Coworking's Third Wave

Coworking, and its growing importance in innovation, is a subject we have a special interest in - as O/TG itself grew out of the platform that our principals, Jonah and Tracy, built founding and scaling New Zealand’s largest coworking provider over the last decade, BizDojo.

Coworking, if you’re unfamiliar with it, is a form of working that emerged in San Francisco in 2005, and involves the use of an office or other working environment by people who are self-employed or working for different businesses, typically to collaborate and share ideas and knowledge.

“The whole idea of coworking is to bring bright, creative people together and let the ideas collide.”

The workspace flexibility and strong communities that have sprung up around many coworking spaces have then made them a natural magnet for founders, entrepreneurs, and startups.

And as this has happened, coworking has come to play an increasingly important role in innovation ecosystems - supporting startups and entrepreneurs through building community, connections and providing support which is critical to business success.

Over the last decade we’ve witnessed first hand the huge global growth in the coworking industry and, as it has become a more mainstream offer, seen it become a significant component of the commercial real estate market. According to Deskmag, a staggering 1.7 million people were working in around 19,000 coworking spaces globally by the end of 2018.

And as coworking becomes part of the industry mainstream we are seeing some clear trends emerging which impact how we should think about the value proposition of coworking in innovation ecosystems.

Alex Hillman, the founder of Philadelphia’s IndyHall (one of the world’s oldest coworking spaces, established in 2007), has started to talk recently about the three waves of coworking to date, which we’ve found an excellent lens through which to examine the innovation impact of coworking.

While early coworking pioneers such as BizDojo and IndyHall were focused on community and collaboration (first wave coworking), the emergence of US coworking operator WeWork as one of the world’s most valuable startup unicorns (raising USD$12.8b to date at a valuation of USD$47b) has seen large amounts of venture capital flowing into a number of operators, who have then focused on the real estate aspects of the model and establishing global scale at breakneck speed. Landlords also have started to embrace the second wave, introducing their own coworking offers to drive improved returns on their building assets.

This second wave of coworking has prioritised the real estate model & global scale often ahead of true community and collaboration, and has seen an aggressive focus on revenue by operators needing to grow rapidly in order to justify valuations and secure market share. Examples of second wave providers include IWG/Spaces and CBRE’s Hana.

We (and Alex) now see Asia as the emerging leader globally in third wave coworking, where the pendulum is swinging back from a focus on real estate at the expense of community development. Third wave coworking is invested in executing well at scale in BOTH operations AND community, and understanding how both create distinct business value for its residents. Asian providers leading the third wave charge globally include Singapore’s JustCo and India’s 91springboard.

Both second wave and third wave coworking operators remain heavily funded, often with sizeable cash reserves, and we believe that the next 3-5 years will see a battle for dominance between the two models, with customer acquisition being fuelled heavily on both sides by operator subsidies and price discounting.

So … when it comes to innovation, why does the third wave matter?

While there is nothing wrong with the second wave, and real estate focused flexible workspace solutions are (and will continue to be) an important component of the broader market, there is no denying that some of the largest second wave operators (e.g. WeWork) are now working hard to try and shift their coworking offer to the third wave.

The reason for this is that when it comes to innovation - community, culture and collaboration are the crucial pillars for an ecosystem to prosper and thrive.

And as coworking spaces continue to attract founders, startups, and early stage companies, then the third wave will increasingly become the players to watch.

In the words of John Hagel, Co-Chairman, Deloitte Centre for the Ed ge:

“It's all about community - and it's not about who you know, it's about building relationships with a commitment to support and help each other, that's the key to thriving.”