With fast-growing economies and tech-savvy populations, many corners in Southeast Asia are perfect for co-working spaces. Real estate services company Cushman & Wakefield describes the region as “the new battleground for co-working clout.” In Vietnam, that’s even more evident given the country’s young population and a startup boom.
Founded in Hanoi in 2016, UPGen is one of the few homegrown workspace operators that have been able to expand regionally. After receiving funding from Singapore’s Northstar Group in late 2018, UPGen has taken its operations to Kuala Lumpur and Bangkok, bringing its total number of locations to 21 across Vietnam, Malaysia, and Thailand.
UPGen claims that it hit profitability only after three years and that its valuation now stands at USD 300–500 million. KrASIA recently spoke with Namster Do, co-founder of UPGen, on why co-working spaces in the region are taking off while WeWork attempts to find its legs.
KrASIA (Kr): Congratulations for securing new funding from Northstar Group. UPGen began expanding in Southeast Asia this year, and now operates 21 locations across Vietnam, Malaysia, and Thailand. Given WeWork’s fiasco, is this a challenging time for a co-working chain to raise funds and expand?
Namster Do (ND): This is a very capital-intensive kind of business. It’s important for us to raise funds outside Vietnam and expand to other markets. Our model is suitable for markets that still have a lot of growth. We definitely will go to Indonesia, probably in 2020. We choose our markets carefully, in terms of their characteristics and also timing.
Right now, with the whole WeWork story, investors’ confidence is definitely not high. So having the similar model to WeWork will make it super difficult to raise funds. However, it benefits us in a way, as people have started to pay more attention to why we’re profitable, why we have been able to build a completely different business model.
Kr: You were inspired by a WeWork facility in San Francisco back in the day. But you also believe that its business model is seriously flawed? Why is that?
ND: I am very fond of WeWork. When WeWork just started out in 2010, I was among the first people moving into WeWork in San Francisco. I think it’s a brilliant model in commercial real estate. WeWork is the first model that optimizes the space using the sharing economy. Obviously, when you’re the leader, the pioneer, you always run into problems.
The traditional co-working space model guarantees financial losses. It’s good for the customer but it’s not sustainable. For example, if your company has 100 employees, you’ll never see 100 people in the office. So, with 100 desks, you can sell to 150 people. That’s the model for traditional co-working spaces, to get that margin.
In reality, everybody has their own favorite corner. So after a while, you decide to buy the dedicated desk. Over time, out of 100 desks, 80 will turn into dedicated desks. You can’t really sell the remaining 20 desks to 60 people. If you look at WeWork, its occupancy rate is always about 85–86%. The problem is that its pricing model is based on 150% occupancy. This means the more people you take in, the more money you will lose.
Kr: What’s different about UPGen’s business model?
ND: Traditional co-working spaces put a lot of effort into branding. They build the WeWork roof and everybody gets under the WeWork roof. That means it’s very hard to build your own culture or your own brand, which is super important for companies to grow. We want to change that. The brand and culture of our customers come first.
We have two different models: UPScale and UPBase. UPScale is for larger companies, and it’s super important for them to keep their unique culture and brand. Our customers in this range include companies such as VNPAY, Tiki, Standard Charter, FPT Software. We build the space to suit them. On top of that, we allow them to expand over time.
UPBase is for smaller companies. Our model is the balance between UPBase and UPScale. We always have the larger corporations as “anchor tenants,” those that have 100–1000 employees. To fill the space that they haven’t grown into, we bring in the short-term tenants. About 95% of our revenue comes from enterprises, and the space that we rent in the “traditional co-working model” only represents less than 6% of revenue for us.
Our vision is to build a scalable platform for commercial real estate, similar to a cloud platform. If you have 100 employees today and you need to grow to 200 employees in a year’s time, will you rent for 100 or 200 people? If you rent for 200 people, you overpay. If you rent for 100, then in about six months, you’ll run out of space. By guaranteeing the space for companies to grow into, we guarantee stability, flexibility—therefore allowing them to stay longer.
Kr: If the key is to have more enterprise customers, does that take away the feeling of forming a community via co-working?
ND: At traditional co-working spaces, a lot of efforts focus on the aesthetics of the space and the community aspect. For startups, changing the color of a wall is not as important as pricing and flexibility. And they don’t just need events. Startups need to be part of an ecosystem, so that they can plug in, get funding, see their products. For larger companies, they want to monitor what’s going on out there on the innovation front and to access the talent. Our holistic approach allows us to build a mini-ecosystem at each of our locations, where startups can see their potential investors, buyers, and customers on a daily basis.
Kr: After WeWork, the “1.0 model” of co-working, what comes next? What changes in the industry do you foresee?
ND: It’s time for companies like us to step up and slowly replace the first model. I strongly believe that in five or ten years, the majority of clients will grow with this kind of model, rather than the traditional rent-your-space model. The second wave of flexible space operators like ourselves have the benefits of seeing those problems before we even start.
WeWork is the first company in this, the creator. WeWork is like companies in the dot-com era: they’re very big, burn a lot of money, and do not necessarily last that long. It’s the reason why we have the second wave of super successful companies like Google and Facebook. But we still need the Yahoo of the old days to learn from. Just as we saw with the dot-com bubble bursting, it did not affect the entire internet industry. New players still come in with the right business models and take the market. This is why I think we all have WeWork to thank for.
The interview has been edited for brevity and clarity.