Breather Products Inc., the Montreal startup that raised more than US$150-million to build a global flexible workspace operator, is abandoning hundreds of leases in an effort to reboot the pandemic-stricken company.
Breather’s U.S. subsidiary on Wednesday filed in California for an insolvency process called assignment for the benefit of creditors, while its British unit began a similar process known as creditors’ voluntary liquidation. These subsidiaries, which lease 315 office spaces in the United States and 40 in Britain – amounting to hundreds of thousands of square feet of space – will be assigned to third parties to wind them down and repay Breather’s creditors. Breather informed its tenants of the move Wednesday afternoon.
That leaves Breather operating 79 spaces in Canada, but not for long. Chief executive officer Bryan Murphy told The Globe and Mail that Breather will try to get out of those leases as well in the next 90 days. The company, which furloughed most of its 120 employees this year, will make those cuts permanent and shrink to 30 people.
Mr. Murphy hopes to rebuild Breather as a pure technology play, turning it into an online marketplace for renting other landlords’ flexible office space. “The decision I’ve made is that Breather in its current form as an operator doesn’t make sense and, to be frank, I’m not sure it ever made sense,” he said. “I want to be like Airbnb” – which enables people to rent third-party lodgings – “not WeWork,” which rents its own spaces. “We’re doing radical surgery on this company.”
Company director John Stokes said: “COVID has clearly impacted some businesses way more than others and Breather is one of those most impacted. Decisions like this are never easy or simple, but when we considered all of Breather’s stakeholders, [this] direction emerged as the most appropriate.”
Breather became a darling of Canada’s tech sector soon after its 2012 founding by self-styled trend spotter and business book author Julien Smith and designer Caterina Rizzi. Their idea was to rent offices by the hour to clients through an online platform, like an Airbnb for boardrooms. But unlike Airbnb, Breather leased the spaces it rented out, requiring lots of capital. By signing long-term office leases, they figured Breather could profit by renting the spaces at higher rates for hours to months at a time.
Venture capitalists, drawn to flexible workspace providers, piled in. Peter Thiel’s Valar Ventures led a US$27-million funding in 2015 and Menlo Ventures invested US$25-million in 2016, its largest commitment since backing Uber years before. The Caisse de dépôt et placement du Québec and Singapore sovereign wealth fund Temasek led a $60-million [about US$45-million] round in 2018.
By early 2019, when Mr. Murphy, a former eBay executive, succeeded Mr. Smith (now chair) as CEO, Breather had raised US$120-million. It had 16,000 clients, including Apple, Google and Royal Bank of Canada, and 500 spaces in New York, San Francisco, London, Toronto and six more cities. Revenue surpassed US$35-million last year.
Then, in August, 2019, the parent of co-working giant WeWork filed to go public. Investors balked at its business model, governance and losses. The company slashed its valuation, pulled its IPO, laid off thousands and ousted its CEO. That debacle dried up investor interest in flexible office providers just as Breather sought new funding.
Breather did raise between US$35-million and US$40-million, but at a steep cost. Only past investors ponied up, devaluing Breather to about US$100-million postfunding. It laid off 17 per cent of staff last December, part of a sweeping cost-cutting effort.
Still, Mr. Murphy was optimistic when he spoke to The Globe 12 months ago. Breather was 95-per-cent sold out for extended rentals on new spaces, planned to add dozens more and would be profitable by the end of 2020, he said. “The market for flexible workspace continues to accelerate,” he said.
Then the pandemic hit. Demand for short-term rentals, accounting for about half of Breather’s business, vanished. Mr. Murphy said last week that Breather spaces are now 25-per-cent occupied. Breather tried to delay or renegotiate lease payments, but seven landlords in four U.S. cities sued the U.S. subsidiary for non-payment of more than US$475,000 in obligations, court records show.
Other flexible workspace providers have been hit, too. New-York-based co-working space provider Knotel Inc. faces 20-plus lawsuits from landlords; Switzerland’s IWG plc, parent of Regus, has put 100-plus locations into bankruptcy; and co-working startup Serendipity Labs of Rye, N.Y., filed for creditor protection.
Breather recently hired investment bank Moelis & Co. to pursue a financing or sale, but buyers balked at its lease commitments. Meanwhile, Mr. Murphy directed engineering and product teams to expand Breather’s platform to handle third-party listings. He said Breather ran a pilot program with 10 locations that went well.
Mr. Murphy said landlords stuck with surplus office space are keen to join, and he expects Breather to have 100 third-party spaces listed in 60 days “and then to accelerate rapidly from there.”
Mr. Murphy has long predicted landlords will one day offer more offices for flexible usage. Now, with employers expected to reduce office sizes and let staff work from home more postpandemic, he’s betting tenants will push for flexible leases and that landlords will oblige.
“In the same way COVID-19 has accelerated e-commerce adoption ... I think it will accelerate flexible office adoption by five years,” he said. “I wouldn’t be surprised if within six months, we [offer] significantly more square footage and spaces than today.”