The U.S. operations of Knotel, a flexible office workspace company co-founded by Amol Sarva, filed for bankruptcy this week.
The COVID-19 “pandemic created a uniquely challenging operating environment, with significant impacts on leasing velocity and the rate of renewals in key markets, particularly New York and San Francisco,” said Sarva, who is Knotel’s chief executive.
However, even before the pandemic began early last year, Knotel was reportedly in financial trouble. The company is said to have had a backlog of missed rent payments on several properties it leased from building owners in New York. In 2019, even while demand for office space was strong, Knotel reportedly suffered $223 million in losses.
In 2020 there was also another controversy involving Sarva. Knight RE, which backstopped surety bonds issued by insurer Rhino on two Knotel building leases, says Knotel reportedly failed to disclose family ties in the transaction. Rhino’s chief executive is Paraag Sarva, the younger brother of Knotel’s Amol Sarva. Knight RE told Rhino that no similar bonds could be issued “due to the appearance of impropriety,” according to Business Insider.
As part of its bankruptcy process, New York based Knotel will give up multiple office locations in the U.S. If the court approves, Knotel will be sold to Newmark Group, a full-service commercial real estate firm, for $70 million, according to Bloomberg. In early 2020, Knotel was valued at $1.6 billion, according to news reports.
A serial entrepreneur, Sarva founded Knotel in 2016. This was around a time of booming demand for flexible short-term, fully furnished office space rentals sought by designers, accountants and other professionals as well as start-ups and small businesses. Such month to month and other short term rentals was popularized by WeWork.
Sarva expanded upon the idea by offering small as well as large companies flexible rental agreements for a fully furnished separate office or an entire floor or several floors in choice New York City locations. A company, which is growing rapidly or needs office space for a short-term, could rent for a year to three years from Knotel, instead of being locked into a lease for ten or more years with a building owner. Knotel leased the floors, as well as entire buildings, from the building owners for the long-term, typically ten or more years.
The financial strategy of Knotel - and WeWork - is to charge clients, taking up its short-term office space higher rents than what it pays on its long-term leases to a building’s owner. This markup on rents, as well as markups on furniture rentals, utility bills, cleaning and other services, is the profit a business like Knotel would earn - assuming the overall occupancy was high.
As the global economy grew in the late 2010’s, there was rising demand for office space. Knotel rapidly expanded around the globe to twelve cities besides New York, including Boston, San Francisco, London. Paris, Amsterdam and Toronto. It leases over five million square feet of office space from building owners in 200 locations on four continents.
“Every single company in this space has gone broke,” Sam Zell told CNBC in 2019. WeWork and Knotel’s business, sub-leasing office space which they lease from building owners, has been tried since 1956, he added. During an economic downturn, many tenants do not renew their short-term rentals while the sub-leasing company, which has a long-term lease, must continue to pay rent for the entirety of its lease to a building’s owners.
In 2007, at the peak of an earlier real-estate cycle, Zell sold Equity Office Properties, a company he founded and which owned office buildings, for $39 billion. His net worth is estimated to be $4.8 billion, according to Forbes,
About two weeks after Zell prediction, Sarva told CNBC that an economic recession would not hurt Knotel’s business: “I feel really confident that defense-minded CEOs, when they are on defense, they’re going to come to flex (office spaces) and away from (long-term) leases.”
Over the past year, with most white-collar employees working from home due to the COVID-19 pandemic, demand for office space has collapsed. Today in New York City, for instance, Knotel is offering 17 office spaces, ranging in size from 1,400 to 40,000 square feet, for immediate occupancy.
Some like Bill Gates say the pandemic will permanently reduce demand for office space. Gates, the billionaire co-founder of Microsoft and a major philanthropist, predicts that employees will spend 30% fewer days in the office.
In March 2020, soon after the pandemic began, Knotel reportedly laid off half of its 400 employees.
Sarva is a serial entrepreneur. Prior to Knotel, he co-founded Halo Neuroscience and Knotable, a digital platform for shared notepads.
Sarva is on the board of Plethora, a modern factory for getting metal parts faster. He’s an advisor to Fon, a wi-fi network; Payfone, for mobile payments; Work Market, a platform for labor resources; and Ouya, an open source game console.
In 2007, Sarva co-founded Peek, a pioneer in mass market smartphones — a $30 Internet and email gadget As CEO he launched the product worldwide and raised over $25 million from venture capital firms. Peek was acquired by Bharti SoftBank in 2012, which used the product to expand its offerings of Hike services in India and elsewhere.
Sarva was co-founder of Blue Mobile, an effort to create a prepaid wireless offering in the U.S. Earlier he worked as a consultant at McKinsey & Company in New York. In 2000, he joined Virgin Mobile USA.
Sarva grew up in Queens, New York. His father, an accountant, and possibly his mother, are alleged to have been involved in a number of fraudulent financial and tax evasion schemes, according to Moneyinc.com.
Sarva’s Ph.D. thesis from Stanford University was titled “The Concept of Modularity in Cognitive Science.” He earned a B.A. from Columbia University with a double major in economics and philosophy. He was a national debate champion while at Stuyvesant High School in New York, the leading city-run school.
In 2016, Sarva joined the faculty at Columbia University, teaching undergraduates on Venturing to Change the World. Through his family angel fund, he is involved in more than 50 start-ups ranging from electric bikes to kids clothing to key robots and food delivery.
One of Sarva’s photographs is in the permanent collection of the Museum of Modern Art, New York. He has collaborated with the painter Tom Sanford on a painting which is in the collection of the Syracuse University Art Mmuseum in upstate New York.
Knotel raised $560 million to grow its business, including $400 million in 2019, according to CrunchBase. Investors included Newmark, which is buying Knotel; Wafra, a Kuwaiti government-owned fund; and Norwest Venture Partners, which is based in Palo Alto, California.
At Norwest, Indian American Promod Haque is a senior managing partner. Over the past 30 years, he has invested in more than 70 companies, in the process creating more than $40 billion in total exit value, either through a public offering or a buy-out of the companies.
If Knotel’s sale to Newmark for a reported $70 million is approved in bankruptcy court, Norwest, the Kuwaiti fund and other venture investors will lose 90% or more of their investment in Sarva’s office space venture.
The ParlayMe team is sad to see Amol Sarva depart Knotel. We interviewed him twice on his startup journey.
Watch our inteviews with him in New York and London here