The View
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Start-ups fill Hong Kong’s co-working space, turning into tenants without mentors

In Silicon Valley, firms such as Y Combinator (co-founder of Airbnb) and Andreesen Horowitz (co-founder of Twitter and Facebook) offer a variety of high value added services, such as mentorship, design reviews and business advice

PUBLISHED : Thursday, 23 November, 2017, 1:45pm
UPDATED : Thursday, 23 November, 2017, 5:03pm

I am often asked who was the most brilliant entrepreneur and what’s the most bulletproof business model I have ever seen. I instantly say Sigmund Freud, the founder of psychoanalysis.

Other entrepreneurs might identify and solve a difficult problem. But, Freud realised started an industry for an unsolvable and chronic human condition – unhappiness.

He built an entire clinical school and practice of psychoanalysis, where patients pay for lifelong treatment trying to come to terms with their perpetual unhappiness and depression.

They don’t discover a disease that can’t be cured. But offer hopeful treatments.

That is a business model which is difficult to beat, unless you are in the business of selling the new high tech platform of co-working spaces.

The global tech bubble has inflated market valuations, but also conflated the very idea of what constitutes technology.

Co-working or collaborative office sharing spaces have done the near impossible – they have become the first real estate sector that has cleverly repackaged and repositioned itself as a tech play attracting top-tier investors and major developers.

And like any heavily hyped idea, co-sharing operators have concocted their own trendy lexicon like evolving a “collaborative social or physical network” for millennials. The tech bubble has spawned its own real estate bubble around the world, and in Hong Kong that is ripe for a bust.

The co-working space is now massively over supplied and so simple a concept such that anyone can execute it. Cutting up a space into shared desks, installing hip interior design that resembles MTV Real World and offering free ping pong tables and drinks doesn’t represent a high barrier to entry or much value added to start-ups.

“There is already an oversupply of co-working space. Since January 2016 over 16.7 million square feet of co-working space has opened up across 25 cities in Asia,” says Paul Salnikow, CEO of The Executive Centre.

“In Hong Kong there are now over 64 co-working operators offering over 1.14 million square feet of space. Almost all have launched within the same short period so now they’re competing on price and discounting.

“Regardless of the advertised vibe when you visit them, many are mostly empty.”

Any start-up with a great idea certainly doesn’t want to share it with a room full of strangers; they want to talk to an adviser, investor or technologist

Arguably the highest profile operator in Hong Kong is US-based WeWork, which has two sites in Hong Kong – on Lockhart Road and Jaffe Road – and has projected a stratospheric US$20 billion global valuation, or about 20 times annualised revenue as of October, after being created in 2010.

Its prices here start at HK$3,500 (US$448) per month for a hot desk, up to HK$7,800 for a private office.

It now stands as the fourth most valuable US start-up after Uber, Airbnb and SpaceX, with sites all over the world.

Chinese co-working space unicorn URWork, backed by Alibaba Group-affiliate Ant Financial and Sequoia Capital, closed a 1.2 billion yuan (US$179 million) pre-C fundraising in August from a group of Chinese investors, to push forward its global expansion, becoming the China’s first unicorn in the shared work space sector. The company is also looking at more launches in San Francisco, London, Paris and Berlin, as well as Southeast Asian countries in a bid to challenge WeWork.

South China Morning Post has reported the Hong Kong government is also set to launch a scheme for heavily discounted, co-working spaces and studios in industrial and commercial buildings.

Almost 90,000 square feet of space provided by 10 landlords will be rented out at half the market rate to young entrepreneurs hoping to launch a tech-, creative- or cultural-related business. This will only further flood the market in 2018 through to 2019.

Sanity lies where sane deals are actually being done. In June, private equity group Blackstone acquired The Office Group in London, a successful and profitable service office centre, at a valuation of about 14 times Ebitda.

When the market falls, landlords who assumed they have rented out a fully leased floor to a co-sharing office operator will be disappointed. And that co-sharing tenants represent low quality business as they are actually quite transient and don’t stay long. Investors may find that operators meet capacity, but not revenue targets as the market becomes cutthroat.

The virtual, shared, collaborative office concept has been around for decades in the US along with accelerators and incubators and in-house entrepreneurs.

Except, that in Silicon Valley, firms such as Y Combinator (co-founder of Airbnb, Dropbox) and Andreesen Horowitz (co-founders of Netscape, Twitter and Facebook) offer a variety of high value added services, alongside their considerable experience, to their investees such as mentorship, design reviews and business advice.

Each incubator curates a tribe or class where synergies can be shared for development or organised around an investment strategy. They aren’t just seeking office tenants.

Only wishful thinking assumes that major corporations want to share office space with outsiders. Major corporations certainly utilise serviced offices, but not co-shares where their executives are mixed with complete strangers.

Confidentiality and privacy rules prevent that. And any start-up with a great idea certainly doesn’t want to share it with a room full of strangers; they want to talk to an adviser, investor or technologist.

Throwing a group of inexperienced entrepreneurs together in a co-shared office without leadership and guidance will only generate failures. And few of Asia’s co-shares offer anything more than office space.

All Hong Kong and Asia have done is perverted a non-real estate concept into an overstretched real estate play for landlords desperate to fill commercial space.

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