Comparing flex-office companies can be difficult.
"The reality is that if you go under the hood of each of the companies, I think all of us have a different strategy," Ryan Simonetti, CEO of event and flex-space startup Convene, told Business Insider recently.
Convene, founded in 2009 and last valued at $500 million, started out as an event-space company and then added flexible offices and coworking spaces. Its focus is more on partnering with its own landlords instead of employing traditional leases.
Simonetti talked with Business Insider last week about how his startup and other seemingly similar companies should be categorized, and discussed how Convene has plotted a path to profitability. How to define the flex-space industry has become top-of-mind for potential investors after coworking giant WeWork released financials in a step towards going public.
WeWork's mid-August S-1 prompted harsh criticism from the likes of NYU professor Scott Galloway and real-estate billionaire Sam Zell. In the first half of the year, WeWork had a loss of $690 million on $1.5 billion in revenue.
Simonetti said that Convene has been profitable every year of operation except for 2019 — the result of a more aggressive growth strategy this year. He said that the company is profitable at the unit level only now, but could be back in the green overall again in 2020.
Here's what Simonetti shared with us about how Convene works:
- Convene had looked at launching a more-traditional coworking product, focused on smaller customers. It didn't see the right opportunity in the market, so instead started a product that caters to 10-50 person teams and growth-oriented businesses.
- The startup views itself in more of a hospitality company model, and Simonetti said that feels less like Amazon's AWS cloud service, which helps companies outsource fixed assets, and "a lot like Airbnb meets Hyatt or Hilton or Marriott."
- Convene has 35 locations: 26% of those are managed partnerships, and the other 74% are partnership-structured leases.
- Partnership leases involve a base rent, and Convene also shares a slice of revenue or profit. All of Convene's deals of this kind involve the landlord putting up a bulk of capital for renovations.
- When it comes to margins on revenue, once spaces leased by Convene are up and running, they tend to hover at around 35% unit-level earnings before interest, tax, depreciation and amortization — a key profit benchmark.
- Convene's best-performing management contract locations make a profit in the ballpark of $700,000 to $1 million. For its leased locations, profit at the location level can go as high as $5 million or $6 million a year.
- For spaces managed by Convene, margin percentages can reach the mid-60 to low 70s.
- Convene takes in percentage of gross revenue for managed spaces and then typically a share of profit over a hurdle. That return benchmark is typically a net operating income-based threshold. (Net operating income is a key profitability measure for real estate.)
- The return benchmark is usually the going market rent, plus a premium that accounts for capital the building owner spends broken out over time.
- Convene is contemplating offering its own tech platforms — which are mobile and web-based and help run things like administration and booking —to others in the space. "I wouldn't be surprised in the next 12 months" if landlords or competitors end up using the company's underlying technology, Simonetti said.
- "Are we a technology company? No. Are we a deeply technology enabled business? Yes," he said.
- Convene is looking at M&A right now, with the goal of building a family of different brands. Simonetti expects a rush of consolidation in the space. IWG, a publicly traded flex-office company that has been around since 1989, operates the Regus, Spaces, and HQ brands among others, and has started franchising in Japan.
- When it goes out for its next fundraising round, Convene wants to build on its previous approach of bringing in building owners.