Stories
At the appointed time I make my way through Trafalgar Square and down Whitehall, past the Admiralty, the old War Office and the Department of Defence, to a palatial and very official-looking building called Whitehall Court. I push on a heavy wooden door.
I’m in Huckletree Public Hall in Westminster, London. It’s a co-working office catering specifically for something called gov-tech, which means “businesses looking to disrupt and transform the public sector.”
Public Hall is emphatically not decorated in the public sector style. It’s bright and modish. There are copper taps, neon signs and a blue velvet banquette.
I’m here to meet Andrew Lynch, the chief operating officer of Huckletree. Huckletree runs this space along with seven other shared workspaces across London, Manchester, Dublin and Oslo.
For the last five years Huckletree has been going toe-to-toe with WeWork, the lavishly-funded, fast-growing and now disgraced co-working giant. It hasn’t been easy. WeWork’s M.O. has been to hoover up all available office space in a city, kit it out expensively, and offer steep discounts to new tenants. It has burned $18.5 billion in the process. “Within a half-mile radius of our Shoreditch space, there’s something like fourteen WeWorks”, Lynch tells me. (Since our conversation, that number has risen to 17.)
But now, in late 2019, the tables have turned. WeWork is on the ropes. And Huckletree’s model — which is slower to grow, and more focused on curating groups of members within individual industries — looks more durable.
In this interview, we cover:
Sean Keyes: What have you taken from WeWork, good and bad?
Andrew Lynch: Good and bad…
We’ll start with the good. I think we’re where we are today because of WeWork. Our industry is where it is because of WeWork.
People talk about Regis being the original one. One of the little anecdotes my father has said to me is ‘whenever you’d see a professional services firm in a Regis, you wondered whether they were about to go out of business. Because it looked like they couldn’t get a landlord on board to take out a lease, or they don’t know what they’re going to be in a year’s time.’
Whereas I think WeWork in 2009, 2010, 2011 turned it on its head. It became the opposite: ‘I need the flexibility because I’m going to be massive in a year. So I want to be around like-minded people to help me grow.’
Then, potentially, they lost their way a little bit on that message, as commercial pressures got to them. But, at the end of the day, they paved the path for us to come along, in behind them, having done two things. They normalised the idea of a business like us. And the idea of the derivative of property between landlord and tenant.
So, from my perspective, that level of competition has made us what we are today. It’s helped on the fundraising side because people can see a bigger entity raising money and Benchmark Capital, etc., and proving there is demand for this type of product.
But also on the member side, people are just more familiar with the concept. They’re more familiar with that, I would pay per head, and not pay per square foot. I’ll pay for a certain amount of desk and office which on the traditional side might seem like desks in an office.
However, people are used to the fact that there’s much more break out space. You’re paying for extra amenities, you’re paying for flexibility. So, the concept is proven and legitimate.
But what I’m talking about, we’ve seen them do it in the last two or three years, specifically in London. Pardon the phrase but, they’ve gotten into a pissing contest on price with lot of the other bigger guys as they’ve grown. Because the economics work at scale.
But we haven’t purposely gone fighting in that corner of the market. They’ve got those big enterprise members — HSBC back office, taking a full floor. And the cash that comes off that is is more lucrative, evidently.
But when people come in just based on the commercial bits, they leave as easy as they come. So what we’re trying to do, is make sure that they don’t just come in because of the commercial bits. That’s probably where we are today because we’ve been focused so much on not just coming in on a gun-slinging contest and a race to the bottom.
SK: Because you’re not going to win that.
AL: Well, we didn’t have a couple of billion quid in the bank. But, maybe it’s panned out for the best.
SK: Do you wonder whether what happened to WeWork will cool investors on the whole concept?
AL: It’s a good question. I think sentiment around the industry is probably changed. But, again, the proof is in the numbers. Right? And if you have a nice steady track record, and you’re saying you’re going to do what you did. In the most competitive or the second most dense co-working space market in the world, bar New York, we’ve done what we’ve done in a hugely competitive environment. Fuelled by this, massive amounts of cash, and growth, and competitors and blah, blah, blah.
And we’ve done all of that through fundraising cycles, staying relatively on piece with regards to pricing and all of that good stuff. I think the issue comes if we try to then say we’re worth 25 times more in revenue. And that that’s where the problems start to occur. And also, if turned around and said, we’re going to do 50 buildings next year. We need 100 million quid, at a valuation of 20 X revenue.
That’s when the people go, ‘you’re talking out your…’
SK: Yeah. It would be hard to pull that off with a straight face after all of what happened in 2019.
AL: Ah, stop. And the problem is, I’ve said this before, I think almost all of WeWork’s issue was the language. You said you saw the S-1. The language, it just came across as entirely disingenuous. And almost a bit like, what are you smoking?
But sometimes you just have to realise that at the end of the day an investor is investing in a business for a return. They’re not investing in a business for free yoga classes on a Tuesday.
Our investors have always been cognisant of the WeWork angle, but also in almost all metrics, we have excluded that as an outlier valuation. In terms of, for example, unit economics of spaces, because you don’t know what the hell is going on. I read WeWork’s S-1 and I was like, ‘I have no idea.’
Or take their metric of community-adjusted Ebitda. Annoyingly, again, if they talked about that in a slightly more genuine way, there is absolutely merit in stripping out some costs from your bottom line that is specifically focused on growth. If you’re going to open ten buildings next year, you do have to have an expansion team. If you’re not, and you want to retrench back to profitability, you can sack that whole expansion team, or tech team or big finance team, or back office, whatever. You can do that. So if we wanted to be a much more popular business than we are today, more than just break-even, we could do that within three months. But again, we’re still ambitious. We still want to grow, but we don’t want to be burning, burning, burning through cash.
So the question was sentiment. It’s changed a bit. But, the fundamentals for our business are still the same as they were two years ago, for now the better. But all of this noise around the market is probably pushing the people out who were tentative. But the people that still see the drivers of real estate markets, the drivers of tenants, of our members are looking for the trends and still all point towards this concept. But what we’re saying is, the concept isn’t just buy in bulk and chop it off and flog it off.
SK: It must have been very helpful to you watching what happened to WeWork, reminding you what they do differently to you. What’s worked about it and what hasn’t worked about it.
AL: 100 per cent. When the S-1 came out, finally we were let under the bonnet. Finally. We were getting booted around by this car, and then finally someone popped the hood. And we realised, oh my God, there’s a one-litre Fiat engine in it. And because we’ve always been held to task over WeWork over the last five years, both positively and negatively, it’s been like ‘WeWork is doing this, and they’re expanding. Why aren’t you expanding?’ We’re like, ‘I don’t know why we’re not.’ I can’t go out and convince someone we’re worth 20 times revenue.
It was almost like self-flagellation at home going, ‘what are we doing wrong, that we can’t do what they’re doing?’ We thought all of their members loved them.
And now, if you go on LinkedIn, search on LinkedIn, that’s where you see the sentiment changing. Not so much sentiment on investors. Landlord sentiment has definitely changed. The member tenants, that’s where we’ve seen the biggest change in the last four or five weeks. The brand no longer has the same level of cachet. You don’t see many people wearing the T-shirts anymore, the tote bags, the water bottles, saying ‘do what you love.’ It’s almost a joke.
SK: And whatever about landlords, but it’s also a risk now for tenants to commit to staying at a WeWork.
AL: Absolutely. Within a half-mile radius of our Shoreditch space, there’s something like 14 WeWorks. And what we see anywhere between six and 12 months after WeWork opens, we’ve seen inbounds from existing WeWork members. And they say, ‘well it hasn’t really panned out from a community perspective. Yes, the free beer is great, but also, my deal has run out.’ Because, evidently, no one can operate a business on those margins at that price and successfully deliver all the added-value bits.
Chemistry in the room
WeWork is an example of how outside investors can corrupt a company. SoftBank’s Masa Son gave Adam Neumann, the WeWork CEO, $4.4 billion and, says a former WeWork executive, told him to “go crazier, faster, bigger and more.” The abundance of capital, and the need to live up to a crazy valuation, caused WeWork to metastasise. The capital is partially to blame.
Maybe for the want of a multi-billion dollar investment from SoftBank, Huckletree has taken a slower approach. It’s focused on chemistry among groups of people. It gathers diverse groups of people together from the same industry, in the hope their skills will complement one another. This approach doesn’t scale quickly, like WeWork’s. But then WeWork didn’t scale successfully either.
SK: This idea of curation. As I understand it, each space has its own theme, which you use to bring like-minded people together. And you interview people, and screen them at the outset. Do you turn away people? What proportion do you turn away?
AL: About half. Just to shine a little light on that. It’s not like “no, not tonight, lads.” It’s more, sometimes we describe it as like a date. There isn’t a second one unless both parties agree afterwards.
So, what we do is when we sit down with people, we figure out what they want and if we can’t provide that, we tell them upfront. Unless we can provide you with what you need to help your business grow, that there are way cheaper serviced offices out there that look nice, and that are totally functional, and that are in the area, and that’s actually what you need.
And then the reverse order is we asked them, what can you deliver to the member businesses that are here? We’re specifically looking for tech recruiters that have experience in these sectors. We’re looking for other service providers like graphic designers, accountants, all the service elements. We have a model that specifically tries to fit in all of those businesses.
SK: So you charge a premium?
AL: Yeah. To be honest, because we’re so focused on that member interaction, it costs us more to deliver it. We have more staff members, the staff members are from more varied backgrounds, they’re not all facility managers, ex-property industry facility managers.
What we try and do is, there’s always going to be a retrenching in founders’, or CEOs’, or business leaders’, minds to price. The price is always going to be a consideration.
But what we try and do is we’re not only trying to be more expensive than a lot of our competitors appear, but what we are trying to do is we try and deliver the baseline value of the serviced office part, for the same price, and then instil in the members that’s what they’re paying for — the premium, so to speak — is worth far more than the couple of 100 quid or whatever extra per person that actually is being paid.
A good example is, one of our first members was a pinprick blood testing business — I know what you’re going to say, no, it’s not that pinprick blood-testing business. Not Theranos. It’s called Thriva. And we used to have KPMG’s innovation team as a member in Shoreditch. And Hamish, Thriva’s CEO, was chatting to one of the healthcare guys from KPMG in the bathroom, and told us a couple of months later he’s getting two or three grand worth of consultancy services totally for free. Just because they were upstairs.
SK: And for KPMG, it makes great sense because they’re a business-to-business company.
AL: 100 per cent. They do it for marketing and business development. If they talk to 1,000 early-stage businesses and one of them potentially becomes a client in 10 years, and they, all of a sudden IPO or become a corporate finance client or whatever, that’s in essence why they work with us.
SK: Does that mean you target business-to-business companies and say “this is a good fit for you, we’ve got lots of businesses, you can talk to them.”
AL: 100 per cent. Now, we don’t overplay it. It has to be balanced. Or all of a sudden we just have five professional services firms looking at each other. We try not take too many. Because we still get the benefit of them in a five-person studio, or a couple of hot desks than we would if we had 50 people.
SK: So it’s all about the chemistry within the room.
AL: And that’s the bit that we always have to keep in mind all the way through this. Since WeWork, I think a bigger spotlight has been shone on that differentiator. Not to keep harping on about WeWork, but it’s interesting. I think, at the start, they were all very much about ‘community’ and ‘do what you love’ and, in essence, what came with the big bucks, was bigger demands, bigger expansion targets, justify that valuation. Push, push push, push, push.
And we’ve done venture rounds and everything, but it’s always been more member-focused. And we’ve always said, you never want to do more than like, six to eight buildings a year at a stretch. We don’t want to become the Starbucks, the one on every street corner. And we also have a specific mandate around the types of the size and types of space that we want to take. It’s not big glass box offices that looks like a hen house. And we are more generous with the amount of space that we give.
SK: Where did Huckletree start?
AL: Our CEO, Gaby, came back from New York. She was in film. She was front of camera, behind camera, got involved with production and financing as well. And she worked from a co-working space in New York.
And she thought the concept was fantastic, thought it made loads of sense. This was like 2011/12. So, pre-WeWork, really jumping outside of New York and making the concept well known.
And then at the same time, I was at a large investment consultancy business called Cambridge Associates. I was working predominately on the private equity and venture team. And I knew her husband, who is a venture capitalist, a partner at a business called Felix Capital. And, long story short, I ended up chatting to him about potentially doing something entrepreneurial and ended up meeting Gaby.
SK: So she had the vision, and she had seen it work, and she wanted to bring it to reality. And you are somebody who had done quantity surveying and a master’s in real estate. So you’re the operations guy.
AL: Yeah, exactly. So the genesis of us partnering up was as I said, I had a chat with her husband — didn’t really didn’t know Gaby at the time — and as I said here, ‘I’m really bored. I want to do something different.’
He put me in touch with two people. One was Gaby and the other was the guys from Deliveroo. And I ran both processes at the same time.
Gaby was looking for somebody genuinely to come in, as a partner. We had, the Clerkenwell space up and running. So it was 38 members, it couldn’t really afford anyone else except Gaby at the time. So I was moonlighting a little bit in Cambridge associates, and helping out on the operations from afar. And then, once we’d properly kicked things off, I sacked in the job at Cambridge and came on board full time.
Investors, and their expectations
There are two ways investors can cause trouble for a start-up. One is if they don’t give it any money. Clearly, that’s bad. The other is if they give it too much money. That brings its own problems. Start-ups which are saturated in cash lose their focus. They get flabby and undisciplined. And they feel the need to think big, to justify their investors’ assessments.
A CEO needs to generate enough excitement to attract investment, so they can grow. But not so much that investors’ big plans take the company in the wrong direction.
SK: Typically, the way a company grows is it sells some equity, borrows some money, and then there are other stakeholders at the table. And then the business logic starts to shift in order to please the investors. Because shared offices is a capital intensive business, it’s important to keep investors happy. So how do you think about outside investment?
AL: On the commercial side, how we look it is as follows. We have raised debt and equity in the past. Fundamentally, our goal at all times — because we haven’t raised hundreds and hundreds of millions — is the unit economics of these spaces staying profitable across the group.
And I think the key concern that’s come out of a lot of these businesses like ours, that maybe have failed or have gone through some turbulent times is, they’ve, by the looks of it, had to pay more and raise at more aggressive valuations in order to sustain the growth that they’ve claimed they can do. We haven’t claimed that we can grow with 50 buildings a year. We haven’t gone into the market and said, ‘we’re worth hundreds of hundreds of billions of pounds.’
So in a weird way, we haven’t leveraged ourselves so aggressively. We’ve grown at a steady practical pace and what that means is that we’re still quite hustle-y on the cost side.
It’s still very much our business. We haven’t sold out hundreds of investors at crazy money and we only do something if it works well. Which means, for example, we didn’t launch any spaces in 2018. Because we didn’t find anything we wanted to do. We weren’t slaves to the growth trajectory, slaves to that revenue focus, revenue at all costs by buying revenue. So we didn’t open one space in 2018 — but we opened four in 2019. Because we have been cooking so many of these fantastic locations, and they all just happened to come online at the same time. So the pressure for us to grow isn’t there all the time. Albeit we’re still ambitious, we still want to grow and expand the network, but not at any cost.
But again, we’re not paying crazy, super inflated headline rental prices, and typically the feedback from investors and landlords that we are partners has been that they’re looking at us more as like a building activation tool and less of a super high yield commercial transaction.
So for example, we partnered in Manchester with Wittington Investments. We talked to them about two years ago about this incredible Art Deco building. We’re taking the ground, lower ground, the first floor. It’s 15 per cent of the building.
So they are one of the more forward-thinking groups that are sitting there going, ‘Okay, well, yes, we could get it off to banks and just let it. Or we could look at this more holistically and try and set the tone of the building and set the rental tone of the building by having more amenities.’ So all of their tenants are going to have access to our 150 person auditorium, the meeting rooms. So they’re really using it in a slightly different way rather than just letting the floor and giving you the key. You really buy into the whole concept of the building.
New phase – new brand
SK: That’s another example of how you benefit from hosting young companies. One is that you get B2B companies selling to them, the other is that landlords want them around.
AL: 100 percent. This is only yesterday, but we’ve taken an additional 13,000 square feet in White City in West London to account for and to be able to fully service member growth of two large businesses that are going in there and going to be doubling in the next 12 months.
SK: That sounds like a different model to your existing one.
AL: It is. We’re announcing that next week.
SK: So up to now you’ve been focusing on entrepreneurs and startups. In order to broaden it out and grow, you’re going to have to change it. Does it change the business? Do you launch a different brand? Do you separate this from your existing offering?
AL: We do have a more grown-up brand coming. [The new brand has since been launched. It’s called Huckletree Places]. Again, driven by exactly this, by two big members in Stanhope and Mitsui. They said, ‘we want to stay with Huckletree, we see the value, we’re a 50 person team, but we still think there’s value for a 75-100 person team. But we want you to do this, we want all the normal flexibility and structure that comes with a service office. But we want to be bigger, and we don’t want to leave behind all the extras, and network, and community and events and all that sort of stuff.’
So we’ve said, ‘Jesus, okay, well, it’s either that or you leave.’ And then we had a chat with Stanhope [the owner of the space]. And they said, ‘Well, that’s what you’ve sold to us from the very start.’ So this is exactly what we wanted. We wanted, to be the incubator of these teams and then pass them on to us. The next iteration of that still has them in the space and on-site, the partner and de-risk a little bit.
SK: How will you host these bigger members. Is it to be a little more generic and less curated?
AL: No, it’ll still be curated. I mean, this does still have to go through the member curation. It just so happens that they’re bigger.
And again, that is a huge value to us, because then we actually are able to tap into bigger scaling startups so that I can add value to smaller businesses coming in.
It just catered for the whole life cycle of those businesses. So the amount of value we’ve lost in in putting a huge amount of value of growth and scale of these businesses, and then they leave.
You know, it’s funny, one of our timelines used to be “Huckletree — until you outgrow us.”
But I don’t think in my view, one works without the other, I still think our bread and butter is where we can add the most value and is probably at that early stage. But potentially, as the bigger companies come in, and we can service those bigger businesses and still stay curated, still focused on our key themes and values.
SK: A couple of questions around the unit economics. How long do tenants stay with you?
AL: That’s a good question. Problem is, we’re young. So for example, they’ve stayed with us for two months here.
It’s typically anywhere between 20 and 25 months. But if you think about it, we’ve only been over five years. But the easier metric to monitor is our quarterly churn. It’s anywhere between two and three per cent. I think, on average, churn in the industry is between seven and 10 per cent.
SK: Churn is fine as long as you’ve got a low cost per acquisition, right? If you’ve got people queuing to join.
AL: We’re at 100 per cent across the board.
SK: And so do you spend money to attract tenants? How do you market?
AL: Yeah, so we all the usual channels. People always go with the brokers. I think brokers account for only about five or six per cent of our inbound. Of the rest, a lot of it is member referrals. We got to 100 per cent capacity in this location, 100 per cent through member referrals. So it would be people in our network referring other people.
It’s great because it shows that we’re actually doing something right because our members are saying, ‘come here.’ And also, it’s great commercially because we don’t have to pay for the privilege of having to market ourselves to the hilt.
SK: For each location, what’s the life cycle? How long does it take for the investment in each new location to pay itself off?
AL: You know, we’ve been very lucky. We’ve been very focused, on not losing money. It’s much much easier to lose it than it is to make it. So we’re focused on keeping central overheads down. And also making sure that the unit economics are stable very quickly. Yeah, I think as I said the fastest we’ve ever gotten to full was this location in Westminster, which filled up in under a month.
When I see some of our peers say that maturity is 18 months to two years’, I wonder how on Earth it takes them that long. No wonder so much cash is being burned. Because that is a very long time to be sitting on all the costs that we know exist.
SK: So if you’re able to fill your spaces quite quickly and easily, would that not imply you should be opening more offices more regularly?
AL: You sound like one of my investors now… But again, as you said, it’s a capital intensive business. So just because the unit economics work on a single location basis doesn’t mean that you necessarily have the five million quid to put it into another one.
SK: What’s the constraint, then, on your growth?
AL: The self-imposed constraint is that we’re still always very focused on the individual spaces. Gaby and I are always in the spaces, always talking to new members. There is that personal element to it. We sign off on all the hires still. So what we don’t want to do is all of a sudden, go crazy and lose that personality. All of a sudden the brand takes a hit, and then it actually just kills our ability to be able to deliver what we’ve been able to deliver.
Our track record has been based on that personal approach. To be honest, we’re quite content with how quickly we’ve grown. You know, could we have opened more? Could we be more profitable, have more spaces? 100 per cent. But we’re completely content, and our investors are content.
SK: Where do you want to take this company?
AL: I think our biggest thing at the moment is expanding our network across Europe. If we can continue to deliver that level of value that we’ve delivered today, across 10 countries over the next five years. That’s what we would deem a success.
All this chat about ‘an exit’, and ‘what do you do’, there were guys there in WeWork that thought they there were 30 days away from an IPO, they probably had told their parents to stop working, and they had taken out credit cards, putting deposits down on houses. Evidently, you can be 30 days away from nothing at any point in time.
*****
Co-working is a rare thing: a new industry which isn’t about technology. The assumption that all new industries are technology industries — and therefore can grow incredibly quickly — is why investors poured tens of billions into WeWork. And then the money ruined it.
How big can a co-working company get? Thanks to WeWork, we now know part of the answer. A co-working company definitely cannot get to a $47 billion market cap.
The question is, how big can a non-insane, member-focused co-working business get? Is it like fine dining — impossible to scale, without ruining the product? Or is it like hotels, which can be replicated once the formula is right?
Huckletree is trying to thread the needle. It’s launched new brands in order to go after big companies without tainting its startup-focused core product.
The temptation will always be there to take the money. But, to be fair to Lynch and Huckletree, they have refused to compromise so far. And that approach has worked for them.
