The Future of Office Space as a Service

An interview with Duncan Logan, the founder of San Francisco tech campus, RocketSpace.

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Image courtesy of RocketSpace.

When we talk about the future of office space as a service, it turns out that the future may not be about the space at all. Take, for example, RocketSpace, a tech campus for startups in San Francisco and soon — having just last week announced plans for another campus — London.

Since opening in 2011, it has sent more than 15 unicorns out into the world, including Uber and Spotify. Today, it continues to attract tech entrepreneurs and high growth startups to its campus, but there’s a twist: it’s attracting big corporations, too. In fact, only 50 percent of RocketSpace’s business revolves around providing space and services for startups. The other 50 is all corporate innovation consulting, helping companies like AT&T, RBS, and JetBlue to ward off disruption.

It’s all part of founder Duncan Logan’s vision for his growing company: to be a tech ecosystem, where the office space they provide is merely a platform for the “curated community” and other services they offer to members.

“We spend a lot of time building relationships outside of our four walls,” said Logan, adding that their knack for getting startups funded has less to do with the space and a whole lot more to do with the relationships that RocketSpace has built with VCs and other industry players.

“We’re a relationship broker,” he said. “Corporates come to us because we have such great startups, but now the startups come here and you have immediate access to the C-Suite of big corporations.”

RocketSpace isn’t — forgive us — rocket science, but we think Logan is on to something. He’s offering an iteration of the coworking model that adds value for his company, its members, and for the property owner from whom he leases his spaces. And it’s not just because it’s San Francisco, and it’s not just because it’s tech (the valuations of the RocketSpace alumni network might be, but the success of the model isn’t). The key thing is that RocketSpace is focused on one industry and consistently nurtures the ecosystem that they’ve built around it.

But you don’t have to take it from us. We talked to Logan recently to find out more about his plans for RocketSpace, why he thinks the traditional coworking model is wrong, and what he’s going to do about it.

Image courtesy of RocketSpace.

Image courtesy of RocketSpace.

Start by giving us a little bit of background on RocketSpace.

We started in January 2011. The whole concept was based around two things: the explosion of tech, [and that] RocketSpace is really a glorified coworking space. We call ourselves a tech campus because we only take tech companies. There are two conditions [for joining RocketSpace]: One, you must be a tech company. Two, you must have raised at least one round of finance.

So you’re not an incubator?

We’re more of a — once you’ve started the business, you’ve raised the money — we help accelerate. So I wouldn’t call us coworking. We’re a more specialized animal than that. Currently we have around 175 companies on campus. The maximum company size is around 75-80 people. [But] we’re totally focused on the quality of the company, not so much the volume.

That ties into the fact that only 50 percent of our business is around the startups and the space. The other 50 percent is corporate innovation consulting. And the reason the corporates are so interested in us is that in five years, we’ve had 16 unicorns, including Uber, Spotify, Leap Motion, Kabam, and Supercell.

Collectively the companies in RocketSpace have raised over $10 billion. It’s a pretty unique environment for high-powered startups.

So you also bring in large corporate companies looking to tap into startup talent?

Yes. These are well-known companies from banks, to retailers, to energy companies. Typically these corporations would have fended off disruption with their in-house R&D labs, but they can’t keep up. [For example], Airbnb is really a technology company, it’s not in the hospitality business. But by God, it’s disrupting the hospitality industry.

Image courtesy of RocketSpace.

Image courtesy of RocketSpace.

Where does RocketSpace fit in on the office space as a service spectrum?

The space thing’s really interesting. When we started, we did a revenue share deal and, actually, ironically it’s one of the best deals we’ve ever done. It was good for us and good for the landlord. It made more sense: it’s more like a hotel model than a lease arbitrage model, which is what the coworking industry is set on.

There’s a spectrum of office space as a service and coworking is one aspect of it. There’s people storage, then WeWork, then something more specialized, like a RocketSpace, to finally something totally niche like Y Combinator.

I think a large chunk of the market — 10, 15, even 20 percent of the real estate industry — will move to some sort of office space as a service market. We haven’t even seen the tip of the iceberg. The news is that I think the model is wrong. The lease arbitrage model looks brilliant if there’s a ton of demand, but when you go through a cycle…

That’s the big risk with WeWork, right?

They’ve probably got deep enough pockets and investors that they’ll work through. But there are a lot of other people who are far thinner capital-wise who I think it will become increasingly hard for.

It’s sort of like Napster to iTunes. Napster proved that there’s a big market, but it wasn’t the right model.

Tell us more about your first building, and the revenue share model.

We started in 15,000 square feet and ended up in 45,000 [they expanded to occupy the full building]. Then we moved into two buildings in the Financial District. Both of those buildings were not temporary, but, my big thing with RocketSpace is that I’m not in any rush to roll out the wrong model. I think coworking has a pretty strong last mover advantage. If you’re a transatlantic airline and you see people changing from seats to beds, [there’s an advantage in] the ability to watch the other airlines, and then improve it: to be the last airline to have beds.

The coworking market is like the hotel market. It’s just not the case that because San Francisco’s got 20 hotels, we can’t build a hotel. Today RocketSpace occupies 55,000 square feet of space. We do have ambitions to grow out our real estate, but for us real estate is just a platform. Other coworking spaces say they want 500,000 square feet and X many members. That only represents a small chunk of our revenue and our ambitions. We’re moving into a different model in San Francisco, and we’re looking at this model in other locations, as well. We’ve done the math around the model and we now feel very confident [that it works].

How does it work? How is it different from the lease arbitrage model?

I think the closest cousin to coworking is the hotel industry. We’ll end up with a Marriott, a Hilton, a Four Seasons, and a Motel 6 version of coworking. Regus is now a house of brands. You can compare that to a Marriott house of brands. I think the angle of trying to be all things — a Four Seasons wanting to offer something to a traveling family and a high-powered executive — you do that, you struggle.

Image courtesy of RocketSpace.

Image courtesy of RocketSpace.

Are you still doing a traditional lease on your space today?

Today we are, but probably won’t be moving forward. One of the things we did early on was hire a deep technical financial analyst — look at where the money flows, look at where the risk is, and really look at it from an investor standpoint. Today that’s why I think there’s a mismatch. Signing up on the lease arbitrage model, well, they think there’s risk, but there’s the deposit, etc. The deposit doesn’t really cover their risk.

You mentioned the “science” of coworking earlier — tell us more.

I think it’s driven by a focus on the ecosystem rather than a focus on filling desks.

I often say the difference between a coworking space and a commercial office is the same as the difference between a private jet and a commercial jet, where every square inch of fuselage has a revenue offer. There’s a way you build out the space differently. WeWork sees this, but others don’t.

For RocketSpace, we think of ourselves as an ecosystem, and the building’s the nucleus of the ecosystem. We spend a lot of time building relationships outside of our four walls. We could have an ecosystem manager — they’d spend most of the time outside the building. Whereas if you look at a traditional coworking space, they’ll say we need a community manager, looking inward, making sure everyone within the building is doing well. Driving the ecosystem is a broader way of making sure [everyone is doing well].

This is where it plays to our focus. We’re not trying to be everything to everyone. Our ability to get people funded because we have a symbiotic relationship with VCs; we’re a relationship broker between parties.

Corporates come to us because we have such great startups, but now the startups come here and you have immediate access to the C-Suite of big corporations. Again: relationship broker.

Then there’s the general interaction between [members]. Probably the biggest reason to go to Stanford is the people you meet there. Quality begets quality and that’s something we play into a lot.

You said the space is at the core of the ecosystem. How is it working? What types of space do you have? Is it evolving?

One of the beauties is that we’re a B2B business but eat and live with our customers day-to-day. Very few B2Bs have that opportunity. We’re very aware of change and demand. When we started, RocketSpace was a stepping stone to companies getting their own office. Typically, the companies were small, they were all startups. Over the course of the five years we’ve been in business, we’ve seen the size of the company get a lot bigger. They expect to be here for two to three years. They’re 30 person companies. A company might say they’ll have three key hubs in the U.S. — New York, Chicago, and LA — but then we’ll have a few spoke locations and we’re just going to use an office as a service provider. That’s what we would now call our “labs” product. For most companies under 10 people, they can live in that environment. Early stage startups are kind of like cults insofar as there is a leader with a vision and everyone works tirelessly to achieve that vision. But once you get over 10 people, they move from a cult to start having to think about culture. Culture comes in when everyone doesn’t have a close relationship with a CEO and that became tricky with an open floor plate, that’s when people start wanting private space.

 

This interview has been edited and condensed.

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