Founder Story: Steve DiBartolomeo of Artwork Conversion Software

Written by Theresa Shafer. Posted in EDA, First Office, Founder Story, skmurphy

Steve DiBartolomeo is co-founder of Artwork Conversion Software, Inc., an EDA software firm headquartered  in Santa Cruz CA with a development office in Manhattan Beach, CA. Founded in 1989, the company develops CAD translation programs, CAD viewers, plotting software and IC packaging software.  Artwork has over 5000 customers worldwide including Alcatel, AMD, Applied Materials, Agere, Bosch, KLA Tencor, Motorola, Ericsson, General Electric, Hewlett Packard, Hitachi, Lockheed Martin, Siemens, Seagate, Sony, TRW..

Q: Can you talk a little about your background and how you came to found Artwork Conversion Services?

I have a BS/MS in Electrical Engineering from UCLA (1978). My founding partner, Antonio Morawski, has a BS from Loyola and a MS from UCLA from around the same time period. I cut my teeth at TRW Semiconductor in Southern Calif starting in 1976 as a student. When I graduated I continued on there until 1980 as an RF design engineer, as did Antonio–we met at TRW.

I took a year and a half off of work and went back to college (UCSB) until I ran out of money and then in 1982 joined Avantek in Santa Clara as an international sales engineer. In 1984 my boss asked me to join a startup, Step Electronics, that would specialize in high tech import/export selling microwave and RF components and subassemblies. One of our first clients was a small software start up, EEsof, which pioneered microwave EDA on PCs. (Prior to that microwave design software ran on a $250K VAX and cost $50K – EEsof’s ran on a $5K PC and cost $7500.) I spent much of the next years selling EEsof tools in Europe (where I lived for a year in 1986) and then later in Asia.

In 1986 I needed a translator for a pattern generator in order to close a large EEsof sale in Germany. EEsof could not do it. I mentioned this to Antonio and he said he knew how to write such a translator. We took the order and delivered it 6 months later.

In 1987 I returned back to the US and tried to sell more pattern generator translators in Silicon Valley. The companies that I contacted were not interested in our translator but had lots of suggestions as to what they did need — so we slowly developed new products (on a part time basis) based on their feedback. At that time (between 87 and 89) Antonio was employed as a consultant at TRW and as a professor at Loyola. He did the programming out of a corner of his small garage.

Finally in 1989 we decided to do this full time. I left Step (which had really been an excellent apprenticeship for learning how to run a small, lean operation) and Antonio left Loyola after completing his teaching contract.

Our primary reason for starting the company was to be “masters of our own destiny” and to work on stuff that was interesting. We really only wanted to make enough money to cover our mortgages and live a reasonably comfortable life.

Q: So what were the early days like?

Between us we put up $10K each and started with that (and two years of experience and a few customers and orders in the pipeline). As mentioned, our largest initial purchase was two fax machines (at $1500 each) and a copy machine ($3000). I worked out of a 500 sq foot office in Santa Cruz and Antonio continued to work out of his garage in Manhattan Beach. We broke even from day one even if the monthly salary was small. Eventually we added a secretary and a programmer and Antonio moved from his one car garage to his father’s two car garage.

I handled all the sales which were almost 100% from Silicon Valley. I basically drove into the valley several times a week and installed and demonstrated the software. I also did tech support, marketing, technical writing … basically everything except programming.

We added employees one at a time and grew slowly but surely.

At the time we started (end of 89), the business we knew best — RF and Microwave components and design — was taking a tremendous hit; the giant build up of the early and mid 80’s (due to Reagan’s military budget) was over and an enormous consolidation was occurring. I’d call an engineer on a Monday to make an appointment and by Friday he’d be gone.

There was not yet any Internet and even cell phones were a tiny market. Things looked especially grim because no one could envision what was going to drive new designs. But somehow we ground through the first couple of years — not making much money but not losing any either and slowly adding a few products every year.

By 1995 we grew to a peak of 14 people – 8 programmers, 1 sales guy, 1 boss (me) and 3 office people. Our maximum revenues peaked at about $3 million dollars in the late 90’s.

Business took a major downturn in 2001 what with the dot-com crash which killed a whole bunch of network and chip startups that were buying our tools as well as hurting just about everybody in the tech business. I recall our shipments dropped 40% one month and stayed down for 18 months before slowly building back up again. By 2004 business was excellent again. Things stayed pretty buoyant until 2007; from that point on it seemed to drift down gradually and, of course, at the end of 2008 the downward drift became disturbingly steep. Most of 2009 was pretty awful and it was not until early 2010 that we saw the green shoots of a recovery.

Q:  Where are you today?

Today we are 10 people (7 programmers, 1 sales guy, 1 boss and 1 office person – the internet nature of business no longer requires production of software other than a click). Our goals are not high growth but rather a good profit margin. As a software company we have zero cost-of-goods and the great majority of our expenses is salary. So once you are past “break even” everything after that is profit.

Q: When you look back over the last two decades or so what are the accomplishments that you are most proud of ?

We are very proud of having kept the company going for over 20 years completely on our own. We didn’t borrow a penny and every quarter we showed an operating profit.

We  made several major market and technology shifts during those 20 years that kept us going:

  • We started by building software for RF and Microwave designers.
  • We branched into software directed at PCB designers.
  • We branched into software directed at IC designers (back end).
  • We moved from translators to display software (viewers).
  • We moved from direct sales to end users to OEM sales to other EDA companies.

We have seen many other EDA and technology firms try to change direction, usually in response to major changes in technology or the market that either died or were badly injured in the process.

We were early Internet and web adopters and this enabled us to expand our market from just Silicon Valley to worldwide without a large sales force.

Q: What’s been the biggest surprise?

I think it was more of a gradual realization: most EDA entrepreneurs start as EDA users, run into problems doing their job, come up with a clever solution and are suddenly find themselves an EDA supplier. The surprise comes some years after you are an EDA supplier–you have stopped designing stuff and find that you no longer really understand the “problem” side of the equation and have to pester people to tell you about what problems they need solving. However this reliance on others for your critical input is never as reliable as your own (past) understanding of the problems that need solving.

Q: What were the significant changes in the environment you have had to respond to?

The internet changed everything. We jumped on it early and have benefited from our ability to be everywhere in the world from our desks in Santa Cruz. Nowadays I think WEBEX (and the other screen sharing apps) is one of the seven wonders of the modern world.

We realized that we needed to change from direct sales to OEM partnerships in the late 90’s because the big kahunas–Cadence, Mentor and Synopsys–started sucking the air out of the EDA markets. They each wanted to be all things to the customer and cut the kind of deals (we call them all-you-can-eat) that would cut off any other vendor.  So we changed our focus to selling into the big EDA companies with small modules that enhanced their products.

Q: What’s the current challenge you are wrestling with?
Design is following manufacturing offshore. We’ve seen this accelerate since after the dot-com crash. It’s a lot harder for a small  US based company to cover Taiwan, China, India and Singapore. The big guys set up design and application center’s in these countries.

Q: Any suggestions for other entrepreneurs who want to bootstrap a software business?

If you want to run a company you can make a living from–in other words you are not writing a business plan where the exit strategy is on the first page–then I think I can make a couple of suggestions.

  • Start with a small team with common values and complementing skills – in our case Antonio was the programming guy and I was the sales/applications guy.
  • Don’t take any more money–none if possible–from outsiders than absolutely required.
  • Create something small and simple and quickly get it out there. You’ll get much better and faster feedback than if you try to go around asking people what they want.
  • Refine it based on feedback. Document it. Do it again.
  • Grow slowly. Fast growth is very inefficient since you will then have a lot of people on board that have not figured out their job.
  • Staff or employee turnover has a high hidden cost since the replacements have to start over.
  • Cash is king. Save some of your profits as a cushion against a rainy day.
  • Spend a lot of time listening to your customer’s problems. Not every problem is one you can or should solve, but the aggregation of their issues gives you a solid base for making seat-of-the-pants decisions. You’ll never have enough information to make a MBA-style decision on new products or directions. But if you’ve listened to enough customers you’ll have a good “feel” and make better decisions.
  • Beware of business plans. Have a look at some business plans that are 3-5 years old of both successful and unsuccessful companies. You’ll have a good laugh at both. The main difference between the successful companies and the dead/dying ones is how they reacted when their assumptions blew up.

Finally and most importantly: people can say one thing and do another. Only act on what people tell you if you see that their behavior is consistent with their talk. People are much better at telling you what they don’t like than at what they want. When we are developing a new product we try to get something into their hands quickly and then listen to them criticize it. The criticisms are usually much more specific and useful to defining a product.

Q: Steve thanks very much for your time.

Five Serious Financial Mistakes Bootstrappers Can Avoid

Written by Theresa Shafer. Posted in 1 Idea Stage, 2 Open for Business Stage, 3 Early Customer Stage, First Office, skmurphy

Five  serious but avoidable financial mistakes we hear from time to time at a Bootstrapper Breakfast:

  1. Mistake: using credit cards to finance your startup.
    Fix: Pay cash, trade favors, barter, go without, but don’t let your monthly balance roll over and accumulate.
  2. Mistake: not having a stopping rule for when you need to stop bootstrapping and look for work. This can lead to bankruptcy.
    Fix: set a time limit and an expense limit for getting your new business off the ground. Work part time and work on your business part time to maintain break even cash flow.
  3. Mistake: not keeping your spouse in the loop if they are working and keeping the lights on while you bootstrap.
    Fix: treat your spouse as an investor or a board member: provide ongoing detailed accounting of plans and spending.
  4. Mistake: hiring a full time employee too soon.
    Fix: start with contractors, make sure you can at least break-even on a regular basis with the contribution the employee will make vs. the additional expenses incurred–understand all of the expenses you first full time employee will trigger (e.g. workers compensation, payroll service, fixed salary expense (vs. contractor)).
  5. Mistake:  signing a lease on an office too soon
    Fix: use co-working space, look for an informal sublet, be clear on why you need an office (e.g. just pay for meeting rooms as needed, barter for lab or working space as needed, look at hourly/day rate offices for conference calls or meetings).

#3 got picked up by Entrepreneur Magazine in a roundup of 7 tips: “Funding Your Business on Your Own? Learn From These 7 Entrepreneurs.”  I thought these three from the list were also common and avoidable:

  • “Branding too soon” by Rebecca Tracey of The Uncaged Life
    This is really investing too much in messaging before you know what works. I have made this mistake and I see others do it as a way to make the business seem “more real” or “like an established company.”  Trying things out in conversation gives you the fastest feedback and is the easiest way to iterate if you are deliberate about it.
  • “Idealism about costs” by Tom Alexander of PK4 Media
    This comes in many forms, but the most serious that he touches on is not understanding how long it can take to get paid, especially by a larger firm. 90 to 120 days from invoice has not been uncommon for many of our clients. Small firms tend to pay faster, and getting paid the first time by a large firm can take much longer than subsequently.
  • “Failing to calculate burn rates” by Steve Spalding of Project MONA
    This takes several forms, but one mistake is to pay yourself a salary (incurring State and Federal taxes on the “round trip” from your savings back to your bills instead of putting less money into the business and living off of your savings. It’s also better to provide the bulk of your starting capital as a loan instead of equity, so that early profits can be distributed as loan repayments instead of salary or dividends.

Update Thu-Feb-27 (morning): Elia Freedman offered a common critique of this post, In Getting Good At Making Money by Justin Williams and “How to Get Good at Making Money” by Jason Fried. Writing “The Art of Bootstrapping” he observes

The only thing a bootstrapper needs to know: CASH IS KING. Nothing else matters and every decision needs to be made to maximize cash. The articles refer to revenues, but revenue is not cash. Here’s an example: I do a contract development job today for $10,000. When done I submit an invoice and the company takes 60 days to pay. Yes, I have $10,000 in revenues today but I don’t get the cash for 60 days. How do I pay my bills in the meantime?

I am relentless when it comes to managing cash. I have a spreadsheet that gets duplicated and updated with actuals and projections every month. This allows me to make cash flow decisions months before the negative shortfall actually happens, allowing me at various times in the history of the company to ratchet up spending, lay people off, cut payroll or minimize other expenses. Because of this work, I see the company very very clearly on a month to month basis and can make appropriate choices.

I think it’s a fair criticism. An accrual accounting perspective has too much parallax from bootstrapper’s actual cash position and offers a false sense of security. I tried to sharpen the advice from the Entrepreneur round up on “Idealism about costs” toward this but I would add a sixth mistake to make it clear:

Mistake: Using accrual accounting (ignoring the timing–the real cash impact–of cost and revenue items) will kill you.
Fix: Forecast  and manage the explicit timing of cash in and cash out for your business. Understand that people will cash your checks immediately but be slow to pay your invoices.  Some won’t pay the full amount or even pay at all. Rely on clear understanding and simple plain English agreements, don’t hope that “legal language” in a contract will make a difference to your getting paid (assume any contracts you sign will be enforced against you by larger firms.

I think trust is as important, if not more important than cash. Bootstrappers who focus exclusively on cash without also managing trust and social capital will often fail to prosper as well. Related blog posts:

Update Mar 8: this post was included in the Founder Institute’s “Mar 2 2014: This Week’s Must Read Articles For Entrepreneurs.

Capturing Intellectual Property Workshop: Saturday Oct-19-2013

Written by Theresa Shafer. Posted in First Office, Legal Issues

Every once in awhile we find great workshops that are open to all size companies.  Bill Meade’s “Capturing Intellectual Property” is one such workshop.  His hands-on workshop will cover:

  • What is intellectual property (IP)
  • The forms and functions of legal IP protections
  • The IP system and its functioning (on one slide)
  • Capturing an invention
  • Checking the invention for enablement
  • How to capture invention if you work in a big company

Who should attend:

  1. Engineers who have never filled out an invention disclosure form.
  2. Section managers/Scrum Masters who are interested in learning what types and quantities of IP they should be seeing from their product development efforts.
  3. Patent agents and attorneys who are not “seeing enough” IP from their project teams and would like to capture more.

Bill Meade is an intellectual property consultant at BasicIP.   In addition to capturing inventions, Bill has substantial experience in disclosure evaluation, IP portfolio management, business side of litigating patents, and licensing patents.

Register NowSaturday, October 19, 2013
9:00 AM to 12:00 PM (PDT)
Sunnyvale, CA

GroundFloorSV Leaving 2030 Duane Location Nov-30-2012

Written by Sean Murphy. Posted in First Office

Following closely on the heels of Monday’s announcement of Hacker Dojo relocating we received the following notice this afternoon from Ground Floor Silicon Valley

Special Announcement
We are writing to members of the Ground Floor community to let everyone know that the building at 2030 Duane Avenue has been sold. The last day that Ground Floor will occupy the building is November 30, 2012. All events and meetups listed on the events calendar and planned for the rest of October and the month of November will take place as scheduled.

Members of the Ground Floor community are welcome to continue their memberships through November 30. If any member wishes to discontinue membership at the end of this month, please notify us and return your RFID fob by October 31 and you will not be charged for the month of November.

We are still in the process of deciding whether or not to continue Ground Floor at another location. The process of selling the building has taken place very quickly, and we are giving everyone as much advance notice as possible. We sincerely apologize for any inconvenience this change may cause.

Please contact Peter (650-291-6707; or Max (408-466-4310; if you have questions.

Thank you for your understanding.

Peter and Max

As I mentioned in the Monday post, we have been very happy with GroundFloorSV and the Pacific Business Centers in Cupertino and Sunnyvale for the majority of our meetings. The Silicon Valley startup ecosystem will definitely benefit from Hacker Dojo’s continued operation and even from a few more co-working facilities in the South Bay. My sincere hope is that GroundFloorSV finds a new location in the South Bay.

Having spaces that can foster technical entrepreneurial communities with flexible short term commitments for co-working, meeting room, and classrooms seems to me to be one of the elements necessary for a thriving entrepreneurial ecosystem. It’s the equivalent to cloud computing as a computing infrastructure for early stage startups.

Related: Feb-08-2012 “New Co-Working Space in Santa Clara: Ground Floor Silicon Valley

Updated Jan-30 to remove links to as the domain has gone dark.

Hacker Dojo Relocates To 599 Fairchild in Mountain View

Written by Sean Murphy. Posted in First Office

Hacker Dojo announced today that they are moving to a new home at 599 Fairchild Drive in Mountain View from their problematic location at 140A South Whisman Road in Mountain View.

Hacker Dojo has found a new home, just 5 minutes away from our current location. The new building is bigger, better, and we’re excited to open this new chapter of Dojo history. We are making our existing spaces available for lease.

We signed a lease on Monday, October 15, 2012, but there is a 10-day window whereby the master landlord must approve the deal. It may take until October 25th to know if the deal is guaranteed.

If the master landlord approves them as a tenant it will open a new chapter for the co-working and hacker community. center. We have been very happy with GroundFloorSV and the Pacific Business Centers in Cupertino and Sunnyvale for the majority of our meetings, but the Silicon Valley startup ecosystem will definitely benefit from Hacker Dojo’s continued operation and new startups would benefit from a few more co-working facilities in the South Bay.


New Co-Working Space in Santa Clara: Ground Floor Silicon Valley

Written by Sean Murphy. Posted in First Office

Max Bloom and Peter Bloom–yes they are brothers–have opened a new co-working space in Santa Clara called “Ground Floor Silicon Valley.” The 15,000 square foot facility is located at 2030 Duane Avenue, Santa Clara, CA 95054

It’s an interesting facility that has only been open a few weeks.  The facility  includes about 4,000 square feet of warehouse space that the brothers are interesting in making available to e-commerce companies. From their description:

Ground Floor offers independent professionals, entrepreneurs and small companies open floor plan workspaces, conference rooms, private offices and a training classroom, all with fast Internet connectivity and access to networked copy, printing and scanning-to-email services. In addition, resident businesses can store, ship and receive physical goods in our attached warehouse.

We are interested in holding workshops and some new larger scale events in the facility. We may experiment with a Saturday morning Bootstrappers Breakfast there as well. We remain deleted with the support and amenities that Pacific Business Centers and the Moorpark Hotel have provided us for small classrooms and meeting rooms and will continue to rely on both for private meetings and private workshops. But this new spaces offers us new possibilities that we plan to explore in 2012.  It would be a great place to hold a technology focused Meetup in the South Bay.

The only two other co-working facilities I am aware of in the South Bay are

Tools for Finding a Physical Workspace: Deskwanted, LiquidSpace, Loosecubes, OpenDesks

Written by Sean Murphy. Posted in Consulting Business, First Office, Silicon Valley, Startups

If you are looking to rent a desk or conference room by the hour, day, week or month here are four tools you can use to search. All of them cover Silicon Valley and other metropolitan regions as well

Updated: Also consider Evenues and Cloud Virtual Office, see below for details.

Implications for the  future of startups and small service firms:

  • It’s interesting that same forces that are making fractional leases on computing capability available in the cloud seem to be at work enabling the ad hoc provisioning of workspaces.
  • Coupled with the pervasive availability of wifi in coffee shops and eating establishments and transition to laptops or even smaller form factor tablets and smartphones for computing support,  the old assumptions that an incubator provided value offering office space, Internet connectivity, and space in a co-located datacenter are defunct.
  • For startups with less than a dozen people, both their computing and physical office configurations are becoming increasingly virtual.

I think this will enable new opportunities for firms to provide professional services, knowledge work, and clerical support in a variety of new forms and delivery modes by interacting either in virtual on-line spaces and/or virtual office space on demand.

Update Thu-Feb-09
: A commenter suggests also provides information about meeting rooms and event venues. I took a quick look at the site for Meeting Rooms San Jose and learned about a number of new venues to consider. The site also had an interesting blog post on “A Brief History of Coffee Houses as Meeting Places” which reminded me of this RSA video of Steve Johnson on “Where Good Ideas Come From.” In it he explains that coffee houses were one of the first co-working establishments that allowed people to mix and recombine different thoughts to form new ideas.

Update Fri-Feb-10: I came across Cloud Virtual Office (tagline “Virtual Offices & Touchdown Space”) researching “Going Bedouin” a term coined by Greg Olsen that I had written about previously on “Bootstrapping Startups: Bedouin, Global, Incessant, and Transparent” Related blog posts:

  • the original blog post by Greg Olsen is no longer available but a copy that admits an image that contained his recipe for a Bedouin startup is still up at “Going Bedouin” on GigaOm
  • The Long Hallway” by Jonathan Follett

Update Mon-Apr-2 a reader suggested DesksNear.Me as another tool for this list.

B.V. Jagdeesh on “Startup Leadership Lessons Learned”

Written by Sean Murphy. Posted in 4 Finding your Niche, Events, First Office, Founder Story

Mr. B.V. Jagadeesh gave a great talk on “Lessons Learned Starting, Leading, and Succeeding at Multiple Startups” tonight at the GITPRO meeting.  Mr. Jagadeesh co-founded Fouress (a bootstrapped consulting firm), co-founded Exodus Communications, was CEO at NetScalar (and stayed on after  its acquisition by Citrix as a VP/GM),  was  president and CEO of 3Leaf Systems, and is today  president and CEO of Virtela.  He is an accomplished entrepreneur (more details on LinkedIn and CrunchBase) and he gave a very candid talk on his entrepreneurial journey starting with his arrival in the United States in the early 1980’s to work at Novell.

I have had the privilege of hearing experienced entrepreneurs talk about lessons learned but it’s normally been a small group, a half dozen or dozen folks in a conference room or 15 or 20 around a Bootstrappers Breakfast table. This had that same sense of practical candor but there were perhaps a hundred to a hundred and twenty folks in the Oak Room.  It was a candid an insightful talk punctuated by frequent questions from the audience.  What follows are a few stories that I thought had a particular emotional resonance with the early stages of a startup.

He came from a family of teachers and professors of modest means. They were delighted when he graduated with bachelors degree in engineering and went to Bombay to earn a Masters degree. When he  was able to get a job in America it was unprecedented success. His new job allowed him to buy a used car which was one of the first owned by his family.

This made for a difficult phone call when he called his father to tell him he was going to quit his job to start a company. He had tried to work on it on the side with his future co-founder but came to understand if it was going to move forward he would have to focus on it.

“How much will this new job pay?” his father asked.

“It’s a startup, once we get clients I will be able to make some money” was Mr. Jagadeesh’s answer.

Needless to say his family thought he was making a mistake, but his calculation was that he had enough money saved to live simply for a year, he would pursue his dream of his own company and if it didn’t work out he would go back to being an engineer for a while.

Exodus went on to spearhead the concept of offsite co-location datacenters, changing the model from on-site data center served by an ISP. It enabled a number of companies large and small to establish a significant presence on the Internet.

His tenure at NetScalar saw the company narrowly avoid shutdown and go on to establish a  new paradigm for Internet connectivity management. He had to prepare two speeches for the employees, one where he announced that the company was getting shut down, and one where they announced  new round of funding (from Sequoia as it turns out). He was able to give the second speech and returned 8x to Sequoia when Citrix acquired NetScalar two and half years later.

He had to give the other speech a few years later as CEO of 3Leaf Systems when a key ASIC needed another spin and he was not able to convince investors to help. His point was that in both cases you had to prepare for the likely outcomes and take responsibility as CEO for what happens, doing the best that you can for your employees and investors.

One theme he stressed repeatedly was the need to impose the discipline on yourself and your team to prepare and act with the professionalism that your competitors are going to bring to the market. He talked about one team that he is advising that has met with some initial success. They realized that treating their offices as dorm rooms had been OK when there were a few founders, but now that they were growing and had two dozen  employees they needed to establish a more professional tone–without spending a lot of money. So they spent a few thousand dollars at IKEA and held furniture assembly parties. The new look changed both internal attitudes toward the workplace and those of  customers and potential investors who visited their offices.

He talked about volunteering to help the IEEE Silicon Valley put on events and conferences while he was still working at Novell. They met more than two decades ago in the Oak Room where he was speaking tonight .  By volunteering to find speakers he was able to have conversations with managers and executives at many companies that allowed him to develop a network that helped out as he was growing Exodus and NetScalar.  He felt a sense a coming full circle: he was now the invited speaker in the same room where he first started out as a volunteer.

It was a candid and reflective talk, Mr. Jagadeesh not only offered a wealth  of practical advice, answering a number of very good questions,  but he also communicated a fundamental sense of what it means to be a CEO: you need to take action and take responsibility for outcome of your actions.

New Firms in Silicon Valley

Written by Sean Murphy. Posted in First Office, skmurphy

Companies names have sure changed in the last year or so. I was noticing today how many signs outside of office buildings seem to be branch offices for these firms:

  • Move In Now
  • First Month Free
  • Your Name Here
  • Available for Lease
  • Space for Rent

Here are two directories that list available office space for Silicon Valley:

We use Pacific Business Centers and have been happy with them.

First Office: Arwen Funk, Real Estate Broker

Written by Francis Adanza. Posted in First Office

In earlier interviews Frank Bailey and Ed Correia each recommended using a broker as the most effective approach to finding an office. So I called Arwen Funk, a commercial and residential broker, to get some background. Arwen pointed out some potential land mines in leasing contracts such as property tax protection, methods of pass-throughs, and options to grow or adjust their office space. The Q&A that follows is an edited transcript of our call.

Q: Why do firms hire a commercial real estate broker?

There are a number of pitfalls in the leasing process; renting an office is not a cut-and-dry process. There is a lot of paperwork, sometimes with land mines you can run into from a leasing perspective. It can really help to someone who understands the process and helps you to prepare, explaining issues as you go and often alerting you to the implications of a situation. You should keep in mind, more often than not, it’s the landlord who pays the commission: so finding yourself a representative is normally effectively free. But even when you pay the commission, the up-front expense is normally worth it relative to how much an experienced broker can save you in unexpected costs. When you do it yourself, the three areas you can often get caught on are: property tax protection, reimbursements of operating expenses, and planning for their future.

Q: How are property taxes a risk area?

In the state of California, any property–commercial or residential–is assessed property taxes by its county government. When Proposition 13 passed in 1978, it limited California property taxes to no more than 1% of the assessed value at the time it was purchased, with increases no more than 2% annually. The assessed value is not necessarily the purchase price: people sometimes overpay or underpay, so each county has the authority to reassess for tax purposes if it believes that market value was not paid. In addition to the base property tax of 1% of assessed value, there are usually several bonds and assessments that are also on a property tax bill. These additional fees fund school districts, street work, sewer systems and other local public items. They all add a little bit to your property taxes, but it’s very rare for someone’s total property tax to be more than about 1.25%, normally it’s around 1.15%. As long as the same owner owns the property, the property tax can only go up by a maximum of 2% every year.

If you are a tenant in a building that is sold to a new landlord, however; property taxes get adjusted to a new baseline and this higher cost is passed through to all tenants in the form of expense reimbursements. Assume your landlord bought the property twenty years ago and has only had a 2% increase ever year since. The property taxes are low but the property’s value may have quadrupled in that time. When you started to rent, your property tax expense reimbursement was quite small. It’s a proportional share of the landlord’s total tax bill based on how much of the total property you actually occupy. When the property sells for four times what the original landlord paid for it, this resets the assessed value and the new owner’s property taxes, and therefore your proportional share, will increase significantly.

A broker can help negotiate “Prop 13 protection” for you as a tenant. This protection allows you to set your property tax amount so that you only have to reimburse the landlord at a certain base level, usually the price when you first leased the space. This way no matter how many times the property is sold or how much people paid for it, you will never pay more than the negotiated baseline, plus the 2% increase every year, for the term of your original lease. If the property is sold, the new owner absorbs the expense of those new property taxes. Thus, new tenants that sign after the property sells will probably pay more in property taxes whereas you will be locked in at the contract rate.

Q: Can you explain about reimbursement of operating expenses?

Normally when you need an office you will look at a variety of different spaces on the market that might fit your size requirements. These spaces will be offered for varying lease rates and the rates quoted will either have a letter “G” after the amount, or they will have an “N” or sometimes three N’s. The “G” is for gross and the “N” is for net. Three N’s stands for triple net, but it’s really a net lease, just a finer distinction. In a gross lease, the rate quoted is the gross amount, which means it is the base rent plus the reimbursements (also known as pass-throughs) for all the expenses the tenants owe to the landlord such as electricity, water, property taxes, insurance, common area maintenance, and more. You will not get other bills for other things from your landlord under a gross lease. A net lease, conversely, has these expense items invoiced separately. The rate quoted in a net lease will be the base rent amount only then the tenants will receive a separate bill for all of the expense reimbursements. A broker can help you understand what you are agreeing to as a tenant and get the best deal possible.

Another aspect of expense reimbursement is understanding the pro rata calculation (the portion the tenant leases in relation to the total building space). For example, assume your office is in a 5,000 square foot building, and you’re a tenant using 1,000 square feet. Therefore you use 20% of the pro rata square footage of the building. Subsequently, you will probably be asked to reimburse the landlord for 20% of the electrical that’s used for common areas. Depending on how a property is setup, the tenant might contract with PG&E directly. The important thing to remember is that nothing is free.

Q: What should I look out for in terms of planning for the future?

If you’re in a startup with three people you may only need a small space, say 500 square feet. It is wise to build in some kind of growth pattern for at least the next lease term. For example, you lease a space for $1.00 per square foot, and you lease it for two years. Right next door to you is suite that would be a perfect configuration if you needed to grow and add one or two people – you could simply knock out a wall and add it to your suite. When you negotiate your lease, request if that space next door becomes available during your current lease term, you want to lease it for the same rate that you pay on our current space. More so, you could negotiate for an option to extend the lease on both spaces when those two years come up.

Other ways to protect your costs for future could be to negotiate lease extensions with fixed lease rates (rather than risking paying the higher market rate when the time comes). Or to negotiate for the Right of First Refusal to Lease on other spaces that come available in the same building. Some tenants who plan for big success even negotiate options to purchase a property if the landlord ever wants to sell. Obviously, these options are all key to the future success of small businesses to allow them to plan appropriately for growth.

Q: So a tenant can negotiate to keep future costs down over certain period of time?

Absolutely! As in any industry, a layperson doesn’t know all of the possibilities–that’s why whole industries of “experts” are born! Somewhat who is not very familiar with real estate won’t know to ask for protections in the form of future options. If you own and operate a startup, you’re probably more concerned about operating your business than spending time learning real estate 101. Your worries more likely include funding, market timing, delivery, fulfillment, employees, customers, etc. You assume the business will take off, need ramping up, and ultimately be successful. Well, what do you do if you have signed a five-year lease, but you’ve only got a thousand square feet, and suddenly you are busting at the seams? Now you need more space, but rents have gone up so much that now you are competing with every other tenant in the world who comes up for that space just next door to you in your multi-tenant building. You are stuck and with leasing rates rising (theoretically) you won’t be able to grow without a large increase in your overhead which may stunt your growth. Now is when you’ll wish you’d had a broker who had negotiated some options for you to grow, move, etc. There are a lot of ways to anticipate and negotiate for future needs, the important thing to remember is that almost anything that you can imagine doing in leasing has been done at some point and a skilled representative will help you be prepared.

A good agent will know how to write options for extensions, refusals, expansions, and Prop 13 protection in your original lease.

Q: Founders are often starved for time, how much time would you normally would save a first time tenant?

Hiring a commercial real estate broker will save a newcomer dozens of hours–and headaches–depending on the situation. But I believe that the hours are not the main savings. Hiring an expert in any field is not just about the actual hours that are required to do the job, it’s also the years of experience that allow an expert to do it properly!

When hiring an expert it can be hard to understand what to ask for and what to expect. One way to mitigate the risk is to meet with the person and make sure they have a very clear understanding of what you need. A good broker will go out and do most of the leg work for you. All you need to do is look at a couple of spaces that your broker will have selected for you based on your needs and see which one you think is going to work best. Then listen to your representative’s assessments. They should be able to assess the type of owner of a particular building; is the landlord someone you could work with? Your agent can speak with other tenants on your behalf for feedback or aid you in those interviews. How are they in the negotiations; are they cutthroat or are they pretty easy to work with? Most properties have different people negotiate the leases and manage the property.

Frank Bailey, Sales VP at RTDA, on First Office Experiences

Written by Francis Adanza. Posted in First Office

Today Sean and I sat down with Frank Bailey, VP of Sales from Runtime Design Automation. RTDA offers automation tools that manage all design resources such as licenses and CPU’s in order to streamline workflow. RTDA products track all licenses in your network, capture all jobs in your project, and automatically dispatch the jobs in the farm, all with one-click simplicity.

Q: I understand that you have had to change offices three times. Can you share a little about your first experience in finding an office?

Well, when Andrea and I first started the business, we were each working out of our homes. Andrea lived in the east bay and I lived in Mountain View. I cannot speak for Andrea, but I did not find this effective because of the distractions from television, the telephone, and the ability to run errands at will.

You could say that our first office kind of found us. One of our early customers, Exemplar Logic, was nice enough to give us space in their facility. Located in Alameda, we utilized the free space for eight months until they were acquired by Mentor Graphics. After the acquisition, we were forced to move out. It was not until this point that we actually had to find a place.

Q: What were your three primary concerns in finding the right first office?

  1. We wanted to be close to our customers and prospects. We spend a significant amount of time on the customers premises.
  2. We wanted something that had conference rooms. By this time we had hired a couple of employees. Not all conversations should be heard, so we wanted something with private meeting rooms.
  3. Finally, we wanted something that was near places where you could get a quick bite to eat. We basically lived at the office so being able to get something that tastes good, but not unhealthy was an issue.

Q: How did you get started when you began searching for an office?

I pulled out a map and drew a perimeter from San Jose to Mountain View and tried to find a place that was central to our customers, accessible from various directions, and easy to find from the street. We found a place on Apollo Way in Sunnyvale. This was a great location because it intersected Central Expressway and Lawrence. It was also close to 101. In 1995 this was the heart of the Valley.

We were there for about three years before the property was acquired by another company. The acquiring company raised the rent, so we moved to a place in Fremont which was about half the price. What we at first anticipated was a bargain on space turned out to be a disaster. Our office building was right next to a probation office building who we shared the same parking lot. It seemed like there were always questionable people hanging around the lot. Often, strange people would walk in and out of our building in search for the probation building. We only had a few theft incidents, but there were several vandalized cars. This office did not have conference rooms so it made meetings with visitors difficult. I observed that our visitors were hesitant to speak out, since they were not sure who was listening. Another problem of being in Fremont was dealing with heavy traffic on 880. It took at least an hour to get to San Jose to visit a customer and an hour back to return to the office.

Q: How did you measure or asses the quality of the office?

We compared a lot of offices before we settled on one. We basically looked at the image of the facility compared to the price. By image, I am referring to the neighborhood, the condition of the building, the common areas, and the amount of outside noise.

Q: Do you have any words of advice or things to look out for that people might over look?

Be careful of who your neighbors are and what types of businesses they are in. One of the businesses in the complex was a delivery service. They took up about a dozen parking spaces with their delivery vans. I would also stay away from sub leasing. We had an issue where we were sub leasing from a guy for six months. Turned out that this guy disappeared and never paid the property manager the entire time of our lease. We were not held liable, but the paper hassles and police reports were time consuming.

Make sure you have a separate machine room. Servers are extremely noisy and radiate a lot of heat. You want a separate room where you can set up a cooling system and keep all the noise regulated. I also recommend a place for miscellaneous stuff. Otherwise your office will look messy and cluttered.

I would recommend using a broker. I found a broker who I used for the next two office relocations. I much rather let an expert deal with all the fine line paperwork. This lets me concentrate on business objectives instead of worrying about none strategic busy work. A good broker will catch liability insurances, and other contract requirements that fluctuate from place to place. I recommend Jeff Rogers from Colliers International.

How much was the cost of the move? How long did it take for you to become operational?

There were five people in the company in Silicon Valley: with furniture, setting up the IT infrastructure, and paying movers, the total cost was $10,000. I would say we were fully operational in about four to six weeks.

Where did you buy your furniture?

I went to Repo Depo. People think they save money by purchasing the low end stuff at Office Depot. However, I think even though that furniture may be brand new, it can break down before the well built high end items you can get second hand.

First Office: Ed Correia, Sagacent Technologies CEO

Written by Francis Adanza. Posted in First Office

For my third post in the “First office” series, I wanted to learn about alternative office options to incubators. Earlier this month I sat down with Ed Correia, founder of Sagacent Technologies, to learn about his experience in finding the right first office.

Sagacent Technologies specializes in business technology management services. Clients benefit from highly skilled professional service resources utilizing a proven methodology for assessing challenging IT environments or implementing complex technical solutions. Sagacent Solutions are carefully tailored to meet the specific business needs with strategic and farsighted planning. Below are the question and answers from our conversation.

Q: What were your three biggest concerns in finding the right office?

Location was the most important concern in finding the right office. We wanted something that was central to our current client base and close to our target market. One of the things that differentiates us from some other IT management firms is that we not only do remote monitoring but our staff spends most of the time in the field at different customer locations. Driving time for my employees and heavy traffic hours was definitely an issue. We are not a store, so being close to the road or in a strip mall was irrelevant. The look of the building and the surrounding location was the second biggest concern. I did not want to be in a run down building or in a questionable neighborhood. We wanted something that was aesthetically appealing and in a professional office space so that we didn’t undercut our credibility. I would say our third biggest concern was security.

Q: In terms of getting started, when you made the decision to move, what was the first thing you did?

I called a broker from California Properties and then developed a map of Silicon Valley. The broker and I figured out where our current customers were located and then determined where our target prospects are located. Then we outlined a tight circle of locations that would suit our needs. We looked at 20 properties before I decided on the ideal office place and location.

Q: How did you measure or assess the quality of the office?

I looked at the facility to see how well it was maintained. Then I spoke with some of the other tenants to understand their impressions of the place. Finally, did I like the building manager? Was this someone I could work with?

Q: How long did the whole process take from making th first call to moving in and being functional?

It took about a month and a half to see all the properties and then another month in a half to move the essentials over to become fully operational. However, the place was a mess and was not presentable to visitors. It took a total of 6 months to paint, gather furniture, and organize everything before we invited people to our headquarters.

Q: How big an expense was furniture for you? Did you find a store or other source for good used furniture?

We put the word and were surprised at the number of people who had a surplus chairs, tables, or desks they were happy to part with if we would do the hauling. We spent hardly any money on furniture as a result.

Q: Was this a frustrating search? At one point you thought you had found a good location but the deal fell through.

We knew it was a big decision for us so I wouldn’t say that it was frustrating. At one point we had signed a contract and I thought we were done. I took a few days off for vacation with my wife to celebrate and when I came back our prospective landlord had left a message that they had gotten a better offer and were rescinding our deal. So at that point I realized I wasn’t just picking an office, I needed to take a harder look at the landlord. I had been looking at a lot of “objective measures” of the office, but that experience made me realize that leasing an office is the start of multi-year relationship with your landlord. And you want to select one who will be a good business partner whatever happens to your business.

Q: Even with a surplus of office space you were surprised that a number of landlords didn’t want your business?

Yes, I was shocked that IT firms have a bad reputation among landlords. I don’t know if it’s lingering fallout from the dotcom crash but several times they would immediately lose interest in working with us when I described the basics of our business.

Q: What were the three biggest surprises you discovered in your search or after you moved in?

The biggest surprise was the amount of paper work involved in negotiating the lease. There are all kinds of hidden fees and tenant responsibilities in the contract. I recommend that you have your attorney read over the contract for you. The next surprise was the poor quality of building’s DSL line. We ended up having to install our own T1 line. The third surprise was being able to rent more space. Our business doubled less than a year after the move. We are already looking to rent an additional 1000 sq ft. Our property manager has been great in helping us plan for the expansion.

Q: What has the impact of the office been on your business?

I have been pleased at how our getting an office has allowed us to communicate our professional approach. We have always been committed to our customers in the way that we do assessments, in our thorough proposals, and our contracts. But for many prospects who have visited us in the office, it’s been another proof point in their minds that we are committed to the business and are growing. We have also done a number of open house events that have made new prospects aware of our services and let our current customers come by and give us informal feedback.

Update Feb-29-2008: Ed Correia was profiled in a San Jose Business Journal article “Sagacent Grows by Helping Small Business Avoid IT Woes.

John Holton of Symphony Consulting on Business Incubators

Written by Francis Adanza. Posted in First Office

Following up on my “Silicon Valley Incubators” post in the “First Office” series I wanted to get a tenant’s perspective on the the advantages and drawbacks of locating in a business incubator.

Symphony Consulting is a manufacturing outsourcing, procurement, and supply chain consulting firm that helps original equipment manufacturers and their supply chain partners in three key areas: revenue, assets, profitability. I talked with John Holton, co founder of Symphony Consulting, about his experience of finding his first office after looking at a number of Silicon Valley business incubators. Below are the questions and answers from our short discussion.

Q: What were your three biggest concerns in finding the right office?
A: Our three biggest concerns were location, IT infrastructure, and professional appearance. We wanted something that was easily accessible by major highways and close to our clients (technology companies). IT infrastructure is expensive, so the incubator system was an attractive proposition. We also wanted a place that looked professional. Plug and Play has a professional appearance from the outside and great facilities inside.

Q: What were three things that surprised you after choosing your office space?
A: There are about a hundred companies in this incubator so I appreciate the amount of energy from other entrepreneurs in the building. However, I must admit, the noise from the other people can sometimes be distracting. I knew I would be more productive in a regular office setting but I was surprised by how much more I can focus on tasks important to my business.

Q: What specific benefits does your office leaser offer as a part of their service?
A: Plug and Play Tech Center has really nice conference rooms, cafeteria with good food, and 24 hour coffee. The administrative assistants and staff are helpful. The cubicles come furnished with desks and chairs. Finally, there is plenty of parking.

Q: How do you measure or assess the quality of the facilities you looked at?
A: Basically, we just judged the place by the location, the appearance of the building and its interior, and the amenities it offered.

Q: Is there anything else you would like to comment on or make suggestions to others looking for their first office?
A: I think it was a good investment. It makes the business seem more professional and credible. I also think it makes me more disciplined and productive.

First Office: Silicon Valley Business Incubators

Written by Francis Adanza. Posted in First Office

This is the first in a series of blog posts on where a start-up team might look for their first office. One of the first types of office space to consider would be space in a business incubator.

A business incubator is comprised of multiple businesses operating independently within one location or under a membership group. The objective of the incubator is to help its businesses get started and grow. Incubators offer services that can help entrepreneurs overcome a wide range of obstacles by reducing startup costs with a shared system of support and resources. Most incubators offer shared office space, utilities, and services that create a unique environment for new businesses to grow. Incubators are known for helping startups lower overhead costs, create networking opportunities, and increase the chances of survival.

Tenants in business incubators share overhead costs such as utilities, office equipment, IT support, conference rooms, laboratories, and receptionist services. Additionally, basic rent costs are usually below the normal market value for the area. Often, incubator managers and staff members provide insightful advice on a broad spectrum of issues including, business development, market research, strategy, and fund-raising. Jim Robbins, Director of the Environmental Business Cluster believes, “founders are surprised to learn that they can get startup services for no more than the cost of space, furnished units, strategic planning advice, and free common areas like conference rooms.”

With the desire to create an entrepreneurial environment, some incubators host a variety of events that cater to both their internal members and external community. Plug and Play Tech Center, one Silicon Valleys largest incubators, is well known for hosting conferences and entrepreneurial events. Some of their past conferences and events include the TechDirt Greenhouse, ANZA Technology Conference, Web 2.0 Expo, and monthly workshops like the SVASE Startup-U and VC pitch sessions. As a frequent attendee of these conferences, I appreciate the opportunities to meet other entrepreneurs, keep in tune with new technologies, and learn from distinguished guest speakers.

There are many factors involved in transforming an idea into a marketable product. Besides the significant technological challenges, building and operating a business is very complicated. The Small Business Administration reports that over 80 percent of businesses fail in their first five years. However, the National Business Incubation Association claims that 87 percent of businesses that graduate from an incubator program are still in business after five years. Since access to other startups, management professionals, executive mentors, and expert consultants are so readily available, it makes it easier for incubator tenants to fill gaps in their business.

If you are considering a business incubator you should make sure that your firm’s focus is aligned with the incubator’s mission and then schedule an appointment with the director. Most incubators have initial requirements before incubation consideration. Some incubators are industry focused and only cater to certain segments like Biotech, Cleantech, Software, and Semiconductor. Like investors–and remember many of these organizations will ask for equity–directors want to meet with the entire management team and see several written plans like marketing, financial, and product roadmap. Evan Epstein, Chief Operating Officer (Silicon Valley) for the Girvan Institute of Technology says, “It helps to be referenced in from someone within our network.”

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