Coworking: If You Can’t Beat Them, Join Them (For Now)

While Silicon Valley garages may have been the birthplace headquarters for today’s blue chip tech companies, to find the next generation of startup success stories you may want to check out a coworking space.

These open-area offices, which allow freelance professionals and entrepreneurs to rent desks cheaply on a month-to-month, or even day-to-day, basis are generally not-for-profit, corporate-sponsored or venture capital-sponsored entities.  They function in an incubator-like capacity, catering specifically to early-stage startups by offering networking programs, business-fundamentals clinics and mentoring opportunities. A survey by the coworking industry publication Deskmag found one in every three coworking locations across the country is planning to expand in 2012.

According to some venture capitalists, as valuations for online media companies rise and more of them go public or are acquired, the returns are trickling back into the sector in the form of investment in early-stage, Internet-based startups.  All the more reason for the growing popularity of these collaborative office complexes in tech hotbeds nationwide

“What we’ve seen in the environment today that there’s more money going into seed and early stage companies since 2000 at that level,” said Laura Sachar, a general partner with New York-based venture capital firm StarVest Partners L.P. “There’s a lot more interest in the early stage, and a lot of interest in social, mobile, ad-tech—so there are a lot of new companies being created in these areas.”

Supporters of coworking say the entrepreneurial communities could help prevent another tech sector meltdown like the one of the late 1990’s and early 2000’s.

“I think we might be heading toward a bubble,” said Matt Shampine, one of the co-founders of WeWork Labs, a New York-based coworking space.  “That being said, I think that our focus in this space is really to help these startups turn themselves into real businesses that actually have real revenue.”

Whether the sector is indeed turning into a bubble is, as ever, a subject of debate among industry insiders.

“The term bubble—they have to burst at some point, and that puts a negative connotation on it, so I stay away from that term,” said Peter Flint, a partner with Boston-based Polaris Ventures. “It’s a frothy time with a lot of people looking to raise money, and a lot of angels willing to invest.”

According to the folks opening and running these shared office spaces, competition for desks is fierce and plans for expansion are imminent. The space Shampine operates has a waiting list that’s more than 400-companies long. WeWork Labs just expanded from 5,000 to 17,000 square feet, and has plans to open up another floor in its Soho offices, as well as a location in San Francisco later this year. Wix Lounge, a free coworking space sponsored by online web-publishing platform Wix.com, hosts networking seminars and meetups in both its New York location, which opened in 2010, and now its recently launched lounge in San Francisco.

Despite the popularity of coworking and incubator-like programs, not every entrepreneur is a fit. Shampine cited examples where some were concerned about privacy, and opposed the idea of other companies within the office understanding the inner workings of their business model.  There is also an argument that startups utilizing a venture capital-backed collaborative, like Polaris’s Dogpatch, could actually have a harder time raising capital from another VC-firm.  Flint denies that this is an issue.

“We’ve had more than 500 people, or 300 companies, come through the Dogpatch network so far, and I would say the majority of them have received funding in one shape or another,” Flint said.  “$150 million has been raised by companies in Dogpatch; other VCs—they’re in and out of Dogpatch all the time, and we welcome them.”

Sachar, of StarVest Partners, said because many coworking spaces have competitive entry processes, locating inside one can set a particular company apart.

“Any of these incubators and competitions that make a company stand out is going to be helpful when there’s a lot of noise in the field,” Sachar said. “There’s a lot of competition for dollars, but it’s not just about access to capital; I think when you have companies down the hall from other companies being created it helps management find solutions to problems and creates a lot of momentum.”

Whether that momentum leads to a bubble remains to be seen, but coworking spaces are adamant that the next Pets.com – which went to R.I.P status as the Internet bubble of the 90s burst -- will not emerge from one of their offices.

“We’re trying to help people create sustainable businesses,” said Jesse Middleton, Shampine’s business partner at WeWork Labs.

Middleton said the fact that there are people at WeWork Labs who experienced the first dot-com bubble firsthand, will help to prevent the creation of a similar situation.

“Having gone through that, a lot of people look at this and say we’re a little bit more prepared.” Middleton said. “There’s still a bubble, but at the end of it, a lot more people are going to actually be making money and continuing their businesses through just a little bit slower growth.”