The 1776 Merger: An Anomaly or an Omen?
The Forrest Four-Cast: September 25, 2017
The DC-based startup incubator / co-working space 1776 appeared to be one of the leaders of this founder-focused industry. Established in 2013, this organization had created significant momentum within the beltway entrepreneurial ecosystem. The Challenge Cup events it sponsored in other cities across the US and around the world further enhanced this strong reputation. Thus many of us were surprised at the recent news of the potential merger between 1776 and a Philadelphia-based co-working company.
According to a September 20 report in the Washington Business Journal, the proposed deal “hinges on about $1.6 million in additional money from current 1776 investors, who risk their ownership being massively diluted by the combination of the two companies, sources said. Benjamin’s Desk, they said, would bring $1 million to the table to finalize the marriage. Of the total, about $2 million would go toward the combined incubator company to pay down some debt and provide working capital.”
A much less charitable analysis of the potential merger of these two companies can be found from Glen Hellman via a blog post titled “Stick A Fork In 1776 DC… It’s Done” on Driven Forward.
Changes at 1776 roughly parallel some of the transformations in Austin, where Tech Ranch recently announced that it is getting out of the co-working business. While co-working has been a staple of the the company’s model since it launched more than 10 years ago, Tech Ranch founder Kevin Koym told Austin Inno, “I’m not here to build a WeWork. WeWork is doing that.”
The takeaways here point to a maturing market. Ten years ago, the lean startup movement created a new generation of founders. These many new entrepreneurs needed non-traditional office setups for their new projects, hence the proliferation of co-working spaces in the US and abroad. To this end, the number of co-working spaces in a given city has often been used as a measure of the strength of the city’s ecosystem. Now that startups have more office options to choose from (ranging from global companies like WeWork to small, neighborhood coffee shops), co-working facilities must up their game to outpace their competition. Expect to see more consolidation as spaces continue to thrive that can provide the most value to their customers and the most return to their investors — while other spaces that aren’t able to execute on these items begin to whither away.
SEPTEMBER 26 POST SCRIPT: Comments a Houston-based VC who regularly reads this column: “The co-working business is a notoriously tough one, with extremely high tenant turnover and price sensitivity. Co-working spaces produce some fantastic ancillary benefits for the community, but seldom are cash-flow positive by themselves. Some people use them as a loss leader to help a larger real estate play, while others use them to get access to equity, but the business itself seldom works on its own.”
Hugh Forrest serves as Chief Programming Officer at SXSW, the world’s most unique gathering of creative professionals. He also tries to write at least four paragraphs per day on Medium. These posts often cover tech-related trends; other times they focus on books, pop culture, sports and other current events.
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