Lei Jun, billionaire founder of smartphone maker Xiaomi, famously pledged to "forever limit" the net margin on its hardware sales at a maximum 5%. In the red-hot co-working business, a 30-year-old serial entrepreneur reckons he can do something similar.
In an interview with FinanceAsia, Liu Chengcheng, founder of co-working space company Kr Space, explains how he plans to address the lack of afforable office space to startups with resource constraints. Kr Space's strategy carries the risks and cost associated with traditional property, but it is receptive to short-term leasing and pays for the upfront costs, such as Wifi installation and basic decoration.
The privately held company, founded in 2016, is seeking to raise a further $200 million, having already raised Rmb600 million ($94 million) in January from investors such as IDG Capital and China Minsheng Investment Management. The latest fundraising round values Kr Space at $1.3 billion and is expected to complete by early July, a person familiar with the company’s thinking told FinanceAsia separately after the interview.
Liu, a Jiangsu native, is probably best known for founding 36Kr in 2010, a few months after he graduated from college. The website, China’s home-grown answer to TechCrunch, provides news and data about technology startups in China and is backed by Ant Financial.
The following interview extracts have been edited for clarity.
Q You have been a serial entrepreneur since high school, from selling MP3s to group buying electronic gadgets. How did you get started in the shared office business?
A In the three-year period to 2016 my team at 36Kr tried a number of commercial projects from crowdfunding to data analysis, in which most of the attempts didn’t turn out to be successful as we mostly learned from trial and error. At that time we were trying to build an ecosystem, but later we found out that we don’t have the resources to create such a network.
The idea at Kr Space first emerged in 2014 after we visited WeWork’s co-working office in New York. We were inspired by the business model and then we quickly began our venture into the co-working industry in China.
We started operating under an incubator model, which provided co-working space to companies and startup entrepreneurs developing their business ideas. Our first attempt in the shared office [business] didn’t end up a huge success because there was limited privacy and some level of noise in these offices.
After the first attempt we changed our business strategy in 2016, switching to the co-working model where we provide flexible private offices to our tenants. Currently about 70% of our tenants are small businesses and the remaining 30% are regional offices of large corporates. On top of the monthly rents, meeting rooms are hired on an hourly basis.
Q Can you explain Kr Space’s business model? Where do you make profits from?
A We solve a lot of problems for the small businesses. First, we provide an office with furniture such as a desk and chair, as well as a WiFi service.
At this juncture, we are expanding very rapidly because we want to achieve a sizable scale. We put profitability in second place because of our aggressive expansion plan.
Our thinking is a bit like smartphone assembly; you can’t assemble a smartphone under Rmb1,999 by yourself because you don’t have the economies of scale and mass production.
Q What’s your competitive advantage?
A We develop a standardised system to shorten the time on construction and internal design. The system has helped us expand quickly into other cities too.
I think our business model is a bit like the smartphone maker Xiaomi, which can make money from inexpensive smartphones because it takes customer orders in advance. Therefore, we can sell our product and service at a very competitive level.
We also develop our own process management system, allowing us to monitor every step from design to implementation.
For our tenants, we provide flexible short-term leases from three-month to one-year, so they don’t have to use their short-term capital at once on decoration, deposits on WiFi or utility deposits.
More importantly, the co-working spaces allow you to connect with different people who may wind up collaborating on projects or shared ideas.
A Currently our earnings before interest, tax, depreciation and amortisation (EBITDA) margin is about 30% which is in line with WeWork’s profitability. But I think our profitability can go down to as low as 10% because of our expansion plan in the next few years.
Having a meaningful scale is the number one priority for us at this moment, and profitability is only the second most important yardstick for us.
Q What’s your expansion plan?
A Currently we operate more than 40 co-working offices in 10 mainland cities. We will expand into another 30 offices in both overseas and mainland cities, including Singapore, Bangkok, Hong Kong and Tokyo.
The average space for each of the 40 co-working offices is roughly about 3,000 square metres, but the average for the new ones will be much bigger at around 8,000 to 10,000 square metres.
As of April Kr Space operated 200,000 sq metres of office space. We will add about 50,000 sq metres per month going forward. We should have about 25% of WeWork’s total office space (500,000 sq metres) by the end of 2018, half of WeWork by the end of next year and surpass WeWork by the end of 2020.
Besides expansion in floor space, we also hope to increase our revenues from services, providing tax and software services to our tenants.
Q What’s your overall fundraising goal? WeWork recently sold a $700 million seven-year bond. Are you interested in a debt sale?
A We are currently working with a mainland securities firm for a Rmb300 million sale of asset-backed securities. We don’t have any fundraising plan at the moment.
Q Zhu Xialu, former chief financial officer of Qunar, a US-listed Chinese travel site, joined Kr Space in April. What does it mean as far as an initial public offering is concerned?
A We don't have any specific plan for an IPO at this moment. What we want to focus is our three-year plan.
Of course Zhu's experience in a Nasdaq-listed company is definitely an asset.
This story has been updated to correct the measurement used in discussing the size of Kr Space's offices.
