Underweight: Coworking and Cafe All in One

Key Stats:

Summary

The Parlay Cafe team has been selected as an “Underweighted Deal” by KingsCrowd. If you have questions regarding our deal diligence and selection methodology, please reach out to hello@kingscrowd.com. 

Problem

With more individuals working remotely than at any time in the past, certain challenges have come to present themselves. While many people can work at home, there are benefits to what has come to be called “coworking.” Coworking is when individuals, often from different companies, gather to work in the same location. Gathering this way serves as a good method of networking. It allows individuals to effectively share the burden of costs that would come with a more formal office environment. Amenities like comfortable furniture, a good view, attractive lighting, and robust internet connectivity can all be shared in an affordable way. Even though this paradigm shift in how we work has seen tremendous growth in recent years, the costs associated with coworking can still be high. Not only that, the number of locations, while plentiful, are still a small fraction of what the market might come to demand. 

Solution

One company offering a solution for these issues is Parlay Café. Instead of opening a simple coworking space or set of spaces, though, the company has a twist on this concept. In short, Parlay Café operates as two businesses in one. The first is a café where any customer is invited to visit and enjoy the foods and beverages it offers. The second is as a membership-based coworking space. The goal is to provide both open, casual spaces as well as individual offices and rooms for its visitors. 

Management specifically believes that operating under a franchise model makes the most sense. It should, in theory, allow the most rapid expansion compared to keeping every location company-owned. This franchise approach has the potential to generate attractive returns down the road. A large part of the company’s business will be high-margin in nature. To start up a franchised location, investors will need to pay Parlay Café a $35,000 one-time franchise fee. This amount represents a small share of the more than $300 thousand the business expects the average location to cost. In addition to these franchise fees, management intends to charge royalties. Tentatively, these will amount to 6% of sales. Management also intends to charge another 2% charge for an advertising fund. 

Each location will have a simple menu that will consist of a variety of beverages. These drinks include espressos, brewed coffee, cold brews, smoothies, and more. The company will also make available select foods for its visitors, including salads, breakfast burritos, egg bites, and other items of a similar nature. In short, this side of the business will behave exactly like a standard café or coffee shop. 

In the members-only area, the company will have chairs, desks, monitors, and private offices. Some locations, management believes, will even have larger conference rooms that will be available to rent. Management also intends to charge a fee of $10 per day that a coworking space is in use. Monthly plans will go for $95. Free parking will also be available to these users, which in some locales alone can be a great deal. 

So far, Parlay Café is still an early-stage concept. Management opened a proof-of-concept location in Temecula, California in mid-2019. By month five, that location supposedly broke even. Management believes that this business model will allow the firm to grow rapidly. The expectation is that in no more than 10 years, the company can see 1,000 locations open. If all goes according to plan, though, this won’t matter to shareholders today. That’s because management’s goal is to exit the firm through a sale or other type of exit transaction within around five years. 

Last year Parlay Café had the proof-of-concept location operating. At this time, though, it appears the company is not currently generating any revenue. It also has no current expenses according to its latest financial filings. What the company does have, though, is cash. Its latest filing reveals cash on hand of $152,537. 

An Attractive Market

People thinking about the coworking space today might worry about the issues plaguing one of the industry’s giants: WeWork. Last year, before significant financial problems were revealed at the firm, WeWork was valued at $47 billion. Today, SoftBank (a major investor in WeWork) values the firm at just $2.9 billion. Despite growing to over 600,000 members and around 848 locations worldwide, the company has struggled to be profitable. This performance is discouraging for prospective investors of Parlay Cafe. But it appears to be more the exception than the rule when looking at what the industry is experiencing today.

According to one source, last year there were 18,287 coworking spaces across the globe. By 2022, the expectation is for this market to grow by 42% to 25,968 locations. This implies an annual growth rate of 12.4%. Data suggests that a full 65.3% of new locations are being set up by new businesses, with 26.2% of new locations being expansions from existing firms. The industry as a whole is estimated to be worth somewhere around $26 billion.

The US, in particular, has proven itself to be a particularly attractive place for coworking to take off. By one estimate, a full 45% of coworking activity takes place in the US. According to one source, there were 754,000 Americans participating in coworking last year. By 2022, that number is expected to grow to 1.08 million. In fact, according to one count, the average coworking space has about 185 members in it already. 

Today, somewhere around 6% of all business is conducted in coworking spaces. In the years to come, this share is likely to increase. After all, there are numerous benefits to coworking. In 2018, the average cost for a space in a coworking facility was $1,063 per month. A year earlier, in Boston, that figure was $1,889. In fact, across the US, the 2018 average was $949 per month. With its locations set to charge $95 per month, or $10 for a single daily visit, Parlay Café is working to severely undercut the competition. 

It’s also not unreasonable to blend a coworking space with a cafe.  Café’s, coffee houses, pubs, and similar places have a long and rich history about them that make them ideal for collaboration. The Café de Procope, for instance, was a famous haunt of Napoleon Bonaparte when he was still young. The Café de la Regence, meanwhile, was home to literary, political, and other visionaries such as Voltaire, Benjamin Franklin, and a long list of renowned chess players like Philidor. The Eagle and Child, a famous English pub, was a regular meeting place for The Inklings, an Oxford-based literary group that included J.R.R. Tolkien and C.S. Lewis. This cultural history lends itself well to the idea of a coffee shop easily becoming a coworking space.

Terms of the Deal

At this time, management is trying to truly launch this concept. To do so, they hope to raise $1.07 million, but they will close with a round that’s as small as $50,000. Investors putting money in will receive a SAFE, which will convert into equity upon certain triggering events. The conversion will be done at a 20% discount and will be subject to a valuation cap of $3.5 million. For the first $100,000, this number has been lowered to $3 million. At present, Parlay Café has only $25,351 committed to its raise. In order to participate in this transaction, investors must contribute at least $250 apiece. 

An Eye on Management

Given that Parlay Café is such an early-stage venture, it should not be surprising that its management team is quite small. At the head of the company is its sole founder, as well as its CEO, Don Mastrangelo. Prior to founding the company, he founded Jacked Up Footwear. Before that, he was VP of Local and Channel Sales at WorkWave. His experience before that was as President and founder of GPS Heroes. He is also the author of the book Ready, Set, Sell!. The only other executive at the company is Rachel Mastrangelo. She operates as the company’s Vice President. Prior to this, she was employed in the same role at GPS Heroes. 

Rating

After much analysis, we are rating Parlay Café as an Underweight opportunity at this time. The company does have some things going for it. The industry it operates in is slated to grow, despite the recent slowdown caused by the COVID-19 pandemic. The history of coffeehouses as gathering places plays right into the company’s own story. The goal of undercutting competition, if it can be done profitably, is excellent. Adopting a franchise model makes a lot of sense for the long haul, because of the cash flow the company could be slated to receive. Add to this Parlay Café’s low valuation cap and it does appear to be an intriguing firm to consider. Having said all of this, there are issues that make this a risky venture.

The biggest problem is that Parlay Café is not currently operating. The company did have its proof-of-concept, which they claim eventually broke even. However, a review of its financials shows only cash on hand and no revenue or expenses for the short period those financials covered. This means that either it has no operations at this time or any locations that are operating are not part of the current deal. This alone makes things worrisome since it will be difficult to get investors willing to franchise when there’s currently no substantive business that can demonstrate whether the concept can work long-term. There are other concerns too. Though the industry is expected to grow in the years to come, the fallout associated with WeWork will likely cause many investors to hesitate. The current economic slowdown adds further uncertainty. Opening new franchise locations may be especially difficult in a weak market. All in all, Parlay Cafe may not be the strongest opportunity for investors at this time.