Hearing talk of “angel investors” looking for “unicorn companies” by grown adults sitting in a circle cross-legged on a polished concrete floor might not seem like business as usual, but this new way of doing business is quickly gaining traction. The startup community in North Carolina appears to be stronger than it has ever been, with entrepreneurs in NC collectively raising more than $1.1 billion in 2017, 36.5% more than the previous year. Business incubators are appearing in the dense urban areas, far-reaching rural areas, and everywhere in between. The first part of this three-part series will focus on a trend that business incubators and the startup community have adopted. In the second section, there will be a deep dive of three of the Triangle’s business incubator’s, specificallyHQ Raleigh, American Undergroundin Durham, andLaunch Chapel Hill. For the final part, the state-wide economic impact of these startups and recent trends will be explored.
The terms ‘business incubators’ and ‘co-working spaces’ are often used interchangeably, but this is not accurate. Co-working spaces are shared office spaces where multiple companies (often times unrelated) share office space and amenities. Think of it as a lot of small businesses sharing one large office. Business incubators are typically co-working spaces that also offer additional support geared towards startups. This could include programming for startups, access to and time with attorneys and accountants, and guidance from experienced entrepreneurs. It is meant to be a bridge for startups between the stage where they have outgrown their parents’ garage but are not to the level of leasing out and setting up their own office. The support of these incubators is huge, since many of these founders are trying this for their first time.
Co-working spaces typically have business amenities that include access to common areas and the ability to book conference rooms for so many hours per month, business-class internet, mailboxes, printers, basic office supplies, cleaning service, and phone “booths” for private calls. They typically offer very open and modern office layouts with lots of shared space that’s available on a first-come, first-serve basis. There are typically reserved desks or private offices that can be rented for an additional fee. The latest trend has seen many amenities that resemble packages offered by high-end apartments. These can include a gym, free meals, dog daycare, and fully stocked kitchens with snacks, drinks, coffee, and beer.
The co-working craze was made famous in part by WeWork. This company started in 2010 in New York’s SoHo district and they have been growing ever since. Fast forward 8 years since inception, they have over 170 locations in 18 countries, manage 10 million square-feet of space, and were recently valued at $20 billion. There is a location in Charlottewith additional ones soon to open in Raleigh and Durham. Starting prices in Charlotte are $250/month for a “hot” desk, that is unassigned or shared. A private office for 1 starts at $525 month and goes up to over $13,000/month for offices that support 50 people. Amenities for this high-end class-a space include all of the business amenities listed above plus IT support, use of the global network of WeWork offices, craft beer on draft, bike storage, fitness center, showers, outdoor space, and a wellness room.
At first look, one might question the reason for spending that much on space, but from the prospective of a small business or startup, it makes a lot of economic sense when you look at the overall package. If you were to imagine that we are a small company with 5 employees, we would need to rent about 1,500 SF of space (300 SF per employee), not counting conference room space. 1,500 SF at $30/SF/Year amounts to $3,750 per month lease payment vs a WeWork 5-person private office, costing $1,875/month. We would still need to add furniture, cleaning service, office supplies, IT systems and support, and maybe a beverage and snack service. While there are heavy monthly savings, perhaps what is more important to these startups and small businesses is flexibility. Rent is month-to-month, and you can upgrade and downgrade office space as needed. Typical commercial leases lock in a company to a set amount of space for 5 or 10 years which is contradictory to the nature of startups that hope to have rapid growth. It is really hard for a startup of three people to know where it will be five years in the future. Renting too large of a space in plans for growth is expensive to pay for initially while being stuck in too small a space can cause growing pains later on.
Now that there is an understanding of the co-working concept and economics that make it attractive for small business, keep a look out for Part II, which will take a closer look at 3 local NC business incubators that are also co-working spaces.
Robert Smith is a Master of Business Administration candidate with the Kenan-Flagler Business School at UNC-Chapel Hill. He is also a Community Revitalization Fellow with the Development Finance Initiative.