Extending cash burn rate in tech and scaleup companies

THE CASE FOR LIMITING CAPEX THROUGH

SERVICED OFFICES

In the world of tech and scaleups, managing cash burn is a critical aspect of ensuring sustainability and growth. If you are reading this article via the Gathr platform, this will almost certainly include relevant points for consideration. We’ve sat down with our team and tried to articulate the key points when evaluating serviced/managed versus traditional leases.

Having the right office is important to support all the elements that constitute growth and success, but associated initial expenses can be expensive, and one significant area of expenditure is office space. Traditional leases in CAT A condition (open plan), with their larger rental deposits (especially for high growth companies with a limited financial track record) and extensive fit-out requirements, can significantly strain a company’s finances. In contrast, serviced offices present an obvious alternative, offering the flexibility and cost-efficiency needed to extend cash burn rates and support long-term success.

UNDERSTANDING CASH BURN RATE AND CAPEX

The cash burn rate refers to the rate at which a company uses its cash reserves to cover operating expenses. For tech and scaleup companies, maintaining a low burn rate is essential to extend the runway before requiring additional funding. Capital expenditures
(CapEx), which include spending on assets such as office space, equipment, and furniture, are a substantial component of the cash burn rate. Managing these expenditures effectively can help companies preserve their cash reserves and allocate resources to critical areas such as research and development, marketing, and talent acquisition. Essentially, in the scaleup stage, good hires beats fancy fit-outs.

THE TRADITIONAL LEASE MODEL: HIGH CAPEX

AND FINANCIAL STRAIN

Traditional office leases typically involve significant upfront costs. These include large rental deposits, often equivalent to several months’ rent (often 9 – 24+ months plus VAT), and substantial fit-out expenses to customize the space according to the company’s needs. Fit-out costs can cover everything from partitioning and cabling to furniture and interior design, quickly adding up to a considerable investment.

Moreover, traditional leases usually lock companies into long-term commitments, often spanning several years. This inflexibility can be particularly challenging for tech and scaleup companies, which may experience rapid growth or shifts in business strategy, requiring them to scale their office space up or down quickly. The financial burden of breaking a lease or expanding an office prematurely can further strain a company’s cash flow. We constantly view offices with clients that have a nearly new fit-out, but where the Tenant has left many years before the end of their lease. If your scaleup stage has stabilised from a head count perspective, leaving focus predominantly on revenue growth – then securing one of these almost new fitted sublet or assignment options can be a fantastic opportunity for your business.

SERVICED OFFICES: A COST-EFFECTIVE ALTERNATIVE

Serviced offices offer a compelling alternative to traditional leases for scaleups by providing ready-to-use office spaces with minimal upfront costs. These spaces come fully furnished and equipped with essential amenities such as high-speed internet, meeting rooms, and communal areas, reducing the need for significant CapEx.

Here’s how serviced offices can help tech and scaleup companies extend their cash burn rate:

Reduced Initial Investment: Serviced offices require minimal initial investment compared to traditional leases, preserving cash for other critical business activities. Flexible Lease Terms: The flexible lease terms offered by serviced offices allow companies to scale their office space according to their needs. Whether expanding during a growth phase or downsizing during a lean period, companies can adjust their office space without the financial penalties associated with breaking traditional leases.

All-Inclusive Pricing: Serviced offices typically offer all-inclusive pricing, covering utilities, maintenance, and other operational costs. This transparency and predictability in expenses help companies manage their budgets more effectively and avoid unexpected financial burdens. We always enjoy discussing the nuances of service charge caps, rent deposit return mechanism, business rates relief strategies and the important of
pre-acquisition surveys to help identify and mitigate any unknown costs in a traditional lease.

Access to Prime Locations: Serviced offices are often located in prime submarkets. Yes, the costs of serviced/flex options do track the underlying traditional market rental levels to a degree, but having a smaller, flexible office in the right part of town can enhance a company’s brand image and accessibility to clients and partners.

Focus on Core Activities: By choosing serviced offices, tech and scaleup companies can focus on their core activities rather than managing office logistics.

IN SUMMARY

In the fast-paced and competitive landscape of tech and scaleup companies, managing cash burn rate is essential for long-term success. By limiting CapEx on traditional leases, larger rental deposits, and significant office fit-out expenditures, companies can extend their cash burn rate and allocate resources more strategically. Serviced offices can present a cost effective and flexible alternative, enabling companies to preserve cash, adapt to changing needs, and focus on their core activities. Nothing in life is ever clear cut. Selecting the right type of office is complex – helping business understand the differences between the plethora of routes is what we do.