Knotel Files for Bankruptcy, Assets Acquired by Newmark

Knotel, a flexible workspace provider that once achieved unicorn status, recently announced its bankruptcy filing. Subsequently, its assets are being acquired by Newmark, a commercial real estate brokerage and investor, for a reported $70 million.

The company specialized in the design, construction, and management of bespoke headquarters for businesses. It offered these spaces under “flexible” lease arrangements. Prior to the pandemic, in March 2020, Knotel’s valuation reportedly reached $1.6 billion.

Initially, the situation might be attributed to the impact of the COVID-19 pandemic. However, reports indicate that Knotel was already facing significant challenges.

Multiple sources, including an article in The Real Deal, suggest the company was grappling with lawsuits and eviction proceedings even before the onset of the pandemic.

Consequently, some industry analysts believe the Chapter 11 filing was unavoidable, despite the company’s prior success in reaching unicorn status after securing $400 million in Series C funding in August 2019.

Newmark’s acquisition of Knotel’s assets is widely seen as a strategy to recover a portion of its earlier investment, according to Jonathan Pasternak, a bankruptcy attorney and partner at Davidoff Hutcher & Citron.

The dramatic downfall of a company that raised over $560 million warrants a closer examination of its trajectory leading up to this point.

2016

Amol Sarva, co-founder of Virgin Mobile, and Edward Shenderovich, a former venture capitalist, established Knotel. The company essentially inverted the WeWork business model, generating considerable initial interest.

2017

Knotel secured a Series A funding round of $25 million in February. Investors included Peak State Ventures, Invest AG, Bloomberg Beta, and 500 Startups. The company positioned its services as “headquarters as a service,” providing adaptable office spaces that could be tailored to tenant needs and scaled accordingly.

2018

In April, Knotel announced a $70 million Series B financing round, led by Newmark Knight Frank and The Sapir Organization. By August, the company reported operating over 1 million square feet across 60 locations in New York, London, San Francisco, and Berlin.

Knotel projected reaching 2.5 million square feet and $100 million in revenue by the end of the year. The company claimed a 300% year-over-year revenue increase. Its clientele included both venture-backed startups like Stash and HotelTonight, and larger enterprises such as The Body Shop.

“Their approach is distinct,” stated Barry Gosin, CEO of Newmark Knight Frank, in a press release at the time. “It represents a novel category that the industry is rapidly embracing. We have observed their growth and are now pleased to participate in their journey. This signifies a change in how property owners and tenants collaborate.”

2019

During August, Knotel publicized the successful closing of a $400 million funding round. This investment propelled the company to unicorn status, establishing it as a significant challenger to WeWork in the flexible office space. Knotel reported operating over 4 million square feet of space across more than 200 locations globally, including cities like New York, San Francisco, London, and Toronto.

Sarva, the CEO, stated at the time that Knotel was focused on shaping the future of work environments. He expressed enthusiasm about the new investors’ confidence in the company’s product, vision, and execution capabilities.

Financial Performance and Challenges

Despite the funding success, reports surfaced indicating substantial losses for Knotel during the year. Business Insider claimed the company lost $233 million, based on reviewed financial documents, although a company spokesperson contested this figure.

The startup was reportedly struggling with the financial implications of long-term lease commitments and expensive office renovations. Furthermore, higher-than-expected vacancy rates presented an additional challenge to the business model.

Key locations included major metropolitan areas such as Los Angeles, Washington, D.C., Paris, Berlin, Boston, São Paulo, and Rio de Janeiro.

Wafra’s investment was intended to facilitate continued global expansion and reinforce Knotel’s leading position within the rapidly expanding flexible office market, estimated to be worth trillions of dollars.

2020

Forbes reported in late March that Knotel implemented workforce reductions, impacting 30% through layoffs and an additional 20% through furloughs, as a direct consequence of the coronavirus pandemic. The company’s valuation at that point was approximately $1.6 billion.

Knotel began the year with a team of roughly 500 employees. By the third week of March, staffing levels had already decreased to 400, likely reflecting existing open positions. Further reductions left approximately 200 employees remaining, with the other 200 either experiencing job loss or being placed on unpaid leave, as detailed by Forbes.

“A continuation of standard operating procedures is no longer viable,” stated Amol Sarva, CEO and co-founder of Knotel, in a communication to Forbes. “Knotel has made the decision to take decisive measures in anticipation of a potentially prolonged health and economic downturn.”

During the second quarter, Knotel experienced a revenue decline of around 20%, falling to approximately $59 million when compared to the first quarter, according to Forbes. Several landlords initiated lawsuits against the company, alleging breaches of established profit-sharing agreements.

By July, Forbes indicated that Knotel was pursuing funding efforts, aiming to secure up to $100 million, based on information from sources “familiar with the matter.”

Knotel's 2021 Bankruptcy

Knotel initiated bankruptcy proceedings and reached an agreement to divest its assets to Newmark, an investment firm, for approximately $70 million.

This occurred after the company had been assessed a valuation of $1.6 billion just under a year earlier.

CEO Sarva expressed optimism regarding the deal, stating, "Newmark’s commitment provides a viable path forward during these difficult times."

Sarva further indicated a belief that a successful restructuring would allow Knotel to concentrate on delivering advanced, customized flexible workspace solutions in strategic U.S. and global locations.

Debtor-in-Possession Financing

To enable the transaction under Section 363 of the U.S. Bankruptcy Code, a Newmark affiliate consented to furnish Knotel with roughly $20 million in cash.

This funding was designated as debtor-in-possession (DIP) financing, intended to sustain Knotel throughout the bankruptcy proceedings.

The flexible workspace industry is observing Knotel’s decline with considerable interest, mirroring the previous downturn experienced by WeWork.

With a substantial portion of the workforce continuing to operate remotely and office occupancy rates remaining low due to the ongoing pandemic, projections suggest a potential for further challenges within the sector.

It is anticipated that conditions may deteriorate before any improvement is realized.

Note: This article has been updated following its initial publication to incorporate net loss data and supplementary information.