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The Truth About Real Estate

Our new office cost a fortune, but I still think it is the best investment we’ve ever made.
Jason Fried is the co-founder and president of 37signals. Basecamp, Highrise, Ba

Jason Fried is the co-founder and president of 37signals.


Laurent Cillufo

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My software company, 37signals, is nearly 11 years old. But until now, it's never really had a place to call its own. For much of that time, we've been positively nomadic.

Our first headquarters was in the office of one of our original partners, a Chicago-based graphic designer named Carlos Segura. Carlos's office also housed his design firm, as well as the T26 Digital Type Foundry and Thickface Records. 37signals lived on a corner of a big desk in a room upstairs. It wasn't glamorous, but we didn't need much space. It kept our costs down, too.

After we had been there a year, Carlos left the company, so it was time for us to move on as well. By this time, 37signals was three people -- Ernest Kim, Matt Linderman, and me. We were making money and doing well and didn't require much in the way of an office. So when some friends/clients at a company called Data Harbor invited us to sublease some of their extra space, we said, "Sure."

A year after that, Data Harbor moved, and we took over the remainder of its lease for a few months. Then we decided to finally get a place of our own. We found it across the street (we could see it from the window of the space we were still occupying). It was too big -- 3,500 square feet for just three Chicago-based employees -- but the location was good, the rent was fair, and the landlord was a nice guy. Still, it never really felt like home. Rather than investing in the space, we just put some cheap tables together and got DSL. We worked that way for three years. During this time, we brought on a couple more people, but they were working remotely from other cities.

I suppose we were thinking about office space the way most businesses do -- as a cost center. After all, between rent, furniture, technology, and the like, it adds up fast, especially for a young company. We were doing fairly well, so $2,500 a month wasn't much of a burden. At the same time, it was $30,000 a year out the door when we could all have just worked from home, which might have explained our ambivalence.

But over the course of three years in that Spartan space, we learned an important lesson: An office could make you money, not just cost you money. We had a lot of empty space. Our three desks, conference room, and personal space took up only about 25 percent of the office. Perhaps we could turn that empty space into a revenue stream. Not by subleasing it but by using it to host our own workshops and conferences.

For a few years, we'd been sharing our ideas on software design, marketing, and business on our blog, Signal vs. Noise. We'd begun to build a loyal and passionate following. So why not take advantage of that and hold a workshop about the things we were writing about on the blog? We could host it in the spare space in our empty office. And charge for it.

We put together a one-day agenda, charged about $300 a person, and sold about 30 seats. Suddenly, we found ourselves with $9,000 in additional revenue. Our monthly rent at the time was $2,500. In one day, we just paid more than three months' rent. That was a light-bulb moment. An office can be free -- and even a profit center -- if you start thinking about your company's byproducts.

What do I mean by byproducts? Just like the lumber industry can sell its sawdust (a byproduct of milling trees), we discovered that we could sell our knowledge (a byproduct of running a business). And we could sell it in our spare space. Eventually, we packaged this knowledge in book form. All told, the combination of the book and the workshops has brought in revenue of more than $1 million.

But back to our real estate saga. When our lease was up, we decided not to renew. But instead of getting another space of our own, we hooked up with another friendly company we knew: Coudal Partners. I knew Jim Coudal, owner of the advertising and design firm, through a mutual friend. Jim had some extra space, I mentioned that we were looking, and he offered it at a fair price. This was in 2003. For the past seven years, we've been working out of that office.

It's been a wonderful experience. The folks at Coudal Partners are wildly creative. We've hired them to shoot and produce some video for us, and we even started a side company together called The Deck, a targeted ad network that helps companies reach graphic designers, Web designers, and other creative professionals.

However, since we're sharing the space, it's not ours to do whatever we want with. Holding workshops there has been a logistical challenge, because those events mean that the people at Coudal Partners can't work at their own office for a day. That doesn't scale well. We'd like to be able to do a workshop every six weeks. Or maybe host a spontaneous gathering of all our nearby customers. We needed more flexibility.

What's more, since we've expanded from just a few people to 20 (nine of whom are in Chicago), we've outgrown the six desks we had been renting. Privacy is another thing you don't have much of when you share an office with another company. It wasn't an issue early on, but it is now. Our friends at Coudal Partners have been fair and accommodating, but we decided it was time to move on.

So last year, we began looking for a place of our own. From the outset, we decided to recall what we had learned years before: We weren't just going to spend money on the space; we were actually going to make money on it. That requirement became the driving force for finding the right space.

We looked at a bunch of places -- houses, lofts, offices that already had been built out, raw traditional office spaces. We almost had a lease done on a large factory that had been turned into a six-bedroom residence (we'd use the bedrooms for private offices). But the deal fell through because of zoning and parking issues.

Eventually, we found a beautiful raw space just six blocks from our current office. It's a corner space with two enormous walls of windows. Natural light pours in. We hired architects to review the space and draw up plans. We negotiated the lease, paid the lawyers, paid the lawyers some more, and signed the papers.

The design process took a few months, and the build-out took about four months. We finally moved in July. True to our vision, about a third of the 10,000 square feet is dedicated to teaching. We built a theater-style classroom, with 37 seats, in which we can give presentations, hold workshops, and offer training and support classes for our customers. We plan on holding the first of many regular workshops this fall.

For the past few years, we've rented out different venues for our workshops. It cost us a few grand for the space, another few grand for the overpriced catering (we had to use each facility's sanctioned caterer), and another few grand for audio-visual requirements and other logistical considerations. Though we were able to charge about $750 per seat for a one-day event and sell about 50 seats per workshop, renting still took a good chunk of profit out of the equation.

With our own space, we'll not only save money on the costs side; we can make more money on the profit side. We also believe we'll be able to charge closer to $1,000 a seat. At 37 seats, that's $37,000 in revenue. All we'll have to pay for is catering. All the AV requirements and Internet connectivity are built into the space. And it's much more attractive than the venues we were renting out before. Just a few of these workshops will cover our rent for the year.

The lesson here is less about real estate than it is about business itself. Whenever you make something, you make something else. Your byproducts may not be as obvious as sawdust, but they're there. Maybe it's the knowledge you've acquired by running a business. Maybe it's a piece of software you wound up making when you made another piece of software. It's there; you just have to look for it. You may even find a business you never knew you had.

Jason Fried is co-founder of 37signals, a Chicago-based software firm, and co-author of the book Rework.

Last updated: Sep 1, 2010




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