In recent years, WeWork (the poster child of coworking spaces) has exploded in growth across the globe with its coworking solution that meets the office needs of startups and corporations alike. With flexible office sizes and contract lengths, WeWork has proven to be a $35B idea to date.

The way we all work is quickly being reimagined and there are many more billions in value to be captured in improving the way office spaces work for real people. Just like LinkedIn was created for the white collar class, WeWork is really only tailored for the white collar class of workers.

That is where b[x] spaces comes into play, with a coworking solution tailored to artists and makers! Artists may need an open space to set up a canvas and painting tools. Photographers might need large walls to set up their photography studio. These needs cannot be met by the WeWork’s of the world.

Sadly, there are few viable solutions for this class of workers. Many spaces that are used by artist can often be unsafe and poorly maintained. You might remember the 2016 Oakland warehouse fire, which was a travesty where the only stairway out was a pile of stacked wooden pallets.

A new solution that can handle a tailors big and loud sewing machines, an artist’s messy paint, and a photographers need for a dark room is sorely needed. Somewhere that can take into consideration these unique needs while being clean, safe, and reasonably priced.

B[x] is geared towards fulfilling this unmet need, leasing their spaces out with the target market of creators in mind. Rather than seeing the unique needs of each creator as inconveniences, b[x] differentiates themselves from other office-space providers by catering to the needs of each tenant, often renovating their spaces to meet creators’ various purposes.

 One tailor who rented a B[x] space needed to bring in a variety of machines, and B[x] remodeled their loft into a workshop which could be better used by the tailor. In another instance, a small company that made virtual reality games needed an open space to test their products, and B[x] provided them an open and spacious workplace which could best suit their purposes.

 They’ve designed their three locations into 173 workspaces, which cost anywhere between $300 – $1000. Each of their locations features amenities that far exceed the industry standard, with a package/mail delivery service, internet/wifi connection, kitchens, conference rooms, utilities, and cleaning staff so that each location feels like a traditional coworking space.

 A unique feature of b[x] spaces is their community-building effort. B[x] actively tries to connect different people in each space, hosting 2-3 events each month. Their members are artists, photographers, and designers, as well as techies in VR and AR.

 If a VR producer at b[x] needs a graphic designer, they need to look no further than down the hall to another member for their help. Creating this kind of a community helps drive additional value to b[x]’s workspaces at very little additional cost.

The company has been successful thus far. Each of their 173 workspaces bring in an average of $6.7K in annual revenue, with a 93% occupancy rate. Members have a 47% annual retention rate, with the average membership length a little under 18 months. In fact, many of their members have been members since the company’s incorporation.

By utilizing long term leases on the buildings they manage, the team has maintained a lower cost capital structure and staffing of the business appears scalable with one manager and one maintenance person per location, with one gallery curator who floats amongst the various locations. Their low costs help them maintain a healthy 65% gross margin. The company has also been profitable since 2009.

As with any business timing is everything. B[x] has been around since 2008, but the team is seeing the opportunity to pursue hockey stick growth due to the fast rise of the coworking movement. This market trend is one that b[x] is well positioned to capture. The company has begun the process of planning out which cities across the US to expand to and is working through additional product features to create additional revenue streams.

These include art galleries, weekend markets to sell products, and coffee shop leases, which would add further value to b[x]’s workspaces based on the needs they seem from their tenants. The company hopes to foster the idea that, by being a part of b[x], you can be a vendor across the US.

B[x]’s founder and CEO is Rafael Alvarez. Prior to b[x], he worked as a civil engineer for 12 years, where he led project teams in Estimation, Design, and Field Supervision. He also has 20 years of experience in engineering and contracting in commercial and residential construction/renovation, positioning him well to manage the build out of a network of buildings across the country.

 These experiences actually led to Alvarez’s interest in founding b[x]. While on a contracting project, Alvarez attempted to find a workspace with storage to no avail. His searches on craigslist would yield a few spaces priced reasonably, but with substandard safety standards or dismal working conditions. Being a civil engineer, Alvarez hoped to leverage his background to meet this untapped market, hence beginning b[x].

1. Strong Execution/Demand

B[x] has a convincing product, having identified a market segment with an unmet need, and their success has been incredibly successful so far. A gross margin of 65% is healthy, considering loosely comparable companies like WeWork, has an estimated gross margin of 8%.

Even more, the company has been profitable throughout its growth, a positive indicator, and a signal of reduced risk.

Their 93% utilization points toward a high demand for their flexible, yet inexpensive workspaces. In fact, as Alvarez opened b[x] 1, it took less than 4-5 months to reach 90%+ occupation rate.

The company’s management is actively reflecting and remodeling it’s workspaces, adjusting their offerings based on what workspaces have been high in demand and what others have been leased for long durations. This type of attention to consumer demand has helped the company develop a system/algorithm for determining what kind of workspaces to build and what locations to expand into based on seemingly mundane details, like the number of windows per building.

Strong execution paired with healthy demand yields success in most cases, and in the past ten years since the company’s inception, b[x] has shown that they are extremely able at what they do.

2. Experienced Management

Much of b[x]’s success relies on operational efficiencies. If a location isn’t divided to maximize usable space then the company is not able to access the potential revenue that it could be generating. Failure to maximize revenue deeply impacts the profitability of businesses like b[x], whose primary costs are rent-related.

Alvarez’s background in civil engineering pays off significantly in this aspect of the business – his expertise in estimation and design give him insight into how best to design workspaces.

His experiences in finding a space optimized for creators with unconventional needs also give him insight into the consumer’s mindset. Alvarez’s understanding of what his target market values gives him an advantage in appealing to this specific demographic, allowing him to provide services that his competitors may not have thought of.

3. Market Growth / Acquisition Target

In the past 3 years, over 5 million square feet of coworking space have been added to the market each year. With the market for coworking space booming, b[x] has carved out a niche customer segment, which will be highly attractive to large corporations like WeWork in the coming years.

With hundreds of millions in Softbank investments dollars, WeWork is aggressively acquiring business units that are in different market segments, geographies and product lines. In fact, the WeWork team has been on an acquisition spree in recent years including a $200M acquisition of Meetup along with several others. Needless to say, we think b[x] is ripe for acquisition over the next 5 to 7 years.

Prospective investors might be wary of their expensive $22M valuation, which at 20x revenue, already has a significant amount of growth priced in. However, the team has structured the terms of the deal to try and safeguard against long term illiquidity.

If b[x] does not IPO or get acquired, on the 7th year of their SAFE security’s issuance, investors can request the company to repurchase their SAFE securities for 1.5x their investment value, a 6% annual interest rate.

This may make some weary of whether or not the team will return in the event of a larger acquisition, and this should be considered. Regardless, we think this is the right management team at the right time with a product that has shown sustainable traction and comes with reduced downside risk due to the fact that the business has already shown an ability to be profitable.

Our investment thesis is that the $22M valuation takes into consideration the fact that the team has built a business that works and has the opportunity to go capture what is now a rapidly growing market. If the company can continue to build a network of new locations, it would be a perfect candidate for acquisition by a larger coworking player like WeWork.