Do Startups REALLY Cost More to Scale?

Thomasz Tunguz just published a blog post where he outlines same data that claims:

“It’s becoming more and more expensive to scale a startup in San Francisco. In fact, it’s twice as costly to operate a startup in 2014 as it was in 2009.”

(emphasis mine)

While I agree with the first half of this statement, the second part is what feels a bit deceiving to me.

As evidence, Thomasz reports that office rents have more than doubled from $36/sq. foot to $63. OK, that I get. But office rents are only account for about 5% of the cost of running a startup.

Where things get murky for me is with this graph:

Followed by this little tidbit:

“Wages include salary, benefits, stock options and perks.”

Stock options…

My issue with this piece is that it doesn’t go deep enough. For example, here’s a graph from Pitchbook’s Annual VC Valuations Trends Report:

From 2009 to 2014 Series A valuations (the stage Thomasz’s post focuses on) have doubled. So if you were given a stock option grant for 1% of a company in 2014, it’s like getting 2% in a company in 2009.

Here’s what I’d really like to know: What percentage of this increase in cost is actually due to overinflated startup valuations?

According to this article, senior software engineer salaries in San Francisco have grown at a CAGR of 2.7% from 2009 to 2013. That’s a far cry from the 15% CAGR in Thomasz’s article. So it’s pretty clear that this 100% increase in cost of running a startup surely isn’t coming from a massive increase in base salary.

I’m not disagreeing that the cost of running a startup has doubled. Stock option grants are surely classified as costs.

But I do find it misleading to not actually address the main driver of this cost increase. Most people would read this and think salaries have gone up 2x. That’s not at all the case.

Instead, employees have been given more stock options that, on paper, are worth much more than they used to be. The question is, how much are they actually worth an an environment of overfunding, inflated valuations, and companies operating with negative gross margins?

My bet is the cost of running a startup today really isn’t that much different than it was in 2009 when you account for the massive appreciation in valuations.