Which is Better: Virtual or Physical Agency?

When I first started building websites professionally and full-time out of my house, I almost immediately wanted an office. I would see “agency” websites online with pictures of their sweet entryways, conference rooms, and kegerators and think: one day

After winning a couple of five figure deals, I thought it was time. I partnered up with a neighboring company to “go in” on some space together. This was before community work-spaces and startup incubators became mainstream. Or at least I didn’t know about them.

After a few months of trekking around Denver visiting office space, we honed in on a sweet space downtown. It was right on the 16th Street Mall. The space gave Steve and I the opportunity to have our own offices, and then we had a “bull pen” type area where we could start adding additional employees once we needed them.

Luckily the company we went into office space with had some capital—because the upfront costs to furnish and finish the space ran about $50k. I remember deciding that we wanted a two-tone look, white walls and dark grey running boards. So in lieu of adding additional costs to our ledger, we all decided to spend a weekend painting. It was miserable.

But when you don’t know any better, you might think things like a “two-tone look” are important. They aren’t.

Overhead Can Hurt

Once our office was all settled, it seemed obvious that we needed an employee to sit in it. I started recruiting via Craigslist and the Denver Art Institute for a web designer. After a bit of a search we found a great candidate.

Equipped with an office and our first full-time employee, we officially had overhead. People talk about overhead in business and how dangerous it can be. But what is this overhead, really?

   An ongoing expense of operating a business.
   (See Wikipedia for full definition)

Basically overhead occurs when you have to pay an expense month-in-month-out regardless of how much revenue you make. So what was our overhead?

Estimates:

  • Rent: $1500/month
  • Power/internet/phone: $500/month
  • Employee #1 salary: $3,000/month

I know we had other costs. But as you can see from above, we went from working out of our house with zero fixed monthly costs, and now we had $5,000 a month going out the door. Zero to $5k/month is a big jump. Overhead is relentless, month in, month out. If it was too much for us, we could have let go of our employee, but we couldn’t get out of our lease for two years.

Before, when we were working out of our house, it was an “eat what you kill” type world. If we didn’t want to work, it wasn’t really that big of a deal. Sure we had to pay our house rent and bills, but we had those anyway. If I felt like taking a week off to play video games or go on a trip, no problem.

Adjusting to the constant pressure of revenue took time. I ended up getting in a lot of debt personally and with the IRS. It wasn’t good.

But we kept piling it on. Hired employee #2. Then employee #3.

Before long, I was lining up interns to feed the monster. The only way I knew to structure the business was fixed overhead. Here’s a salary, there’s a salary. That’s what basic business teaches us.

There’s Always Another Way

Now that I’m older and wiser, I know that there is always more than one way to do something. Not only that, but I’ve had the pleasure of interviewing and meeting hundreds of web professionals that are all doing it differently.

While I wouldn’t say there is a right way that will work for everyone, I will make a recommendation based on what I know now.

Keep your operation as lean as possible until you get an absolute, slap-in-the-face-sign that you need to upgrade.

What do I mean by that?

Well, one of the assumptions I made was that clients wouldn’t want to hire me because I worked out of my house. But no client ever mentioned anything about not wanting to work with me because of that. I made a decision based on an assumption for which I had no proof. In fact, at the time, I had two of the biggest clients we ever had—one of them a multibillion dollar oil company.

They never cared that I worked from home. What they did like was that I was down the street from their office.

Another assumption I made was that employees wouldn’t like coming to work at my house. This assumption has been repeatedly destroyed by many startups. I was reading a recent blog post from Danielle Morrill, and she mentioned having over eight team members regularly working from her loft. Sure, they’d probably like a cool “office” to hang out in, but I think what matters more is working on something great, with great people, and getting paid.

I never even tried having a single employee come work at my house. I was too concerned about “what they might think.” I’ll tell you what they would have thought: “thanks for the paycheck.”

I also made an assumption that people needed to be in the same room to get good work done. This assumption has been totally decimated by the great team at 37Signals and their work on Remote.

I Don’t Regret

In the end, I was able to build a profitable business servicing hundreds of clients by building a brick and mortar agency–overhead and all. At one time, HotPress was pumping out over $50,000 a month in overhead. I was a selling machine. I would take deals of all types to keep the pipe filled. Always fearful that one day I would return to a state when I didn’t have enough money to cover the costs of doing business.

But if I started a new agency today, I would do it differently.

I wouldn’t open a physical office until it was forced upon me. I would need to have several clients tell me point blank: “we don’t want to work with some dude home officing.” And my local employees would also have to tell me: “working from your living room makes me uncomfortable.” Or maybe my wife would give me an ultimatum.

Whatever the case, I would wait until the very last minute possible to take on fixed overhead expenses.

I would 1099 all of my employees and have them track hours against their projects, and then I would bill those hours to keep the margin. Only paying for work I got paid for.

I would find the best talent and leverage team collaboration software to allow everyone to work wherever they wanted as long as they got their work done. This is actually what we do today at uGurus. I don’t care if people come into the office. Many of our team regularly comes in because they like to, but they don’t have to.

With our studio, we do need a physical space. But our business has changed. Our lease is up next summer, and I’m already looking at a lot of alternatives for how we move this ship forward.

I would keep everything as virtual as possible until the obvious answer was to get an office. Hopefully, by that time, revenues would so far outweigh expenses, it wouldn’t just be obvious, but painless. If revenues didn’t outweigh expenses 3:1, I would keep on bootstrapping.

What do you think? What has and hasn’t worked for you? I want to know.

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