More Startups are Leasing Office Space

The percentage of venture-backed startups renting office space has risen sharply – but the share of their overall expenses that they pay in rent on average has fallen by more than half, from 7% to 3%.

That’s the finding of an analysis by Kruze Consulting, a San Francisco-based CPA and finance consulting firm for VC-backed startups.

As of December 2022, 59% of the 750 companies studied were renting office space — not too far off the 65% share in January 2020, and well above the 36% that did so at the start of 2021. However, the share of rent as a percentage of their overall costs consistently declined during the Covid pandemic.

While the decline in the real estate market contributed to this decline, Kruze said it was clear that many start-ups were adopting “hybrid/partly-remote models that require a much smaller office footprint.”

However, there was a divergence in how companies operate based on where the companies are headquartered.  “Startups in New York are allocating 3.4% of their expenses to rent, 50% higher than startups in San Francisco at 2.2%,” the report stated. “In particular, startups in San Francisco appear to be aggressively spending less on rent, per capita, than their counterparts in other parts of the country” – and even in other parts of California. The data indicate that startups in New York are more likely to adopt a back-to-office culture.

There are some advantages for startups in having a remote workforce, noted Healy Jones, Kruze’s vice president of financial strategy. These include the ability to hire the best candidates no matter where they live, pay less, and save on cash burn with lower office expenses.

In addition, Jones found that fully remote startups grew at about 2.7 times the rate of those with offices.

Still, there’s no one size fits all. Instead, company founders should manage their company the way that feels best to them for their business model, management style, and culture, Jones advised.