Joseph Lassen -
Nearly every businessperson today has spent time in and around multiple offices across the Untied States, and if lucky around the world. As an employee it is easy to forget about the office and focus only on your task at hand; however, astute investors and managers should always be thinking about their companies’ workspaces.
The ways that office spaces affect individual businesses are often underappreciated or largely forgotten, even though they are a large contributing factor to the company’s performance, the engagement of employees, and the way in which the employees conduct business. Whether positive or negative, these effects help to dictate the long-term performance of the company, which inherently correlate to the return investors and owners eventually realize.
As venture capitalists we have learned to ensure – in addition to a list of dozens additional qualifications – that a company’s messaging is aligned with its environment and philosophy before investing. The examples below demonstrate the repercussions of positive and negative environments, the inherent impact on investment performance, and how our investment theses change based upon these ever-changing dynamics.
‘Workspace’ refers to how an office is laid out (i.e. open or closed floor plan, cubicles or offices, etc.), the location and size of windows, the amenities within the office, and where employees are located in relationship to one another. The resulting corporate culture that manifests as a result of the physical characteristics of an office will determine a significant portion of a business’s success or failure. Entrepreneurs and business leaders will be well served to understand how their company operates as a product of its environment; investors ought to understand the general principal and how it affects an investment’s performance. Because employees are constantly developing higher expectations of an ‘acceptable’ workplace, and investors are looking for any reason not to invest in a business, it is essential that the environment that a management team creates is in-line with the values and performance expectations of their business.
During the late 1990s and early 2000s Google pioneered the idea of innovative office space by asking the question, “why” over and over again. ‘Why cubicles?’ ‘Why chairs?’ ‘Why desks?’ ‘Why 9-5 Monday through Friday?’ Through exploration (and copious amounts of data) the co-founders realized that their engineers worked better and developed more innovative products when they could interact with one another in teams, share ideas, walk around, and sit on ergonomic yoga balls while coding. Free meals also didn’t hurt. They found that any employee shielding themselves from co-workers via gray walls or dividers became infinitely less productive and subsequently out-of-touch with the business as a whole. The genesis of the ‘ask why’ philosophy at Google is Larry Page and Sergey Brin’s belief that each employee should explore the limits of their own creativity and self-motivation and should always think outside the box on a global scale. This philosophy led in part to Google’s success because their environment reflected these values, ensuring that the employees fully lived the values every day.
Early last year we purchased a company that, according to our best estimates, showed signs that pointed to a high likelihood of long-term success, needing only a few changes within the day-to-day operations of the business to realize this potential. However, after being directly involved for the first three months and fully understanding the economics and product offering of the business, it became apparent that during our diligence of the investment we missed few small, yet obvious signs that cost us an immense amount of time and capital. Among the ‘misses’: the office did not align with the values that were sold in management’s description of the company. This, by itself, should have been a red flag. We had been in the office many times during diligence but moving in gave us an entirely different perspective. Spending a few hours somewhere is much different than spending full days there.
Picture this; a large rectangular room with desks and cubicles that look as if they were pulled directly out of Office Space, organized in three rows down the middle of the room in a straight line. Around the walls of the room are offices that house the middle management and the executives of the business. None of these offices is any larger than a standard freight elevator. Toward the front door of the main room there is a conference table that can only hold eight people comfortably with a window looking out onto the cubicles. The icing on the cake, the space is completely underground – there are no windows or skylights – rather than natural light the space enjoys a dim florescent glow.
Each employee who spent longer than six months working in the space noticed negative physical and psychological side effects from being there, including us. We all started to experience the sense of being imprisoned. By midday all that mattered was breaking out.
This attitude was manifest in all our team members. The dim conditions and claustrophobic nature instilled in the employees a palpable sense of resignation and abject lack of creativity. Before making this investment, no one from our team had spent more than a couple of hours, consecutively, in the space. Our primary mistake was that we failed to understand that the company’s environment had no semblance of the optimism portrayed in management’s version of the company. Although the office was not solely responsible for the investment’s performance, it was certainly an important contributor. Sometimes the real data is in the unspoken qualitative signs rather than in the tangible Excel spreadsheet.
It is easy to point out examples of companies that demonstrate an alignment of their office space with their culture, performance, and messaging. Because of the adherence to their corporate philosophies and values, many have become the darlings of the business world. Think of the BMW building in Munich, built to look like a four cylinder engine, Apple’s new spaceship complex promotes openness and creativity, the Googleplex, Dropbox and AirBnb’s headquarters, etc. We can generally see the trend existing in companies all over Silicon Valley due to the continuous increase in employee expectations as it pertains to their work environments. Office space being seen as an essential part of the business experience has begun to permeate through corporate cultures across the world.
As with anything, this phenomenon has its limits, and investors and managers know that engaging and inspiring offices are not exclusively correlated to success of the business. Often, there is a fine line between being a penny wise and a pound-foolish, and just being a pound-foolish. If a company resides in offices like the one described above to save a pittance, or conversely if capital is being spent extravagantly with complete disregard to fiscal responsibility, there is a problem. Investors and managers need to consider both, and need to ensure that the management team delicately walks the fine line of capital expenditure and necessity.
A word to other investors: always visit a company’s headquarters before investing. If the pitch book and management’s story don’t match the ‘feel’ of the office or the employees… run, accredited investor, run!
And to all entrepreneurs: your workspace must match the story that you are selling to the market and pitching to investors – in the long run, a disparity here will ruin your business and your reputation. Conversely, a unique office that matches your ideal culture and values may be the perfect way to continue rapid growth and momentum of a new and exciting idea.