Tuesday, September 05, 2023

NEW INC. MAGAZINE ARTICLE FROM HOWARD TULLMAN

 

In Real Estate, Less is Definitely More for Startups

There's a lot of pressure to bring people back to the office. That's understandable, but don't confuse having a really large office space with having a really good company. 

 

BY HOWARD TULLMAN, GENERAL MANAGING PARTNER, G2T3V AND CHICAGO HIGH TECH INVESTORS@HOWARDTULLMAN1

 

Two decades ago, some of the biggest law firms in the country made a momentous real estate decision. Over the outraged howls of their junior partners, the ruling management committee members decided that not everyone needed a private office large enough to house its own conference table, couch and other accoutrements. Instead, after shrinking the offices of most of the partners, the firms built one floor of conference rooms, which would be available for client meetings or other group activities. I will leave it to your fertile imagination to guess which partners were able to maintain their grand offices with the traditional furniture and fixtures. There must be a suitable Latin phrase for it, but the English translation would be something like "what's mine is mine, and we'll talk about what's yours".

Apart from the sheer wisdom and economics of shedding excess space, the equally compelling argument was the recognition that lavish digs were no longer relevant or important to clients. Conversely, clients regularly commented on the fact that their attorneys' offices were far grander and certainly more costly than their own -- meaning their businesses were ultimately footing the bills for these buildouts. Whatever pride they once took in being represented by their city's most expensive attorneys was rapidly evaporating in the face of growing legal costs. Similarly, the pricy modernist artwork on law office walls seemed unlikely to lead to better results in the courtroom or at the negotiating table.

Not too long after the legal downsizing began -- accompanied by the simultaneous elimination of private secretaries and the return to typing pools -- big banks also woke up to the fact that they, too, no longer needed to demonstrate their institutional might by building and maintaining enormous marble-and-bronze-enhanced priapic temples to the long-gone days when people had real-life personal bankers and transacted business face-to-face. The shift from personal to digital banking also meant that the competition for clients rapidly shifted from comfort and confidence to access and convenience.  The banks quickly built automated branches and positioned ATMs everywhere to eliminate humans from the process. And frankly, until the recent run on Silicon Valley Bank, no one really questioned or expressed the slightest concerns about the viability and longevity of "their" bank, even as it became increasingly clear that most customers no longer had any personal relationship or contact with the bank's employees. 

The moral of this story for startups --even before the massive impact of the remote work revolution -- is quite clear and important. Bricks and mortar rarely matter these days. The very last things that a new business needs to demonstrate its bona fides are substantial and long-term real estate commitments. In fact, it's far more likely that investors, clients and customers will regard posh offices in prime downtown locations as foolish gestures indicative of immaturity and waste rather than an effort to show strength, stability and seriousness. As far as employees go, I'd say it's a toss-up.  People want to work in a nice, clean environment-- if they have to work in an office at all-- but plenty of the same folks would rather see some of the same dollars in their own paychecks or at least be assured that scarce and precious company funds needed to keep the doors open aren't being squandered on vanity buildouts.

The best office lease today is a one-year commitment with a lengthy stream of options for annual renewals attached. The premium you may pay will pay off eventually. Maximum flexibility, minimal commitment. If anyone tells you that this kind of approach is too tentative or makes your business look like a fly-by-night operation just tell them that you'd rather be flighty than be failing. It's all about optionality and any smart investor or employee will appreciate that. Don't be embarrassed or shamed into making bad decisions. Your job isn't to help the landlord improve the rent roll.

Your primary responsibility, especially today, is to conserve cash, let your offices get plenty crowded (and masked if necessary, again) before making your next move and not get too far out over your skis. Collisions and proximity build camaraderie, enthusiasm, and momentum. Cash beats cachet, any day. Shrinking your space and reducing your real estate exposure makes all the cents in the world.