Office Rent as Sign of Startup Spendthrift

Semil has a great transcript on his blog from StrictlyVC’s most recent event titled @Semil Fireside Chat w/ @Chamath StrictlyVC Insider Series. One of the topics of conversation was around quality of office space and rent as a percentage of burn rate, especially for the spendthrifts out there.

Here are a few choice quotes from Chamath:

Now it’s fine to fail, and in fact it’s great to fail, but if you fail because you didn’t have the courage to move to Oakland, and instead you burn 30% of your cash on Kind bars in the office and exposed brick walls?

The company builders are just cheap, they’re just grimy, and just, sh**ty office space, and they’ve got to keep it under 8 or 9% of their total burn, and they find people who really really believe in the thing they’re making, and they decide to just live in Oakland and pay for Lyft, and it’s still cheaper.

If we went and built one million square feet somewhere of mixed-use work and live, and we completely conceptualized what it means to have a modular living environment for a millennial cohort of like… We can do that in a way, and give that back to our CEOs, as a benefit of working with us.

This is something I’ve spent a good bit of time thinking about in the context of Atlanta and the Atlanta Tech Village. Of course, Atlanta isn’t anywhere near as expensive as the Bay Area across all dimensions, but if everything is linearly cheaper, office space as a percentage of burn rate should be consistent across geographies.

Let’s say you’re an 8-person startup that’s raised a seed round of $1 million and have low six figures revenue, here’s what the math might look like:

  • $100k/year or $8.3k/month average fully burdened cost for an employee (salary, benefits, etc.) for a seed-stage employee with good equity
  • $66.4k/month for eight employees
  • $2.7k/month for an 8-person office at the Tech Village
  • Assume modest revenue offsets basic expenses like legal, accounting, hosting, software tools, etc.
  • 2.7/(66.4 + 2.7) = 4% of burn rate towards office rent, internet access, Friday lunches, snacks, video games, and other startup-y perks

Based on these simplistic calculations, office space as a percent of burn should be minimal in places like Atlanta. Also, by owning the office building, costs are potentially contained going forward (the goal was to increase entrepreneurial density and community, not contain costs).

What else? What are some more thoughts on office rent as a sign of startup spendthrifts?

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