What Your VC Wants You to Know: You Don’t Need That Fancy Office
Starting a new business is always hard. From what should you spend on, to who to hire, there are countless decisions to make. In this series, we take a look at some of the common pitfalls startups make, and ways for you to avoid them. All done from the perspective of your friendly neighborhood venture capital.
It’s been a grueling 5 months. Sleepless nights, pitch deck after pitch deck and countless cups of coffee, all leading you up to this very moment. You’ve finally gotten funding. Congrats, you made it. Now what?
For many startups, the answer is obvious. It’s time to move to a better office, one with a nice view and an even nicer neighborhood. But is that the right move?
According to Brex.com, 82% of startups fail due to cash flow issues.
It’s easy to see why. Startups tend to spend way too much on cosmetic changes when they should be investing that cash into core areas. According to Rocketspace.com, the top 4 expenses that startups incur are equipment, human resources, legal, and office space. Here are some ways startups can look into reducing costs are:
1) Alternative workspaces
In 2017, We Work, a coworking space generated 822 million U.S. dollars in revenue. With spaces in 32 different countries and an estimated 268,000 members, coworking spaces have officially entered the mainstream. Many startups choose to go this route rather than pay exorbitant prices to rent an office. Coworking spaces also give startups the opportunity to meet other hardworking entrepreneurs, who they could collaborate with in the future.
If you’re focusing on expansion it makes sense to get a bigger office, but if you have 5 employees, then that money is better spent on developing your product. Of course, depending upon the nature of your business an aesthetic office may be a necessity.
Dubai has an abundance of coworking spaces that come with a multitude of perks and benefits. They provide a great alternative for fledgling startups and even some Fortune 500 companies. Working from home is also a viable alternative, especially for tech-based startups.
The largest overhead cost for a startup is payroll. Startups vastly overestimate the number of employees they require, especially in year 1. This, in turn, leads them to hire more employees than they actually need. By taking some time and performing a cost-value analysis of their staff, startups can reduce future costs exponentially. Hiring smart saves a lot in the long run.
According to an analysis by Quartz, companies with less than $100 million in annual revenue paid 41% more for an average airline ticket, and nearly twice as much for dinners than companies with more than $10 billion in revenue. Those are some ridiculous numbers, which point to a much larger issue. Many startups are likely to have trouble with undisciplined spending. For years they had to bootstrap and suddenly they have more cash than they know what to do with. Without adequate financial guidance, startups can very easily burn through all of it on routine expenses. Leading to them justifying it with, “Well we can always raise more if needed.” This traps them in a vicious cycle of raising and burning through funding until eventually, they burn out.
On April 16, 2015, Etsy issued its IPO. The company, which serves as an online marketplace to sell handcrafted goods, debuted at $16 per share. Shortly after issuance, its founders began to renovate their workspace. They purchased aesthetically pleasing offices, with organic wooden paneling and quirky sculptures to boot. This is keeping in line with the company’s emphasis on artesian and quality furniture. However, in the coming months, due to the sudden increase in expenses, Etsy started making a loss. This puts enough pressure on the board, that they had to eventually fire their beloved CEO Chad Dickerson, all for the want of a nicer office.
Cutting costs isn’t fun, but it creates a strong foundation to build your company on. Being conscientious about the way you allocate your funds ensures that the money is used in the best possible way, allowing you to focus on building a truly extraordinary product or service, one that can really make a change and empower people.