Venture fundraising and landlords (pt.1)

Early stage venture investors have long complained that a good portion of their dollars were likely going straight to Google or Facebook, in advertising spend — the below tweet got me thinking:

Instinctively, this seems about right but let’s dig a bit deeper into this.

Let’s take an upper quartile NYC seed stage company, with 8 employees. Now, let’s imagine that they are using a co-working space and renting/living in the surrounding boroughs. They’ve just raised a $1.5m seed round from some awesome investors. Great! But how much of that capital is going to be flowing back into the hands of landlords?

Office space:

As per WeWork — probably the closest thing to a startup desk space price index as we can get — an average desk in NYC is $943, let’s call it $900 per head:

8 x 900 x 12 = $86,400 per annum on office space

Rent:

The New York average tech worker salary is $118,600 (per NAICS data)

We can expect they spend approximately 30% of their pre-tax salary on monthly rent

Average monthly rent = $118,600 x 30% = $2965

Yearly rent costs for an 8 person seed company = $2965 x 8 x 12 = $284,640

Total:

the formula is: (total employee rent +total office space) / funding round

(284,640 + 86,400) / 1,500,000 = 25%

If we look at this on an annualized basis, assuming an 18 month runway post their capital raise

(284,640 + 86,400) / 1,000,000 = 37%

So to Jason’s post and Mr Thiel’s view; it may not be a majority but it’s likely to be a significant chunk, let’s say between a quarter and a third. That is significant and at the minute, it’s only really co-working providers who are actively capturing this value —though most are shifting towards to enterprise clients.

In my follow up post I’d like to further explore opportunities in the space and what this means.

For all y’all that have been screwing your faces at the numbers I used. I put together an easy to use spreadsheet if you want to put in your own numbers: http://bit.ly/2FWqsnU