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Assuming a venture-backed startup with seed financing that plans to raise further rounds: does it make sense to buy things or should it go for renting/leasing?

"Renting" something (office equipment, computers, cloud servers, Adobe Photoshop) for a fundraising period of 12-18 month is usually cheaper than buying it, which gives the company a better cash flow. The money will last longer, which should help to increase the valuation for the next round.

Additionally, investors want the company to create value instead of owning fixed assets.

When should a startup buy and when should it rent?

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2 Answers

up vote 4 down vote accepted

Great question.

A good rule of thumb for any business is to buy stuff ONLY if:

  1. The purchase is a component part of your product or service offering (i.e. you need cars to offer car rental service; you need servers to offer hosting services)
  2. The purchase adds a long term value to the company

For example, Mc Donalds buys most of it's locations because they are an essential component part of their offering, and because the number of stores and locations they own directly contributes to the long term value of the company - even if they go out of business, the locations will still be worth a fortune.

On the other hand, tech startups have no long-term value from such purchases; all things being equal, fixed assets in a tech startup make no difference if the business fails.

Having said that, things aren't always that simple and every business has its perks.

The bottom line is to carefully think whether owning stuff will make you stronger and more competitive, or renting will do just as good.

Good luck.

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up vote 1 down vote

Defiantly rent everything you can while your getting started. The less fixed costs you need for starting up the less equity you have to give to investors.

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