Young startups spend more on coworking space than on cloud computing services, according to credit card Brex, and some tech investors say it isn't worth it

Courtesy of WeWork

WeWork remains the favorite coworking provider, at least among Brex customers.

• In a recent report, Brex, a startup that offers corporate credit cards to startups, said its customers put 10% to 20% of their monthly spend toward coworking memberships on average.
• We asked tech investors: Is coworking space worth the cost? They mostly agreed that a shared office offers cost savings and convenience for an early-stage startup with a small team.
• The investors also warned that a coworking space can be distracting. At a certain size, it makes sense for a company to create a culture separate from the culture of its workspace.
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The collapse of a notorious coworking giant has not stopped startups from shelling out a significant portion of their monthly budgets on their digs.

Brex, a startup that offers corporate credit cards for startups and doesn't require personal guarantees, analyzed the purchases made by its thousands of customers in the first half of the year and released the findings in November.

It found that coworking eats up much of their budgets.

Early-stage startups that have coworking space spend an average of $5,000 a month on membership, Brex found, which represents about 20% of their monthly spend. Late-stage startups spend more on coworking - $8,500 a month - but the cost makes up only 10% of their monthly spend.

Brex also measured spending on cloud services, productivity tools, and software for managing customer relations.

By comparison, its customers put more than 10% of their monthly spend toward cloud services - the necessary IT that allows the startup to sell its products and services. They also spent nearly 20% on marketing and advertising.

The company's calculations do not include costs that startups charge to other corporate credit cards they may have. So the percentage spent on coworking may be much smaller if the startup also uses their American Express Business Gold Card to earn bonus points, for example.

Still, thousands of dollars a month on office space is a lot of money to burn, considering there's never been an easier time to work from home. The benefits of cloud computing and the rise of tools like Slack and Zoom allow teams to stay connected and get the job done from anywhere.

To find out why startups are still spending on coworking, we asked several tech investors: Is coworking worth the cost?

Getting a startup up and running

It's typical for an early-stage startup with a small team to spend anywhere from $3,000 to $10,000 a month on office space, said Niko Bonatsos, a managing director at General Catalyst, who led the firm's early investment in Snap. He says real estate is the second biggest expense after people - their salaries and benefits.

Tomohiro Ohsumi/Getty Images

The free coffee is another perk.

WeWork remains the favorite office space provider, at least among Brex customers. Almost two-thirds of the money they spent on coworking went to WeWork, whose empire includes more than half a million workstations across 29 countries. However, Brex, which tailors its perks for startups, offers a discount on a WeWork membership so its customers may be more likely to use WeWork.

A shared workspace makes sense up until a point, said several tech investors.

It lets a startup get an office running in less time and for less money than it would take to lease and furnish a space, said Eva Ho, whose boutique firm Fika Ventures puts seed money into data-driven companies.

Entrepreneurs tell her that a well designed coworking space makes them look more sophisticated when conducting meetings with job candidates and clients. The setting can also be energizing, they told her, because the team is surrounded by others in the office who understand the challenges of building a company and trying to change the world.

The free coffee is another plus.

A startup will outgrow coworking

The problem, Ho and other investors point out, is that it's hard to tune out distractions in such an environment.

Semil Shah, an investor at Lightspeed and Haystack, says that while coworking can be a cost-effective option for a small team, it has drawbacks. An environment that causes workers from different companies to work in close proximity makes it difficult to concentrate, he said, and is not conducive to the task of building a team.

Startup accelerator Y Combinator doesn't supply office space for this reason. It tells founders to work out of their homes to avoid any time wasted playing ping pong or standing around the coffee maker.

WeWork

WeWork's culture is about "doing what you love."

Most companies will also want to graduate from coworking into their own office location, these investors advise.

A bigger company requires a private space to define its own culture separate from the culture of the coworking space, said Bonatsos. WeWork's ethos is about finding personal fulfillment at work. Its motto "Do What You Love" appears on coffee mugs and throw pillows throughout its offices. After a tenant adds a certain number of people, it might leave for more space - and room for a new identity.

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