How Coworking Hub RocketSpace Took Off, And Changed Course

Ever since the spectacular dot-com bust of 2000, any new tech boom is eventually clouded by prophesies that another collapse is close at hand. A splashy Vanity Fair cover story this month, entitled “Is Silicon Valley In Another Tech Bubble?”, is just one recent speculation about the possible frailty of the current expansion.

What’s certainly true is that any season in the tech cycle will yield many losers along with its winners. One way an entrepreneur can try to beat the Gold Rush odds facing tech startups is to build a company that serves the needs of the inevitable crop of winners—whoever they turn out to be. That might describe Duncan Logan’s strategy in early 2011 when he opened the coworking hive RocketSpace, which is approaching its fifth anniversary.

Logan, a native of Scotland, had already founded and sold a company before he moved to San Francisco and hit on the idea of creating a shared work space for tech startups. He quickly had a waiting list of eager tenants.

In a little under five years, his fledgling outfit has become a campus spreading across two buildings in San Francisco’s pricey financial district, and its alumni include about a dozen “unicorns”—companies valued at a billion dollars or more—including Uber and Spotify. RocketSpace’s growth may be due to a policy Logan set early on: his workspace would have a selective admissions policy.

To get in, most young tech companies had to have succeeded already on at least one front, such as raising some money or creating a prototype. “The best startups in the valley have all the money they need, and more being offered,” Logan (pictured above) says. “We’ve never had a startup struggling to pay the rent.”

Logan invested $20,000 to launch his first coworking location at 181 Fremont Street, in a grittier area of San Francisco south of Market Street. RocketSpace opened with 30 desks for rent in February 2011, and added another 150 desks in the following two months to accommodate the waiting list. At the time, the dot-com bust was still a troubling lesson in many minds. But others, such as Silicon Valley venture capitalist Marc Andreessen, were predicting a strong tech resurgence, Logan says.

Logan wanted RocketSpace to be more than just a place to park nerds with laptops. He describes his business model as “office as a service.” Part of RocketSpace’s mission is to accelerate the growth of its startups—for example, by enhancing their access to investors. But Logan decided not to make RocketSpace the kind of incubator that demands an equity percentage from startups that can reach the high single digits.

If RocketSpace had charged even as little as one percent in equity, Logan says, it couldn’t have attracted the roster of high quality companies that did set up shop there. And the quality of fellow tenants may be one of the most important amenities RocketSpace offers, he says.

“Young companies, like people, are the products of their social environment,” Logan says. “Good things happen when you hang out with smart people, and good people.”

By its second year, Logan’s curated coworking community was yielding a profit. In June 2013, RocketSpace moved into its financial district headquarters at 180 Sansome Street—where it now occupies seven floors—and a kitty-corner annex at 225 Bush Street. The amenities include meeting rooms, kitchens, printers, and super-fast Internet service. RocketSpace is now home to about 180 companies, and it’s the venue for regular tech events and workshops on startup strategies, such as the upcoming “Persevere or Pivot?” session scheduled for Nov. 3.

In only a brief few years, Logan has seen tech business trends spring up and fade like grass, while some RocketSpace tenants or alumni have become immensely successful. Collectively, RocketSpace alumni have raised a total of about $4.6 billion—not counting the outsized anomalies such as Uber and Supercell, Logan says.

“We’ve seen waves of technology,” Logan says.

Daily deal companies such as Groupon were hot in 2011, but Logan rarely sees such startups these days. There was no Dropcam or Nest in 2011, but the “Internet of Things” is now taking off, he says. A cohort of music-related businesses at RocketSpace—Spotify, Beatport, and Mog—has been followed by photo startups, including Shoto and Picpal.

Other current trends among tenants include data analytics and machine learning companies, on-demand delivery, and virtual reality startups. It remains to be seen which ones will not only capture investor money, but will eventually earn sustainable revenues and make a profit. Even a unicorn such as Twitter—with a $20 billion valuation but net losses—is facing those questions as it lays off 8 percent of its workforce this week.

In spite of the uncertain fates of each business model and individual startup, Logan isn’t one of the doomsayers about the current tech boom.

“I think we’re still at the tip of the iceberg, really,” Logan says.

But any innovative company may need to flex and re-assess as conditions change, he says. And RocketSpace is not immune, just because it houses tech innovators rather than competing with them. The business has gone through its own evolution.

Hundreds of coworking spaces, incubators, and accelerators have sprung up to nurture early- stage tech companies in the Bay Area, each with its distinctive stamp. A coworking space boom often follows a tech boom, as Xconomy has chronicled in Boston, Wisconsin, and the New York metropolitan area. Competition gives startups the power of choice, so a coworking space that offers no more than “people storage” may not be able to command adequate rents, Logan says.

Rates at RocketSpace are at the higher end of the scale, at about $850 per desk per month. Larger companies can rent small private suites, or even a whole floor, at $1,050 per desk. Tech companies initially used RocketSpace as a temporary arrangement until they were ready to set up their own offices, but now they often grow in place there, Logan says. Average stays keep getting longer—it’s now about 14 to 18 months. RocketSpace gets 25 to 35 new applications a week, he says.

Even with such robust signs, though, operating a coworking space is not a high-margin business, Logan says.

“I would love to say that the real estate component of our business is highly profitable. It’s not,” Logan says.

In fact, Logan doesn’t see coworking space rentals alone as a strong long-term model for the company. RocketSpace is already trying other things. The company makes higher profit margins on a related aspect of the business that’s still evolving—helping corporations figure out how to stay alive by innovating like startups.

RocketSpace’s consulting arm, RocketSpace Corporate Services, has more than 75 customers, from government agencies and educational institutions to businesses in fields such as banking, airlines, and health care, Logan says. They include Accenture, Converse, and British Airways. The consulting business brings in about the same amount of revenue as the real estate component, but it accounts for a greater percentage of RocketSpace’s profits. RocketSpace doesn’t disclose its revenue numbers.

The consulting service offers to educate older corporations about emerging technology trends that could disrupt their fields, and teach them how to innovate like startups from within. That’s easier said than done, of course.

But the RocketSpace unit is also playing matchmaker for corporations looking to rejuvenate their business models by working with existing startups. For example, RocketSpace helped Nifty, an Internet service provider in Japan, search for a digital health startup to set up an online diet-coaching app for the Japanese market. RocketSpace introduced Nifty to New York-based startup Noom, and the two companies formed a partnership.

RocketSpace’s curated startup workspace is now making houseroom for corporate innovation specialists and talent scouts, as well as startups. Nifty’s scout, Azusa Kawahara, has an office at RocketSpace.

RocketSpace is using that proximity to big company representatives as a selling point for potential startup members. This comes back to Logan’s core thesis: The scale of a startup’s success depends on the company it keeps.

“The best thing is just hanging around with other people at RocketSpace,” Logan says. “You may have just raised $4 million, but you’re sitting next to someone who’s negotiating $30 million from Andreessen Horowitz. At RocketSpace, $4 million is table stakes.”

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