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Avoid long-term commitments.
It is statistically true that at least half of the young companies funded by angel or venture investors will not survive three years from funding to demise, and more than that percentage will die with two years if not well financed. The greatest burden of either a growing company or one needing to retract and reduce expenses is the office lease. Although payroll is almost always the greatest cost, companies have flexibility as to how to handle both rapid growth and rapid decline in the personnel arena.
The most difficult thing to deal with in either rapid growth or retrenchment is the office lease. A five-year lease may be cheaper per month than a three year lease, and may provide for more free rent and tenant improvements. Those benefits pale in comparison to the high cost of retaining or buying out a longer term lease when growing or reducing in size – which is most of the time for early stage companies.
[Email readers, continue here…] From personal experience with many companies in my portfolio and from many board experiences over the years, young companies are unpredictably unstable in their facilities requirements. Flexibility is worth a few percentage points of fixed cost when companies are in high growth mode or are at early stages of proof of market.
It is a hassle to move, requiring time and planning. It is much worse to worry over paying for two leases each month and tying up two large deposits. Or honoring a personal guarantee if the company cannot pay.
Then there is the dread of “The tyranny of the new office” to worry about. But that is a story for next week’s insight…
I agree, clearly leasing allows a business to adapt.
I also observed another phenomenon: the building of that wonderful glass monument to a successful business results in its demise. I can think of three beautiful buildings right now that were completed but never occupied by the company that built it. I think that management gets distracted from the business as the priority for time and money shifts from the business to the the monument, commonly leading to bankruptcy. There are also issue of why the management of a tech company should think its knows anything about monument construction is baffling. That was one of the reasons I didn’t want any monuments.