Sunday, March 14, 2010

London Startup Office Financials

Astute readers will know that I'm the CEO of OpenGamma, a (semi-)stealth mode financial technology firm funded by Accel Partners. Longer-term readers will know that I'm a huge backer of London as a startup hub for all of Europe. A big part of navigating the London working environment is handling our pretty unique property market; I think our most recent past will be useful for someone else out there.

OpenGamma: Pre-Closing

We got our term sheet in the last half of July. Now while some people will argue that VCs take all of August off, our team didn't, and we knew that we had to work aggressively to make for a fast, clean closing.

The OpenGamma founders are a motley crew:

  • Elaine, our chief quant, had been unemployed while intentionally working through a quite enforceable non-compete.
  • Jim, our head of software engineering, arranged his end-of-contract to be the end of July, with lots of solicitor advice to ensure that there wasn't a binding and enforceable non-compete.
  • I was just ending a contract at a major international Investment Bank (astute readers will have heard of this as Big Bank B).

I argued that we needed a space that we could all be together just to make sure that all the various legal moves that resulted in the incorporation/Series A dance were pulled off okay. Although Jim and Elaine weren't sure, as CEO, I won.

Because up until then we were operating still out-of-pocket, we went with the cheapest serviced office that we could get away with. That basically meant one of the myriad of serviced offices along Borough High Street, and came down to 400 pounds per desk per month. That, to me, is the lowest you can possibly go for a private space in Zone 1 London.

In Which We Run Out Of Space

In the same serviced office block, we were able to expand to an adjoining room, giving us room for 8 people (with one space allocated for servers, scanners, and my Administrative Paperwork Overflow). That seemed fine, until we got to 6 people and had an offer accepted by Stephen Colebourne. Now we had a problem.

Up until then we had been paying for 7 potential workers (building management threw in the 8th for free), at 400/desk/month. But the problem is that the serviced office building that we moved into was full. When we took the initial space it was pretty much empty, but now we had no ability to expand at all. Worst of all, when it filled up, the space that seemed quite fine became completely unworkable.

It was clearly time to move.

Offices, Glorious Offices

We started to look at Proper Offices. We talked with two different tenant's agents, Devono and Carter Jonas, and we chose Carter Jonas as our agents. And we started to look properly.

Things looked very promising early. We found an amazing property right on Bermondsey Street that we liked, but couldn't really afford. We found other properties which were downright miserable compared to the best one, but were in our price range.

And then on a lark we saw a property that had just come on the market earlier that day. Perfect in every way: high ceilings; Victorian warehouse conversion; Geek-friendly museum in the ground floor; great location; cheap rent. This was the place. 2055 square foot (subject to survey of course).

We set our agents on negotiating the best rent possible, and once we agreed on all that, we set our lawyers on the property, started talking to build-out teams, and mentally prepared ourselves to moving.

For those of you familiar with the UK property market, we negotiated a 5-year lease with a 2-year break clause. The standard in London is a 5-year lease with a 3-year break clause, but if OpenGamma is doing well, we'll run out of space after 2 years, so the optionality is worth the slightly worse terms to be able to break early if we're a break-out success. For those of you counting, this cost us about 2 months of rent-free period at the outset of the lease. We also negotiated a 6-month deposit based on bank guarantee, where the industry norm is 12-month cash to the landlord.

The structure of the deal for the location that it's in is:

  • A discount on the asked rent over the 5-year duration of the lease;
  • 3 months rent-free at the onset of the lease;
  • 4 additional months rent-free if we choose not to exercise our break option.
If you're looking at Mayfair or the City today, you'd be looking at 5-7 months rent-free on the outset of a 5/3 lease, and 5-7 months after the break option. The South Bank area is a slightly different market, so we had to look at smaller rent-free periods.

A Tangent on Suitability of Space

Whenever I see Valley or New York firms that have successfully moved into decent space relatively quickly, I'm quite jealous, because their property markets don't work the same way as London's does.

In the states, a general rule of thumb is:

  • You move into the office as-is
  • If the office isn't in move-in condition, you negotiate what are known as Tenant Improvements to make it move-in condition, and the precise nature are a negotiation between tenant and landlord
  • When you move out, you move out of the space in as-is condition (meaning that you just leave all the "structural" stuff in place, but things like cubicles and desks you remove).

What this means in general is that there are a lot of spaces that are pretty much move-in condition if you're not particularly fussy about particulars: they have cabling running to a comms room in the major areas; they have a few offices or meeting rooms; they have connections to the outside world ready to light up.

London is a completely different market. Landlords force a completely vacant turnover; anything you've done once you took possession you have to undo. That means that if you're looking at a 2,000 square foot space, and want to build out two conference rooms and a comms room, you have to remove all those walls when you move out. You have to remove all cabling, all lighting, all electricals, all walls and doors, everything. Whether the landlord would find it easier to rent the space with all that intact is regardless: you have to remove the lot of it.

This means that when you're looking for office space you can't actually find, at all, any "move-in-condition" space unless the previous tenant went bankrupt in the middle of tenancy. And given the different treatment of bankruptcy here, that's actually quite uncommon.

It sucks.

In Which We Get Quotations

We used Carter Jonas' expertise and asked two teams to do a full build-out proposal.

The first company, which seemed to really "get" what we were going for, and which came back with proposals first, finally came back with a quotation for building out our 2,055 square foot converted Victorian warehouse space.

110,000 pounds. Just for the build-out; furniture was another 35,000 pounds.

Our heart sunk. This idea, which initially seemed reasonable, turned into a complete flight of fantasy. There's no way I could warrant as a CEO putting 110,000 into a build-out, 35,000 into furniture, and another 30,000 into a deposit on the property. No way at all.

We worked with the same firm on doing a multi-stage buildout, where we got the most necessary things right off the bat (comms room and one meeting room, and everything else in 6 months after we had a couple of sales), and that initial build-out was still coming in at 70,000 pounds. Plus deposit and furniture. Just to move in.

We had to look at other options.

So we started talking to the guys from Causata, another Accel-backed startup. They've been going for a year longer than we have, and they've spent their entire time in a better class of serviced office than we've been in.

Serviced Offices FTW?

So we started talking to higher quality serviced office providers than we were going with in the Borough High Street area. This would involve moving to second-tier space in the City (e.g. not commute convenience to Bank or Liverpool Street) or second-tier space in the posh parts of the West End (e.g. not convenient to Berkeley Square or St. James).

These buildings were much more suitable to growth companies that don't require bootstrap-levels of expenditure:

  • Chairs weren't crippling
  • The buildings had space in server rooms you could throw a few machines into
  • Phones were reasonable in quality

The thing was that these spaces were coming in at roughly 750 pounds/desk/month (9,000/year). For 12 employees, that ends up being 108,000 pounds per year.

And the best/worst part is that these numbers are based on potential employees in the space. The space in any serviced office is charged at a price per room, with a certain number of desks in it. If the space can support 20 employees and you only have 10 in the space, you pay the 750/month for 20 employees, not 10. So your entire cost savings are based on finding the right space for the right number of employees, and being able to move quickly to minimize overspend.

Capital Preservation Equals Startup Victory?

If you ask any startup, whether well-funded with a major VC backer or not, whether they're happy putting 110,000 into a capital cost on an office, they'll say no. It's a ridiculous predicament to be in.

If you run down the numbers, a Proper Office (even with 110k in capital expenditure) has an advantage (for our space) at 12 desks over the full run of the 2-year initial period, but it's all front-loaded: you have to spend capital to save at the end of the lease. If you stay in the space, in years 3-5 you're laughing at the savings.

But for a startup like ours, 110k works out at 2 months of burn. Now you're in a difficult quandry:

  • If you really believe the Next Round is going to happen at a good valuation, you JFDI; otherwise, you're pissing money down the drain.
  • If you want to preserve your options to drive for a harder bargain on the Next Round, you want to conserve capital at all costs, even if it means you're spending more per month.

It's a tough decision. Clearly (having seen the plans) the right choice for us is the full build-out, but are we willing to sacrifice the additional two months of burn for the optimal working environment over 2-5 years?

What We Did

What we ended up doing was a bit anti-climactic.

First of all, our second build-out firm finally came through with a quotation. 55,000 pounds for everything (from a requirement perspective) that the first firm did. Also, came in at 21,000 for furniture, including pretty darn good chairs. That changed everything.

So we ran the numbers. Turns out that if we assumed that a second round of funding was coming, paying all the fixed costs, no matter how noisome to me as a founding CEO, made sense as of 18 months into a two-year lease. And once the board told me "do what's best for the company over the next two years," that was a done deal.

It was tough though, because we knew all along that from a qualitative perspective, the space in Bankside was the right choice. What we needed was to be able to justify to ourselves and our board that we were sinking the right amount of capital into the right space to put the company on a trajectory that we didn't have to mess about with offices again. That point is quite important, because if you're growing rapidly you don't have the time to deal with this stuff.


If you want to boil all this down to a series of sound-bites, here they are:
  • The UK property market is dysfunctional in requiring tenants to restore the space to an uninhabitable shell on move-out;
  • This makes finding suitable startup office space in London a PITA;
  • ALWAYS get competitive quotes on EVERYTHING because you never know just how far off different vendors can be;
  • Serviced offices in London work out well if you feel the need to be in the City or Mayfair, but less well if you like places like the South Bank [Silicon Bridge] or Old Street [Silicon Roundabout]. Crossover point is about 10 employees;
  • Ask Your Board about the relative value apportioned to flexibility over the short term vs. cost savings over the long term. This is what your board is there for.


We move in in the next 5 weeks come hell or high water (because we've already given notice on our current space, and they've already let it). Wish us luck.

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