A recent Inc. article referred to an elevator ride (“The $1 million Ride, http://m.inc.com/?incid=43282) undertaken by an entrepreneur who, while soliciting investment from the fellow VC elevator rider, the VC gave him some solid advice about how to increase the value of his start-up. In an earlier blog, I stated that an entrepreneur should spend every cent judiciously from an initial investment as if it were the last investment. A corollary rule should be that every cent being spent should be treated as a long term investment to the foundation of a company that will, in the long run, attract additional investment. What does that mean?
The head of the Virginia Tech Angels speaking at one of my panels described an incident in which the firm backed out – all stemming from a simple elevator ride with the entrepreneur. The start-up was located in the Midwest, and, as condition precedent for the investment, the angel investors required that the company relocate its headquarters to the Commonwealth of Virginia. A couple of weeks later, the angel investor rode in an elevator with the entrepreneur, who commented that he was very busy for the move and just leased a car in Virginia to look at rental properties. The Tech Angel stated that the fact that the entrepreneur had leased a car, rather than drive his own car to Virginia, was enough for the angels to claw back the offer. Anyone who cannot manage the shareholder’s investment wisely, even with respect to leasing cars, could not be trusted with the Angels’ investment.
Investors expect the entrepreneur to spend their money efficiently, or in the words of business school professors, with regard to the best shareholder value. First, the Inc. article commented that the entrepreneur changed his accountancy from a local one to a big four. Although the accounting costs are much higher, a major accounting firm provides a major comfort that a well recognized accounting firm, not a local one, will provide an unbiased accounting of the company. Also, I have witnessed that some start-ups avoid even hiring legitimate accounting firms to minimize cost, but that brings about the expression, “pennies wise, but pounds foolish.” Investors expect that the company is being well audited. Mind you, every Wall Street bank requires that any company’s IPO be handled only by a top four accounting firm. The same logic applies to law firms, but only to extent the the size of the deal or transaction.
The same judicious rule applies to office space. In one of my previous jobs at a telecom start-up, the office was located far from midtown New York City, operating at a loft in TriBeCa. Our desks were unfinished doors sitting on top of sawhorses, all acquired from Home Depot. There was not much to say about the chairs either. Yet this company raised every month millions of dollars from various investors, from George Soros ($15 million) to limited partners from Goldman Sachs ($2 million) and other blue chip investors. Once we had the traction, the company moved to mid-town, and still, with consistent consideration for managing costs, the rented space was a sub-lease from a marketing agency. And it was one of two companies in its market segment to achieve finally an IPO in the competitive environment of 300 companies. But an office is an office, much preferable to virtual office or highly expensive office spaces.
The major advantage to seek loft styled, inexpensive warehouse spaces over gaudy, expensive office sites, is that established, high rental office spaces add additional charges to the monthly rent – monthly auto parking charges, expensive office insurance to cover liabilities. So a company is not only paying the rent for a regular office space, but has to add to the monthly charges that can equally match half the value of the rent just to pay for parking and insurance. Again, this falls in line with expectations of investors on how the entrepreneur spends their money.
Another example of how not to waste money is how the company populates the office furnishings. During the great Recession, I poked around different office furniture auctions in Northern Virginia. One image I could not forget is the auction of a hundred Herman Miller Aeron chairs at one site. I immediately did the math and thought of $84,000 worth of chairs that could have been used to keep that company solvent long enough to turn its business around. These Aeron chairs looked as if they had been barely used. The same premise applies to very piece of furniture or technology equipment. Does one need an expensive Mac to send emails? Does one require large screen monitors that are not crucially needed for the day to day operations?
The Inc. article does talk about company shirts, and, to me, that is judicious investment. It shows the team mentality, creates a marketing tool, and demonstrated to future investors that they are investing in a company. I always supported any expenditure that increases the value of the company. This thought process includes weekly company lunches for meetings to create camaraderie and discuss strategies.
Nor do I keep tabs of every pencil, sheet of paper, folder being used. These are marginal costs. I am more concerned about refrigerators, copying machines. And, definitely, not leasing cars.
Now I am not saying that once a company is financially solvent, that I should not hire an office designer and maker the premises more attractive. But a start-up does not have the luxury to do that. It must expect the worst case scenario and not disappoint the eagle eyed investors.