In the past couple weeks, two rising Bay Area entrepreneurs separately told me the same bizarre story about a new obstacle to raising capital: ‘traditional’ investors are reluctant to support a venture lacking a physical office.
Those investors must think a physical address is a status symbol of sorts, an essential tool to foster the teamwork and hard work required to launch a new business.
The entrepreneurs couldn’t disagree more.
They argued – rather convincingly – that a physical office was expensive, inefficient, and wasteful: in terms of electricity, commuting, printer paper and bad coffee, to name a few.
What a sharp contrast to the streamlined virtual offices they run instead. The entrepreneurs argue that the start-up phase of the businesses is exactly the wrong time to take on avoidable expenses.
Fast forward to a somewhat better known story from Harvard Business Review’s blog about YES Bank, which has achieved startling impact by being successful in a previously unprofitable market: microfinance in India.
How does YES Bank do it? In short, they do more with less by minimizing overhead:
“Rather than managing its technology in-house it has outsourced it all; rather than reinventing the wheel, it taps a vast network of partners who offer specialized services… By leveraging an ecosystem of partners and the power of connectivity, Rana Kapoor believes his bank can cost-effectively deliver more financial value for even less cost to a much larger number of customers”
As a result, the bank earns 2% over its cost of lending, a 3 to 3.5% improvement over competing banks (which, by implication, typically operate at a loss).
This focus on network efficiencies got the bank over a small but persistent hurdle – offering competitive and attractive interest rates while still reaching financial sustainability – in order to deliver immense social value.
I believe this may be a future opportunity here in the U.S. as well as in developing economies: finding ways to launch previously unprofitable business models by tapping into this kind of networked, virtual business ecosystem.
[...] simply in industry norms. Many traditional investors look for a set of signals – including a physical office and, yes, large financial upside – in order to separate good investments from [...]