How to play in China’s multibillion-dollar co-working space

China's "sharing economy" boom might have been over-sold, but specific sectors retain great potential. A $120m funding round offers clues on how to carve out a share of the office market.

It seems a lifetime ago that any business model with "sharing" in its title was a guarantee of generous funding in a China flush with venture capital billions.

Now, investors wandering — or perhaps riding a Mobike or a Didi car — through the remains of the many start-ups that failed to find success are having to be much more discerning. The days when basketball or umbrella-sharing ideas won funding are long gone.

One concept that is increasingly pervasive, and is expected to cultivate more multibillion dollar markets, is co-working. The model differs from traditional office sharing with more active management of the space, a philosophy of building communities as well as physical space and, of course, hip touches popular with milennials, like craft-beer bars and hammocks.

At the head of the pack in China is MyDreamPlus, a Beijing-based co-working start-up, which said on Monday it had completed its $120 million series C funding round led by Hillhouse Capital and General Atlantic.

Existing investors including JOY Capital, Ocean Link, M31 Management Fund under Giant Network Group, and K2VC also contributed to this round.

MyDreamPlus says this was the largest single fundraising by a China-born co-working and office service start-up, and that it was the first in China to complete series C funding in the space.

Prior to the latest round of funding, the start-up closed its Rmb300 billion ($43.6 million) series B round in March. Before that, the three-year-old firm raised $26 million in its angel and series A rounds.

“With the fresh capital, we can scale up our market share by expanding to more Tier-2 cities,” the company told FinanceAsia in an email. The company believes demand in co-working will increase, and a wider range of users will turn to co-working.

“The co-working space industry is booming around the world. Demand is particularly strong in China due to its rapid economic development and more dynamic environment,” Hillhouse Capital said in the statement.

According to an analysis by iiMedia Research – a Chinese mobile internet business data provider and researcher – the size of the country’s co-working space market may top Rmb60 billion by the  end of 2018. It predicts the number will top Rmb100 billion next year, while growing to Rmb410 billion by the end of 2022.

Source: iiMedia Research


Who would not want a slice of such a promising cake? The researcher’s analysis also shows that, more than 300 co-working platforms were competing in China as of June.

But among the hundreds of startups, how many can survive the serious liquidity squeeze of the investment market and cut-throat homogeneous competition? They will have to compete with their China-born peers, as well as fight with foreign players.

WeWork, the SoftBank-backed US co-working startup, launched its Chinese arm in 2016, and has raised $1 billion, including its latest $500 million series B round in late July.

China's recent history shows how difficult it can be for an international start-up to compete with local players in the country. The regulatory environment is fluid and often hostile — as tech giants such as Google owner Alphabet discovered — while local players with more feel for the country's nuances can also prevail, as in the case of Didi Chuxing and Uber.

But with powerful funders like SoftBank, WeWork was able to make a strong statement of intent  by sealing a $400 million acquisition of Chinese counterpart Naked Hub.

Chinese venture capital funds often stress the key advantages enjoyed by so-called "head" companies — such as, in the case of co-working, early movers like KrSpace, and well-capitalised firms like WeWork. In other businesses, such companies have scooped up a majority of the market share: some 80% of the revenue goes to 20% of the companies.

For less-capitalised players like MyDreamPlus, that means relying more on its talent and coming up with solutions offering higher efficiency, stronger functionality and lower prices.

“What differentiates us from our peers is that we put a lot of effort on improving our services by better leveraging our strengths in technology,” MyDreamPlus told FinanceAsia.

Eric Zhang, managing director and head of China at General Atlantic, echoes that view, adding: “Technology increasingly becomes a key differentiator in the workspace of the future.” He believes that is how MyDreamPlus will secure itself a place in the competitive game.

“The entire ecosystem of office-of-the-future is our goal, it is also a multibillion dollar market,”MyDreamPlus said.

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