'm super interested in what that looks like. So that is an option that may, may or may not be the type of business that you want to run, but that's where the profitability challenges really come in. And usually from like a design perspective, can I offer the types of spaces that people want to buy in a small space without being too like crowded and just kind of,
00:32:48 you know, challenging. And can I stop it if that's the model that you want to run? So the third reason that coworking spaces tend to, or sorry, not tend to, and one reason Coworking states may not be profitable is it's too small. Okay. The fourth reason is your space is not well-capitalized enough to survive your ramp up phase. So I started to kind of go down this path on the real estate deal because it's related.
00:33:14 So you might have a smaller space in a smaller market that has some pent up demand and just doesn't have a lot of affordable, flexible office options. And it might fill up really quickly and you might no problem, six months done. And you know, your startup capital, no problem. I'm cashflow positive six months, good to go, larger spaces,
00:33:33 15,000 and 20,000 plus, you know, in markets that have other options, they might take 18 months to fill up to 90 to 95% capacity, which is kind of your stabilization rate. You never, probably are going to be a hundred percent full, although it happens. So it could take 18 months and that's a long time to get to stabilization so that you might be cashflow positive,
00:33:57 but not at stabilization. So you might be kind of eking out a little profit, but it might take you 18 months to get to the point where like we are cooking. What do they say, cooking with butter, cooking with oil. I don't know, whatever, you know, until you feel like you're just rocking and rolling, and life is good.
00:34:14 And that number varies, but I don't think most people go that far out when they're thinking about getting to stabilization, we have our proforma template is super awesome automated model and it assumes 18 months. So you have to manually change that assumption in our template to get out of the 18 month assumption for ramp up. So in order to set yourself up with enough runway to survive this ramp up,
00:34:41 period, because when you open, maybe you've sold 20% of your capacity. That would mean you did a stellar pre-sales effort, which a lot of people don't get to because they're so overwhelmed by all the other things they're doing. So if you get to 20%, that would be amazing. And so you're kind of starting from scratch, right? You don't have all revenue.
00:35:03 You're everyday. You're building every day, you're hustling and every week your revenue is growing, but it probably not growing as fast as you had hoped it would. So you need a really realistic proforma and ramp up estimates. So in order to set yourself up with enough runway to build from scratch, while paying rent, then you either need a healthy, free rent period,
00:35:25 or you need a management agreement type of deal, where the landlord is paying out of pocket for operating and marketing expenses, which may not even be the most common deal that we see happening. I hear a lot of revenue share joint venture type approach approaches, where the operators still coming in with capital and paying a base rent, for example, or just,
00:35:45 you know, doing a revenue share, but paying all the expenses, but the landlord might be paying for the build-out. So we talked about that earlier, in terms of the real estate deal. If you don't have to pay for the build out, then you can use your startup capital to fund your first couple of years and those potential shortfalls, but super,
00:36:03 super challenging for spaces that don't have enough money in the bank to get through those shortfall months. So be prepared. Okay. The fifth reason that coworking spaces aren't profitable is because they don't have a marketing budget or a marketing plan. So this is not super common. I find, I get a lot of folks in my startup school that have a marketing background,
00:36:31 and I think it's a great fit for this type of business, because they tend to really understand this whole idea of matching a product to a consumer that you're building, what a consumer wants, not what you want. They tend to prioritize marketing, you know, they invest in a website and I don't mean they need to spend thousands and thousands of dollars.
00:36:56 I have a running list of excellent Wix Coworking websites that all come from members that we have and some other examples. So I just mean they really put a lot of work into the user experience of their website. They might invest in, in creating a brand like great photo assets and imagery and messaging, and they do content marketing. So they send email newsletters,
00:37:23 they're ready to run ads if that's appropriate for their market. So they're really thinking about their sales funnel and generally they still might make mistakes on their real estate deal, but they're getting the location and the product mix and pricing rate, because they're just kind of wired to think about matching that to the end user. So I see a lot of success in that,
00:37:48 but I also see folks who don't come from a marketing background at all, struggle with making these decisions. So again, if you don't come from marketing background, get a marketing person kind of on your mentorship team or your advisory team, or, you know, pay a consultant to help you with these things. Because again, these are all things that are happening before you even open.
00:38:13 Most of these marketing successes certainly are long-term over time, but you know, are things that you're working on in order to kick off the business. It is almost impossible to fix the marketing you can fix, right? I love that fixable, but I would say the first four, if you get these wrong, you can't fix it or it's very expensive to fix.
00:38:35 So again, the five reasons are the location and or the product mix. Don't align with the demand in your park market. You could make some tweaks, but if you built all the wrong size offices, very hard to fix, very expensive to fix your real estate deal is bad. You're probably stuck with that real estate deal for five years, maybe 10,
00:38:53 you have to get that right. Your space is too small. You have to write out your lease. You basically cannot fix that problem. You are not well capitalized enough to survive your ramp up phase. You could raise some more money at this point. It's probably friends and family in order to get through the ramp up phase. If the other aspects you've done well,
00:39:12 you've got the right location, the right offering, the right offices, the right real estate deal then, and your space is not too small. Then you can borrow money to fix it, fix the problem of not being capitalized enough. And then the fist is that you don't have a marketing budget or a marketing plan that this fixable, but you have to recognize it and you have to be willing to invest.
00:39:32 I will say again, these are all things that I see happen. They don't apply all the time and everywhere. I was talking to a very strong operator today with multiple locations. And they said that they have not been spending money on marketing and that they're full in some of their markets. So they said, you know, they just kind of, hadn't been,
00:39:55 and they kind of have to get back in the game. And so there were sometimes reasons why we don't need marketing. We're not doing marketing, but if you looked at this operator's business, you would have realized that they certainly know what they're doing. So, but again, not all of these apply to all situations, but I see these challenges more often than not.
00:40:16 These are the issues that result in people not having a space that's profitable, which is a lot of people want. And again, you might, there are lots of decisions you can make. So Brian Watson's episode on how to automate smaller spaces is one of our top YouTube videos. So I know people are like really looking for solutions. If you weren't staffing and you're operating in markets with great demand like yours,
00:40:44 then I think you can do it in order to make meaningful profit. You have to have multiple spaces, right? He's not starting just one. He's starting many. So keep that in mind. There are ways to do all these things and not all of these are the reasons that, you know, all coworking spaces that aren't profitable, aren't profitable, but I'm just sharing with you what I often see.
00:41:05 So please get these things right before you invest, before you spend money, before you sign a lease, all those things. These are very preventable. If you follow a framework and we offer that framework in our Coworking Startup School, or you can find it elsewhere through other expertise, but don't do this alone. There's a lot on the line. Okay.
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