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.
