Category: Operations

Offices and office space has always fascinated me. I love bringing people together and customizing a sweet office. Just think about it: what percent of your waking hours do you spend at work? If you’re like me, and it’s a high percentage, you want to have a great space that you genuinely look forward to going to several times a week. Now, the coolest office space in the world won’t make up for a weak corporate culture, but if you have a great corporate culture, an amazing office is just icing on the cake.

Only, commercial real estate makes it mind-numbingly complicated to simply compare the costs of different offices. Here are some of the common items thrown around:

• A number of months that are “free rent” or half rent
• Tenant improvement allowance per foot rented (e.g. the amount of construction costs paid for by the landlord to customize the space)
• Moving/cabling allowance per foot rented (e.g. money to pay for wiring and moving costs)
• Percent rent escalation per year and how soon does the escalation start
• Lease term and how that affects all the allowances above (e.g. a shorter lease results in smaller allowance but more flexibility for startups)

Imagine a spreadsheet with many different variables and that’s what’s needed to compare different office space options. There has to be a better way for startups to rent office space.

What else? What are your thoughts on these challenges when comparing commercial real estate options and what are some additional challenges?

With the new year upon us, and many new startups being formed, one question that is on many new entrepreneurs’ minds is “how do you know when a startup will be successful?” Making the leap to even start a company is so difficult for many people, partly because of all the unknowns, and partly because the chance of failure is so high. The allure of entrepreneurship is powerful with the idea of a meritocracy and the ability to control your own destiny.

For me, there wasn’t a particular aha moment when I knew my startup was going to be successful (I’ve started two companies that meet my definition of a successful business), but in hindsight there were some strong indicators, of which here are a few:

• Revenue and sales got significantly ahead of our hiring pace
• The customer acquisition process started to appear repeatable
• I could go on vacation for two weeks, not worry at all about the business, and come back with things being even better than when I left
• We had sufficient levels of depth and maturity in each department whereby the department managers could take vacation and everything was fine
• Each department was truly operating at a high level and doing great things (we were firing on all cylinders)
• Customer compliments were outnumbering customer complaints 10-1

Success appears in so many different forms that it’s hard at times to appreciate the milestones. Knowing a startup will be successful doesn’t happen quickly, but over time it becomes readily apparent.

What else? What are some other ways you know when a startup will be successful?

Earlier today an entrepreneur emailed me asking about the Atlanta Tech Village for his software company. With approximately 10 employees now, and growing to an expected 20 employees in the next two years, he wanted to know how it compared to traditional office space. I explained that the per person per month with internet access and furniture included model was very different from traditional office space due to the ability to scale up and down as needed, rather than paying for everything throughout the life of the lease.

Let’s see how the model compares in a common scenario where a startup raises an angel round, has two co-founders now, and expects to scale to 10 employees at the end of 24 months.

Traditional office space:

• Required space for 10 employees at a high density ratio of one employee per two hundred feet results in a need for 2,000 square feet
• 2,000 square feet at $21/foot/year plus $3/foot/year for parking for a total of $24/foot/year = $48,000/year/rent
• 100 meg cable modem and 12.5 meg DSL line for internet is $800/month = $9,600/year
• Used furniture or new IKEA furniture is $300 per person (including desks, conference tables, etc) = $3,000 total
• Herman Miller Aeron chairs are $800 per person (I’m a fan of getting really nice chairs and just average tables) = $8,000 total
• Total for 24 months for 10 person startup is $96,000 rent + $19,200 + $3,000 + $8,000 = $126,200

Per person per month office space at Atlanta Tech Village or similar facility:

• $300 per person per month for a dedicated desk, internet, shared conference room, etc plus $100 per person for parking and $300 per private room
• Start with two co-founders and three initial hires followed by three additional hires every six months:
  Five people over the first six months is $1,500 month plus parking of $500 month plus private room of $300 month for a cost of $2,250/month resulting in a six month total of $13,800
  Eight people over the next six months is $2,400 month + $800 per month parking + $300 month private room = $3,500 per month for a total of $21,000 over six months
  10 people over the next 12 months is $3,000 month + $1,000 per month parking + $600 month for two private rooms = $4,600 per month for a total of $55,200 over 12 months
• Total for 24 months for a 10 person startup is $13,800 first six months + $21,000 next six months + $55,200 last 12 months = $90,000

In this model the private room plus shared office model is almost 30% more cost effective ($90,000/$126,200) when compared to the traditional office space format.

Much in the same way a Zipcar created an entirely new category of rental car, the per person per month office space is creating an entirely new category of commercial office space. One of the keys of the model is a company that expects significant growth or volatility whereby locking in a traditional office space that’s the largest they’ll need over a period of time results in significantly higher costs and much less flexibility. For a generic company with a fixed number of employees over an extended period of time, traditional office space is more cost effective and fully customizable. Per person per month office space is a much better model for rapidly changing technology companies.

What else? What are your thoughts on the idea of per person per month flexible office space?

At home over the holidays I came across a box of personal stuff that had a large, industrial paper cutter. This paper cutter was part of the many supplies I purchased in high school to manufacture CDs and CD-ROM cases to sell my shareware software in stores. Using the Internet it was easy to purchase everything needed: empty CD jewel cases, writable CDs, CD labels, paper cutter, high gloss paper, shrink wrap plastic, and shrink wrap gun (like a hair dryer).

For the graphic design of the CD label and the CD case, I laid out everything using PageMaker and Photoshop to get it just right. In retrospect, I’d give myself an A for effort and a C+ for the actual quality of the visual design. One aspect of the CD case design was putting together a bar code. I paid a couple hundred dollars to get a UPC number and set to work on a bar code. After looking at bar code generation software, which cost $50+, I decided to hand craft a bar code in Photoshop.

Bar codes work off a strict formula that involves the width of lines and spacing between lines. Everything has to be precise and perfectly laid out otherwise the scanners won’t be able to read them. Imagine zooming in on Photoshop to the maximum level and hand crafting lines to a precise millimeter-level width. Needless to say, it was a tedious and exacting process that was better left to technology.

In the end, when the CDs and CD cases were done and shrink wrapped, I took them to several stores in town that had agreed to sell the product on their shelves. After convincing one of the stores to take several on consignment, I casually asked the manager to scan the bar code to make sure the UPC number was returned successfully. Success! I had hoped I had laid everything out correctly but without a bar code scanner I had no way to test it (iPhones didn’t exist back then).

While it worked out in the end, I realized during the process that my time was better spent on productive tasks that couldn’t be automated with software. Generating bar codes is a perfect task for software and spending a few dollars on a product to take care of it made sense. Now, I repeat to myself the saying “you have to spend money to make money.”

The next time you’re working on something that isn’t the best use of your time, and there’s an affordable substitute, remember the bar codes.

Back in early 2007 we were just getting Pardot off the ground and had a number of road map features we wanted to crank out during the summer. With an extra 2,000 square feet of office space we weren’t using, there was plenty of room to add team members. We didn’t have much money so we did what any enterprising startup would do: we hired 11 full-time, paid summer interns (eight engineers and three marketers). Hmm, you might be thinking, 11 is a bit much since there were only three full-time people in our startup (two co-founders and a lead engineer).

Here are some lessons learned from hiring a large number of interns:

• Without management infrastructure, we actually had one of the interns be an intern manager and manage several other interns, which worked out well, but overall the interns didn’t get nearly the amount of attention they needed
• Hiring standards were lax so we had a number of interns that didn’t work out, including one we had to fire half way through (a small number of the interns worked out really well)
• Customer discovery wasn’t distributed across enough different companies, so the product progressed faster than market feedback, resulting in functionality that was unnecessary
• Some of the interns excelled and we hired them again in the future

My recommendation is to incorporate interns into startups, but do it in a more thoughtful and manageable manner, such that everyone has a great experience.

What else? What are some other thoughts on hiring 11 full-time summer interns for a three person startup?

Last week I received an executive summary from an entrepreneur and it showed financial projections for the next four years. Guess what the projected revenues were for year four? $3 million? Nope. $100 million? Nope. Projected revenues for the fourth year of operations were almost $1 billion — I’m not making this stuff up.

I’m not a fan of financial projections for idea stage startups. Yes, I like big round numbers to see if a financial model generally makes sense, but I’ve found that they hurt more than they help. If you put tiny numbers, which is much more realistic, you turn off some investor’s imagination as to how big the idea can become one day. If you put massive numbers, you show you don’t know how startups progress, even if they are successful.

Here are the ballpark revenues for the first four years of Pardot:

• Year 1 – Under $50k
• Year 2 – ~$400,000
• Year 3 – ~$1.1 million
• Year 4 – ~$3.2 million

I consider those Pardot numbers to be exceptionally high, and not the norm for Software-as-a-Service startups. Now, if it’s a consulting business or something with small gross margins, those could appear to be small numbers. The next time an entrepreneur includes financial projections for their idea stage startup, compare them to this simple example of Pardot’s numbers and ask if they hurt more than they help.

What else? What are your thoughts on financial projections for startups hurting more than they help?

One area I find entrepreneurs constantly talking about, especially tech savvy entrepreneurs, is that of automating everything and having a “touchless” process whereby humans aren’t involved. A common example of this is having a web app with a self-service sign up and provisioning process complete with payment processing via credit card. Now, as awesome as this sounds, it’s incredibly rare in reality. Most startups are working on innovative, non-replicative ideas that are in their first or second generation — generations that require extensive handholding and education.

Temporary labor intensive efforts are fine in startups as long as the economics eventually make sense. Here are a few examples:

• Cold calling is labor intensive and not nearly as elegant as online marketing, but it often makes sense if the gross margins, lifetime value of the customer, and cost of customer acquisition are all inline (cold calling doesn’t have to be a temporary effort as some startups do it indefinitely)
• Manually parsing of data, even large quantities of data, can be done with Amazon Mechanical Turk via Smartsheet.com such that a core amount is handled in a crowd-sourced manner, before investing the effort to fully automate it
• Billing always starts out as a manual process, and there’s a desire to spend engineering time to automate it or use a SaaS billing tool, but it’s easy to do by hand so that engineering can work on higher value projects

The goal isn’t to do labor intensive efforts indefinitely if there are better solutions, rather the goal is to focus on the most high value work at the time, especially if a manual workaround is possible. It’s also important to pay attention to what enables economies of scale vs what doesn’t (e.g. lots of consulting work that is labor intensive).

What else? What are your thoughts on temporary labor intensive efforts in startups?

One of the most important aspects of a startup that can’t be easily accelerated is organizational development of the corporate culture and market understanding. Some things take time even with quick learners and hardworking people — there’s no way to rush it. Generally, it takes 12-24 months for a new startup to solidify its own personality.

Even with extensive experience working together on the founding team, there are always new people in the startup that introduce their own nuances and characteristics. No two corporate cultures are exactly alike. One of the best things a new startup can do is be intentional about its core values and use those as a guide for decision making, especially on the hiring front. Everything starts and stops with people.

Organizational learning about the market also takes time, like the corporate culture. Markets are always more complicated on the inside compared to how they look on the outside. Competitive dynamics are often difficult to understand until a startup gets on the front lines and goes to battle. One of the reasons I recommend startups raise less money in their seed round (see Death to the $700k Seed Round), or raise more money and make it last longer, is that it always takes more time than expected to make progress. No matter how hard an entrepreneur tries to make the right decision, the market dictates what wins, and iterating quickly is the best path.

Organizational development takes time in a startup — there’s no way to rush it.

What else? What are some other reasons organizational development takes time in a startup?

Continuing with yesterday’s post on how much money to spend per employe per month on office space, there’s a gap in the market for flexible office space that’s desirable for startups and creative companies. Firms like Regus provide a massive network of 1,200+ locations with executive offices and conference rooms for rent, but they aren’t desirable for startups due to ambiance (very traditional, plain offices), seating density (typically one desk rooms are $1,000/month), and the types of businesses already in there (mostly remote sales offices and traditional businesses).

The best example of this type of next generation flex office space for startups and creative firms is the Cambridge Innovation Center on the edge of the MIT campus (see the TechCrunch write up). Here are some quick facts about the Cambridge Innovation Center:

• Costs roughly $530 – $1,000/employee/month for the full service option which includes office space (shared space at the lower price and private space at the higher price), conference rooms, furniture, internet access, organic snacks, drinks, showers, etc
• Co-working space with furniture and internet access but no postal address and fewer amenities is $250/month
• Parking is $225/month
• No contracts — everything is month-to-month
• Over 450 companies and 160,000 square feet of space
• 13 years in business and over $1.7 billion raised by companies in the facility

Atlanta, and other up-and-coming tech hubs, would do well to emulate this type of facility. Of course, Boston is significantly more expensive compared to other regions in the country but there’s no reason it couldn’t be done in the $350 – $550/employee/month range for shared offices through to private offices with everyone having communal kitchens, conference rooms, and game rooms. For companies with 1 – 25 employees, the traditional approach to office space rarely makes senes unless the space is a great deal, and even then there isn’t the same community feel as being in a tech/creative centric facility.

What else? What are your thoughts on next generation flex office space for startups?