The Business of Software

I'm seeking some advice from those MicroISV's that are past the start-up living room phase, and have moved to a proper office.

My MicroISV has been in business for a little over a year, and has made a little over $100k this year in revenue. Profit is almost as much, given very low costs. But I'm getting cabin fever and also want to hire a college kid or two for support/programming/administrative type of job.

So I'd like to get an office. The space I found will fit about 5 people very comfortably and rents out for $1,600 per month.

I believe that getting the space and hiring the first few people will get my little company to the next level of growth. Hopefully, it'll also stop me from going insane from working alone in my house all day. I don't get much done because I've lost all motivation and productivity has gone down. I think I need the feel/sounds/sights of an office space.

I don't want a shared office space, nor one of those incubator building things.

So I have a few requests for advice.

When you moved out of your house and into an office, did it help the productivity/loneliness issue?

Can anyone say that moving into an office is one of the things that got their company from the start-up "hobby" phase and into a more professional growth curve?

If yearly revenue is around 100k, like ours, is $1,600 per month + whatever other monthly costs are + maybe a $12-$15 per hour college kid employee, a fitting and affordable thing to do? Never done thing before. My calculations give me costs of about $5-6k a month for everything known. We make about $10-$15k a month in sales now.

I've read some blogs about other MicroISV's around here looking for office space (like Andrey's antair), but they don't release sale numbers or costs of office space, so its tough to tell if I can afford what I seek or if it's too early and I'm pushing it.

Do you need an office or physical address because you need a place to meet with customers?

If not, save your money. I work with a couple of companies that have a lot more revenue than 100K/yr, yet are still working virtually or from their local Starbucks. That $1600/mo. would be better spent on the college kid/intern you mention unless you have a specific need for a place to meet with customers.

If you really need a "corporate" setting as motivation, then either go grab a table at your local coffee shop, or look into business incubator space -- something has to be cheaper than $1600/mo. (I'm saying that even though I live in a tremendously expensive city).

Regular,

Just a thought, but I agree with some guy. Deconstruct what an office is:

- a physical space you have a legal right to occupy,
- a shared work environment.

That shared work environment thing is the tough one for microISVs like us (as one of my cats munches down her lunch on my desk). It gets lonely looking out at a totally static rural street, with the only movement turkey vultures' shadows crossing back and forth.

Maybe it's time to work like it's 2008, not 1978. Here's a couple of admittedly untested ideas:

- Use IM or Skype to keep an open channel between you and your other company members during the workday. You could go so far as doing this as an ongoing video chat.

- Set up a private twitter group to do the same thing intermittently.

The thing is, text is very low interaction - great for moving information, rotten for motivation and encouragement.

There are some businesses that let several small companies share an office, receptionist, etc.  ("Incubators", as someone said above.)  That might be a good option that would let you avoid spending too much.

100k a year in revenue does not justify a proper office, and recruiting 2-3 people.

After paying taxes, it is just 65K left.

If you don't have another source of income $65 is barely enough to make a living in the US. What will you be left with after paying your mortgage/rent, credit card expenses, etc?

Also, you are just in your first year - is the income stable? What if you get a competitor who takes away most of your earnings?

First of all, congratulations on hitting that number in a year. However, you might want to get another one under your belt before you start committing to that kind of expense without a direct benefit...  you're certainly talking well over $20,000 a year just to turn the lights on, much less outfit the joint.

If space in your house and zoning allow, can you build a "real" office in the house (preferably on a separate floor. like a walkout basement) that has some separation from the rest of the place but gives you the feel you need? You can have that same college kid working at the office in the house, but be paying yourself the rent money. That was our solution: $13,000 built a great office with three workstations, and as an S corp, the rent check gets written to you know who.

It seems that half the world's face-to-face business these days is conducted in Starbucks and Panera, and as long as you buy a bowl of soup once in a while there's no rent involved. It's completely acceptable - even has some sort of cachet sometimes - people (at least in our experience) are readily willing to meet in a modern, good looking Panera in whatever town you are or need to be in.

Sounds like it's the lack of social interaction and office discipline that's partially driving you - if you have a place that looks and acts like an office with someone in there working, why pay someone else for the privilege, if that's really what it's about?

That said, there are some enormous successes out there in shared space also - 37 Signals works in the offices of Coudal Partners, and they certainly seem to be getting things done on occasion.

I hope some other people weigh in on this thread, it's a good one.

And what a great line from Bob Walsh: "Maybe it's time to work like it's 2008, not 1978." Love that thought.

Go work at a local Starbucks a few hours a week. Or find a local user group (or SCORE) and meet with them. Go out to lunch with friends and business associates.

"I'm lonely" is not a good reason to get an office.

In addition, if you need hired help, allowing them to work virtually increases your potential talent pool *and* is a very compelling benefit to working for your company.

just curious.

do you sell  B2B or  to  individual customers?

How did u manage to hit 100k in 1 year?  how many years did it take to develop the software?

How do u find marketing sources?

$1,600 may be a little on the high for the revenues you are generating, particularly if you want to hire people.

I'm not sure how much space you're looking at, but I'd look for something relatively small (2 or 3 offices).  You'll likely slowly grow with your 1 college kid and then get another one and then replace one and then lose one, etc... until you get some more revenues.  At that point, your lease will be over and you can get a bigger space.  All that to say, I bet if you looked around at a smaller, more off-the-beaten track office building, you could get something a bunch cheaper than $1,600/month.  Heck, you could probably rent out a 2-3 bedroom apartment.

There are other hidden costs you need to watch out for besides rent ($19k).  You'll also have to factor in utilities, internet access and telephone/fax/voip.  Watch internet access in particular, if you need a T-1, they get pretty expensive ($300-$400/month).  You can get by cheap on furniture if you use folding tables as desks, but you'll want decent chairs, a li'l fridge, etc.

We didn't ever have an office for just one person, but I know that there have been productivity gains for the multiple people that originally moved into our office space.  There were a lot of distractions working at home and it was night and day for many of them. 

If you do have clients that ever want to pop by, an office is great -- but these times will likely be few and far between.  If you want a decent sized line of credit from your bank, you'll need a "real" location.  If you have large corporate clients, it is nice to have a "real" office for your contracts and their probing questions. If you have employees that need to work/meet/collaborate together, IM/VoIP/Email/etc. are great -- but nothing beats knocking things out face to face when necessary.

It sounds like you've done quite well for yourself this past year.  Knowing the little I do, I'd probably suggest that you keep pushing out of your home office and find a college kid that can work from home or that you can work with from Starbucks.  Give yourself a goal that when you have consistent, reliable revenues of at least $15 - $20k, you move to a "real" office.  Maybe that is the motivation you'll need to keep up the good work from your home office.

Overall, I'd say that the biggest flaw in your logic is that a "real" office will make you feel like working better/harder/more productively.  That may work for a month, but I wouldn't count on the new car smell to keep you going long term.  My sense is that a partner/employee would probably do more for your motivation than an office space itself. 

For what its worth...

Work from home and save the money, I'm at the $100k mark after a year and there is no way I would risk moving an office, I'm cautious and will need a lot more than 100k in sales before I start to think about adding staff. When I do I may also work virtually. I appreciate working from home isn't great unless you have a great office in the house. I do outsource a lot of my work so I am in touch with people but I can't see me taking on employees when I can other freelancers a small fee every now and then.

I've thought of moving to a bigger house that has the perfect office where if push comes to shove I can move in a fresh out of college kid to help with support. Just a thought.

Lots of people are advising the OP not to take office space however the situation might warrant it.  Not every business lends itself to being run out of the spare room.  Sometimes in order to grow (and be taken seriously), it's necessary to bite the bullet and set up shop somewhere. 

This really depends on the OP's particular circumstance, but I just wanted to point out that what might make sense for the typical microISV might not make sense for everyone.

Wow.  Lots of "don't do it" - I say go for it.

I manage a small team (fluctuates between 4 and 12 people, depending on our projects), and managing more than about 2 people from the comfort of Starbucks is a pain.  At least, I think it is.

I like desks, and the ability to walk down and say "Hey, are you stuck?  Because Bob can help you out on that problem, he tackled it last week."  Or "No, that's not what I meant, let me show you what I meant."  Hard to do this at Starbucks.  Flying back and forth to Starbucks is great for entrepreneurs.  But not everyone is one.  And those that aren't, usually require structure to their day.

Also, I have a family.  And a relatively small house.  Small enough that we pay more on the biz rent than the mortgage.  And that's fine.  However, I cannot get SQUAT done at home.  My wife comes and goes, busy with school and athletics and studying and groceries, etc...  The boys are playing in, then they're out.  The FedEx guy stops by.  The neighbors want to borrow something.  Sorry, but I outgrew the home office in our second month of operation.

Now, do you need to go to $1,600 / month?  You didn't mention (or I didn't see) the goal for your growth.  Do you think hiring these kids / others will grow that $100k to $200k - $300k?  If you think so, and you've got an action plan ... then yes, by all means, $1,600 / month is fine.  You'll recoup your losses in a few months.

I'd advise to stay away from long-term leases.  Who knows what you'll want in a few months.  Maybe you'll need 2x the space, of half.  Also, I'd recommend that you make sure that your college kids can be trained at their job in under 4 weeks, because that only gives you about 8 weeks until the semester is over, and they bail on you for the summer, or Xmas break.  I've got a LOT of experience with that, and finding bite-sized pieces of application to feed a college programmer isn't always easy.

Personally, I'd look around for a space that shares phones / offices, or an internal "executive" office.  One of our customers runs ... 30 burger kings out of an executive office, and their team of 10 management personnel are all in the office.  And they spend under $1k for the space.

Thanks for the feedback guys.

Here's some more info in case anyone else would like to chime in or follow up. I appreciate it.

The want of an office, aside from the cabin fever thing, is partly a personal thing, and partly a company thing.

From the company perspective, I don't think I'll be able to grow to the point where I want the company to be, which is a mid-size, privately owned software firm; something which can support not only our family for years to come, but hopefully provide some quality jobs for others as well. I don't want to go public, nor do I want to sell the business, but I don't think sitting in my spare bedroom hacking code and answering customer support mail will get me there. Sooner or later, I will get that office to grow the company - the question is more whether I'm risking too much, or if making the jump and getting the office is exactly the kick in the behind that the company would need  right now.

The personal reason is that I'm sort of ashamed of working from home. It may be 2008, but I'm more of a 1978 type of person. I don't tell other's what I do. I would like for my mother-in-law to understand what I do all day instead of looking at me like I'm a bum (who brings in 1/2 the household income, but you know mother-in-laws). I'd like to finally accept that invitation to be a guest lecturer at a local university without facing the students and telling them I'm running a software company in my pajamas. Things like that.

But it is scary. It's 10-12k a month right now, and it's steadily increasing, but there are $1000 days and there are $200 days, and I feel if I had an office and some college kids to pay, I'd be pooping my pants on those $200 days.

I rented a 1500 sq ft office suite planning for growth my first time around at a mISV about ten years ago, at about your same stage in revenue. I don't recommend that however because of what somebody above mentioned, that you end up staring out the window of the quiet office as lonely as before, if that's the reason you want to move. That was wasted money for me at the time.

Also many landlords want a 3 or 5 or 10 year lease and that's a big commitment. If you want 1 year you either have to be in a saturated market or be willing to settle for class "B or C" spaces (e.g. old retail shops converted to offices). That can end up worse than a home office if you're working under buzzing lights and smelling mold all day.

But I would recommend trying an executive ("shared") suite. Most are in true class A space like modern steel and glass. For me it made all the difference in my productivity because I too needed that "office" environment to keep me focused, and with a shared suite you have people walking down the halls, greeting you when you come in, other entrepreneurs you can talk to, little things like that. They'll also often go 1 year or month to month leases.

I'd suggest trying that for awhile to see if it works for you and increases your productivity. If so, you can later move out to your own place which is more cost effective.

The only other costs if you rent directly I can remember are utilities like phone which they charge businesses a lot more for ($300 a month), internet, common area maintenance fees the landlord charges (cleaning, trash, mowing... I don't remember how much per month for that but not a whole lot). Plus general business insurance covering theft, fire and personal injury liability, maybe $800 a year.

If you do choose to take the plunge, I suggest think seriously about subleasing something.  You can get a shorter more flexible lease term, flexible space, usually piggy back on their utilities, net connections, etc.  And usually a way better rate.

Here's another possibility, instead of paying for an office:

http://www.shedworking.co.uk/

Granted, some of what's on that site is kind of bizarre, but the general idea is of putting up a garden shed as your office.  Worth looking at some ideas.  (I'd think security/theft would be the main concern, if you keep a computer or anything in there.)

==> The space I found will fit about 5 people very comfortably and rents out for $1,600 per month

Might I submit another alternative? If you're committed to spending $1,600 a month for 5 people -- why lease?

We bought our first office back in 1999. It lasted us up through 9 people. Mortgage/tax/insurance: $970 a month. Bonus: here we are near a decade later with $120,000 in equity. Ours. Not in some landlord's pocket.

We bought our second office just this past July. Needed room to grow. Couldn't squeeze that 10th person in the old place. Current/New office will comfortably hold 22. Can squeeze in 28 to 30 in a pinch. Looks like a ghost town with only 10 of us, but we're planning for growth.

Mortgage/taxes/insurance: $2,400 a month.

Owning, while a bit riskier and hard to do (how's your credit rating?) gives you multiple benefits. (a) you can, if you shop around and aren't afraid of a couple of months of "rehab" work -- you can get it for half what a lease costs. (b) you get to build equity, instead of the lining the landlord's pocket with your hard-earned cash. (c) you get to catch any appreciation (but on the flip side, property values are on a downward trend at the moment -- if you're in it for the long haul this won't matter. At some time in the next decade or two they'll be going back up in value) (d) you get the tax savings on the depreciation. (e) we set it up so a second company owns the real estate, and the software company pays rent. The rent is much higher than the costs so the property company shows a significant profit. From an income standpoint it's a wash, your just shifting money from profit in the sofware company to a rental expense, and showing rental income/profit in the other company. Income, it's a wash -- but it shifts the income from "earned income" to "rental/investment income" which has some legitimate tax advantages. You don't pay self-employment taxes on rental income.

It's worked well for us, but you've gotta go into it knowing your holding on for the long term. If you pack up and move or close up shop in a few years, it ain't worth it. If you're looking at a long-term commitment, it's the only way to go. You think Microsoft leases most of their office space? Nope. Why? it's to their financial advantage to own it. It could be to your advantage, too. 

FYI -- we're in rural Ohio, though. You won't get away with those prices in, say, Chicago or Manhattan. Adjust for your area and real-estate values.

We did $300K this year and I am not looking for an office any time soon.

Thanks for mentioning the Shedworking site above. The garden office industry has really taken off in the UK and is also growing in the US (look at Edgar Blazona's Modular Dwellings, Neoshed, Metroshed, Modern Cabana, Cabana Village, Modern Shed, etc). It's a great answer for homeworkers and you don't need to have capsule offices - most suppliers will go down the bespoke path for you (though it will obviously cost more). I can see why security is uppermost in your minds, but a reputable supplier will have proper locks on the doors and windows and to be honest I've not heard of any break-ins into garden offices (although there must have been some) except novelist Louis de Berniere's (Captian Corelli's Mandolin) who lost some of a manuscript.

OP, I know exactly where you're coming from.

Seems that like me, you want some office space to bring more legitimacy to your company in your own mind and for other people.  It removes you from the home environment (which sometimes makes it very hard to get work done) and gives you a 'proper' business address.

However, I think that on those revenues, it might be too soon to do it.  Your point about the $200 days *should* worry you.  That said, if you can set aside a chunk of savings to get you through those $200 days, you should be fine.

Where I live, you can rent an office in a shared building.  Offices and self-contained and vary in size, so you could start off small and move to a larger one when required.  There is a shared reception and kitchen but also some nice conference rooms for when you want to meet with customers, but not bring them to your office.  You have to pay for the conference rooms, but then again you don't have to pay for flash office furniture to begin with.

There are even office buildings that specialise in software/IT companies and are all networked/phoned/internetted up, included in the rental.  Short leases too, just in case.

When I go for an office, this is the option I'll go for.  A professional image for your customers, for the best price.  I'm currently doing some work for a company in a building like this and it works very well for them.

If I were you (and I soon hope to be in your position) I would leave as much revenue as you can in the company for six months, then go for it.  That gives you a cushion in case sales drop for any reason.

It could be just the kick-start you need to drive your business forward for a few years. 

Very best of luck.  Can you let us know what you decide?

I had $100K revenue my first year (2006). A lot of it was profit (60K on paper).

Then I hired people with little experience. Pay them quite little too. This year, revenue is up very slightly. Profit is way lower than the last year.

Don't go for college kids. Or if you do, pick a brilliant college kid. You hire someone mediocre, you lose money even if they are cheap. Because you spend time managing them and fixing their errors and testing for them.

Office space won't "help you grow" in the software product industry, but I'm not quite as negative on the idea as others.  What I would poo-poo is hiring a college kid.  I think you are better off hiring someone in Eastern Europe if you want cheap help.  It's extremely difficult to find a college kid that is going to put in any decent work besides answering phones.  Especially at the prices you are quoting. 

Making a really nice home office (with network drops and a fancy coffee machine and everything) can be really rewarding.  Once you get in an office you may feel like you are just commuting to your day job again.

I know wot you mean about the mother-in-law and stuff but to be honest I couldn't care less.  I'm actually proud that I run a small but profitable software firm from home that pays the bills. Everyone I speak to and tell them I run an internet business from home is insanely jealous that I don't have to commute hours everyday and work for "the man" and can work wearing shorts and slippers.

The mother-in-law doesn't understand wot I do but she knows that I pay the mortgage and I sometimes work on weekends and late nights so she understands I'm not clowning around.  If other people can't get their heads around a different way of working in today's world that's becoming more popular other than a 9-5 office cubicle job then that's their problem.

As for office space - I'd give your business another year before you make the jump.  I've been through the inertia thing and I created a more office-like setting for myself by buying new furniture, redecorating, putting wooden flooring down etc.  It's more about setting yourself goals to motivate yourself to the next level rather than your surroundings.  In an office you'd have the same problem just with higher overheads and a commute.  Personally I know at some point I'll have to rent office space and take on employees but I'll prob still work from home most of the time - it can be lonely but with the right goals and motivation I find it exhilarating and they'll have to drag me kicking screaming out of my home office :)

$1,600 for rent - does that cover just the rent, or, does it also cover everything else (like water, heat, electric).

Remember, when you get an office, you take on these additional costs:

Rent
Insurance
Phone
Electric
Water
Internet/DSL
Cleaning

These add up to much more than the $1,600.

Also, why do want to seat 5? are you going to have 4 full time employees (not on 100k revenue I doubt). Not sure how many square feet your office space is, but I would look at 600ft (ish) space to start to get the rent lower. I think our first office space was 850 square feet.

Don't spend your profits on office space if you don't need it - 20k a year gets you an awful lot of marketing and advertising for a small ISV.

To me, the question is, does the expense at least pay for itself. Will you get more business, or, be able to do more business by having the office, and enough new business to pay for the expense?

An excellent read. Lots of good points everywhere. Bookmarked!

Working from home does suck sometimes, but if it saves me travel time (and discomfort) its definitely worth it. The problem is - I'm sure everyone goes through it, is making a fine divide between work and play. Damn! I just can't stop looking at the computer screen all the time. Null productivity, but I feel like I'm working all the time.

My suggestion would be to make up your room like an office. Get a huge desk so you have lots of space to spread paper on, get a white board, make sure its quiet, etc.

Seriously though, an "office" is nothing more than a legal advantage and of course, an asset if you buy it. Work from home if possible.

Cheers!

Try an extended stay hotel room by the month. Get a great view, lots of people around, room enough for associates, plenty of parking, bar and resturant, all amentities, etc. I got one in Los Angeles for $890/m, month-to-month!

Just turning this thread a couple of degrees to the right, can someone tell me where to go to find places that do "shared" office spaces? Is there a national, central website you can go to? Do you go to a phone book? I have been trying to find one in the place I am moving to, but have had trouble.

Thanks a lot.

Here is my take on the issue:

http://blog.gurock.com/postings/getting-a-proper-office-or-not/288/

Short version: we are currently in the process of getting an office just for better life/work separation.

"Might I submit another alternative? If you're committed to spending $1,600 a month for 5 people -- why lease?"

He's a software entrepreneur, not a real estate speculator. It's nice it worked out for you, but that is merely survivorship bias at work.