3 ms·

Startups Spend with Abandon, Flush with Capital

33 points by gdilla 12y ago

gdilla 12y ago
to get through the paywall https://www.google.ca/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=0CB8QqQIwAA&url=http%3A%2F%2Fonline.wsj.com%2Farticles%2Fstartups-spend-with-abandon-flush-with-capital-1412549853&ei=BfsxVLbOGIyyyAT_zoGIAg&usg=AFQjCNGgO75xaCrJxX5bmW0M4fwrO2UNzg&sig2=Q9Y2hvarL9OVTbmcbAabew&bvm=bv.76802529,d.aWw https://www.google.ca/url?sa=t&rct=j&q=&esrc=s&source=web&cd...
- timedoctor 12y ago
  That did not work it says you have to subscribe or log in
hemantv 12y ago
just search the title on google and than read to avoid the login thing.
7Figures2Commas 12y ago
> But increased interest rates or a sudden stock-market chill could slam on the brakes. ZIRP will end. The stock market will not continue to be an easy source of double-digit annual returns forever. The question is always timing, but anybody who is following the Fed and looking at the action in the market can tell you that we're closer to the end of the current environment than we are to the beginning. That doesn't necessarily mean a meltdown is coming (it's of course a real possibility), but even modest changes that inflict minimal pain overall could have significant implications for the startup scene. For all of the genuinely smart, successful people in the Bay Area, I'm constantly amazed at how few people here seem to be looking at how the broader environment has made the most recent boom possible. Mention ZIRP and the majority of people will ask "What do they do?" thinking ZIRP refers to a hot new startup. > More worrisome, Mr. Moeller says, are startups with small teams looking for massive spaces and locking themselves in to long leases. Startups are signing five- to seven-year leases on spaces that used to require two, and more landlords are pushing for 10-year leases on new construction. Those could become a burden if financing tightens. Generally speaking, the landlords are far savvier than the entrepreneurs they're leasing to. They're not pushing 10 year leases to help tenants lock in a good deal. > Mr. Altman says he met a few months ago with an entrepreneur who drove up in a new Porsche sport-utility vehicle. The man’s startup had completed a $10 million early round of financing the previous week. Mr. Altman says he looked at him sternly, asking him, “What message do you think you’re sending to the rest of the company?” The message the entrepreneur is sending to his employees is irrelevant. If there's anything of importance in this anecdote, it's what such behavior says about the mindset of some of the founders investors are lavishing with millions of dollars of investment.
- sshumaker 12y ago
  I'm not sure if the landlords are as savvy as you think. If the startup runs out of money, landlords will be the last in line at bankruptcy proceedings. It's hard to claim losses for the next 6 years of lease income when they can turn around and rent the space to a new tenant.
  - 7Figures2Commas 12y ago
    Are you suggesting that commercial landlords don't understand the risk of bankruptcy? First, not every startup is going to die. Second, you don't necessarily need your tenants to survive to capitalize on these leases. For example, leases affect a property's value. If you're looking to sell a building, having tenants locked into long-term leases at record or near-record rates is not going to hurt you. The landlords have been through booms and busts before and know more about the commercial real estate market than the entrepreneurs they are leasing to. That they're increasingly looking to lock in longer leases is a good clue as to where they think we are in the current cycle.
  - Animats 12y ago
    "I'm not sure if the landlords are as savvy as you think." Some of them are. Saeed Amidi, the rug dealer behind Medallion Rug Gallery in Palo Alto is famous for this. He demands some equity in startups leasing his properties. Google's first office was in his space. PayPal's first office was in his space above the bike shop. Facebook's first office too. Also Foursquare, Danger, and others not as successful. Amidi is now a venture capitalist, but he still has the rug stores. http://www.theguardian.com/technology/blog/2011/oct/14/welcome-to-silicon-valley-shuffle http://www.theguardian.com/technology/blog/2011/oct/14/welco...
hemantv 12y ago
Startup need to spend so much on other things because employees are not working 100% on making company a long term success. They are just doing yet another job. Reward employees with good amount of equity, so that everybody long term interests are aligned in success of the company. I don't see most startup giving meaningful equity, so they have to compensate with all of these perks and high salaries.
- Voodoo463 12y ago
  The first part of this statement sounds like speculation, and the second part sounds a bit like Voodoo logic, no pun intended. There are many factors that will attribute to an employees stock in the company, and I'm not just referring to 'company stock'. Equity is an entrepreneurs best friend, and as such should be treated little different than a savings account (Rarely touched: with exceptions of a rainy day, or if something exists that you REALLY REALLY want/need e.g. a specific Employee) as opposed to monopoly money, where it is spent till the original owner has none of it left. If the company starts to award every employee high yields of equity, it hinders an entrepreneurs ability to leverage the companies assets to possibly position it's longterm stability. This is why there exist so many 'perks and high salaries', and they work... for the most part. However, to imply that these perks and high salaries are falsely impacting an employees investment at a company for long term duration's seems a bit of a stretch without data points, perhaps Hacker News should strike up an Anonymous Poll to find out if such claims are true? I will speculate that for some it is nothing more than 'just another job', but for the right person, it can be the right job. Thus, perhaps the solution isn't necessarily in an excessive amount of equity, or bloated perks, or high salaries; perhaps the true solution is taking the time to find a candidate that isn't necessarily as skilled as they could be, but over compensates by possessing a fervor of desire? If that is indeed the appropriate conclusion; isn't that in other words what Y.Combinator is all about? The ability to find individuals in the most unliklyist of places with a will and a heart to attempt what may just lie out of their reach, helping them grasp what once was only the impossible? It is people like this that attribute towards a companies long term standing, and without them, fulfilling the founders end goal will be much more difficult.
- new299 12y ago
  I'd recommend paying the going rate for your staff in any case. Equity doesn't make up for a lower salary in my view. It makes up for the inherent risk in working in a startup (things might not go well and you might be out of a job in a year).
deleted 12y ago
[deleted]
ChuckMcM 12y ago
I've said it before, and I'll say it again, it is impossible to tell how someone will react so a sudden change in their financial status, prior to that change happening. The interesting thing I learned in the dot com era though was that when people conflated their actual net worth with their paper net worth, it really screwed them up. It works like this, you own 10% of the equity in a company that raises a round of funds which price that company at $1B. You are worth $100M right? Wrong. Your wealth hasn't changed until you convert that equity into cash and them something unrelated to the company. Further you probably can't sell it (the board won't let you). What I have watched happen though is that people think of themselves as being "worth" $100M and start spending like they have that sort of money in a checking account somewhere. And lots of people are more than willing to help them spend! And then things don't go quite as planned, the market changes, a competitor gets bought, the S-1 gets pulled at the last minute, what ever, and the company is sold at a firesale for not even the liquidation preference of the preferred shares. And our poor founder is living the $100M lifestyle with nothing in the bank. What follows is predictable, depression, bankruptcy, divorce, in some cases suicide. It was, for me, the worst part of the dot com explosion. Watching people I knew and respected self destruct.
- clairity 12y ago
  net worth is the accumulation of all the assets you have, including cash and the paper worth of the equity in your startup, less your liabilities (debt). so it's more appropriate to couch this in terms of asset liquidity, and secondarily, the riskiness of that asset. as you allude to, the hard part is properly discounting an illiquid and risky asset (like the paper valuation of a startup) based on your risk tolerance so that you can adjust your finances accordingly. what many new founders don't realize is that a startup is an undiversified investment. they are all-in on a single asset and that's very risky.
jcrubino 12y ago
Anyone want to discuss competitive sober strategies for startups? I see four main issues that the money is being used for 1. Location 2. Business Scaling 3. Work-Place Incentives 4. Founders Optimistic Self Valuation These issues are all necessary to a high degree but what viable options are there that give startups a competitive environment to offer and work with?
- Voodoo463 12y ago
  I am intrigued of what others might add or discern from this list.
teddyh 12y ago
Title has now changed to “Free Spending by Startups Stir Memories of Dot-Com Era Excesses”. Still can’t get through the paywall.

33 points by gdilla 12y ago

to get through the paywall https://www.google.ca/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=0CB8QqQIwAA&url=http%3A%2F%2Fonline.wsj.com%2Farticles%2Fstartups-spend-with-abandon-flush-with-capital-1412549853&ei=BfsxVLbOGIyyyAT_zoGIAg&usg=AFQjCNGgO75xaCrJxX5bmW0M4fwrO2UNzg&sig2=Q9Y2hvarL9OVTbmcbAabew&bvm=bv.76802529,d.aWw https://www.google.ca/url?sa=t&rct=j&q=&esrc=s&source=web&cd...

timedoctor 12y ago
That did not work it says you have to subscribe or log in

hemantv 12y ago

just search the title on google and than read to avoid the login thing.

7Figures2Commas 12y ago

> But increased interest rates or a sudden stock-market chill could slam on the brakes. ZIRP will end. The stock market will not continue to be an easy source of double-digit annual returns forever. The question is always timing, but anybody who is following the Fed and looking at the action in the market can tell you that we're closer to the end of the current environment than we are to the beginning. That doesn't necessarily mean a meltdown is coming (it's of course a real possibility), but even modest changes that inflict minimal pain overall could have significant implications for the startup scene. For all of the genuinely smart, successful people in the Bay Area, I'm constantly amazed at how few people here seem to be looking at how the broader environment has made the most recent boom possible. Mention ZIRP and the majority of people will ask "What do they do?" thinking ZIRP refers to a hot new startup. > More worrisome, Mr. Moeller says, are startups with small teams looking for massive spaces and locking themselves in to long leases. Startups are signing five- to seven-year leases on spaces that used to require two, and more landlords are pushing for 10-year leases on new construction. Those could become a burden if financing tightens. Generally speaking, the landlords are far savvier than the entrepreneurs they're leasing to. They're not pushing 10 year leases to help tenants lock in a good deal. > Mr. Altman says he met a few months ago with an entrepreneur who drove up in a new Porsche sport-utility vehicle. The man’s startup had completed a $10 million early round of financing the previous week. Mr. Altman says he looked at him sternly, asking him, “What message do you think you’re sending to the rest of the company?” The message the entrepreneur is sending to his employees is irrelevant. If there's anything of importance in this anecdote, it's what such behavior says about the mindset of some of the founders investors are lavishing with millions of dollars of investment.

sshumaker 12y ago
I'm not sure if the landlords are as savvy as you think. If the startup runs out of money, landlords will be the last in line at bankruptcy proceedings. It's hard to claim losses for the next 6 years of lease income when they can turn around and rent the space to a new tenant.
- 7Figures2Commas 12y ago
  Are you suggesting that commercial landlords don't understand the risk of bankruptcy? First, not every startup is going to die. Second, you don't necessarily need your tenants to survive to capitalize on these leases. For example, leases affect a property's value. If you're looking to sell a building, having tenants locked into long-term leases at record or near-record rates is not going to hurt you. The landlords have been through booms and busts before and know more about the commercial real estate market than the entrepreneurs they are leasing to. That they're increasingly looking to lock in longer leases is a good clue as to where they think we are in the current cycle.
- Animats 12y ago
  "I'm not sure if the landlords are as savvy as you think." Some of them are. Saeed Amidi, the rug dealer behind Medallion Rug Gallery in Palo Alto is famous for this. He demands some equity in startups leasing his properties. Google's first office was in his space. PayPal's first office was in his space above the bike shop. Facebook's first office too. Also Foursquare, Danger, and others not as successful. Amidi is now a venture capitalist, but he still has the rug stores. http://www.theguardian.com/technology/blog/2011/oct/14/welcome-to-silicon-valley-shuffle http://www.theguardian.com/technology/blog/2011/oct/14/welco...

hemantv 12y ago

Startup need to spend so much on other things because employees are not working 100% on making company a long term success. They are just doing yet another job. Reward employees with good amount of equity, so that everybody long term interests are aligned in success of the company. I don't see most startup giving meaningful equity, so they have to compensate with all of these perks and high salaries.

Voodoo463 12y ago
The first part of this statement sounds like speculation, and the second part sounds a bit like Voodoo logic, no pun intended. There are many factors that will attribute to an employees stock in the company, and I'm not just referring to 'company stock'. Equity is an entrepreneurs best friend, and as such should be treated little different than a savings account (Rarely touched: with exceptions of a rainy day, or if something exists that you REALLY REALLY want/need e.g. a specific Employee) as opposed to monopoly money, where it is spent till the original owner has none of it left. If the company starts to award every employee high yields of equity, it hinders an entrepreneurs ability to leverage the companies assets to possibly position it's longterm stability. This is why there exist so many 'perks and high salaries', and they work... for the most part. However, to imply that these perks and high salaries are falsely impacting an employees investment at a company for long term duration's seems a bit of a stretch without data points, perhaps Hacker News should strike up an Anonymous Poll to find out if such claims are true? I will speculate that for some it is nothing more than 'just another job', but for the right person, it can be the right job. Thus, perhaps the solution isn't necessarily in an excessive amount of equity, or bloated perks, or high salaries; perhaps the true solution is taking the time to find a candidate that isn't necessarily as skilled as they could be, but over compensates by possessing a fervor of desire? If that is indeed the appropriate conclusion; isn't that in other words what Y.Combinator is all about? The ability to find individuals in the most unliklyist of places with a will and a heart to attempt what may just lie out of their reach, helping them grasp what once was only the impossible? It is people like this that attribute towards a companies long term standing, and without them, fulfilling the founders end goal will be much more difficult.
new299 12y ago
I'd recommend paying the going rate for your staff in any case. Equity doesn't make up for a lower salary in my view. It makes up for the inherent risk in working in a startup (things might not go well and you might be out of a job in a year).

deleted 12y ago

[deleted]

ChuckMcM 12y ago

I've said it before, and I'll say it again, it is impossible to tell how someone will react so a sudden change in their financial status, prior to that change happening. The interesting thing I learned in the dot com era though was that when people conflated their actual net worth with their paper net worth, it really screwed them up. It works like this, you own 10% of the equity in a company that raises a round of funds which price that company at $1B. You are worth $100M right? Wrong. Your wealth hasn't changed until you convert that equity into cash and them something unrelated to the company. Further you probably can't sell it (the board won't let you). What I have watched happen though is that people think of themselves as being "worth" $100M and start spending like they have that sort of money in a checking account somewhere. And lots of people are more than willing to help them spend! And then things don't go quite as planned, the market changes, a competitor gets bought, the S-1 gets pulled at the last minute, what ever, and the company is sold at a firesale for not even the liquidation preference of the preferred shares. And our poor founder is living the $100M lifestyle with nothing in the bank. What follows is predictable, depression, bankruptcy, divorce, in some cases suicide. It was, for me, the worst part of the dot com explosion. Watching people I knew and respected self destruct.

clairity 12y ago
net worth is the accumulation of all the assets you have, including cash and the paper worth of the equity in your startup, less your liabilities (debt). so it's more appropriate to couch this in terms of asset liquidity, and secondarily, the riskiness of that asset. as you allude to, the hard part is properly discounting an illiquid and risky asset (like the paper valuation of a startup) based on your risk tolerance so that you can adjust your finances accordingly. what many new founders don't realize is that a startup is an undiversified investment. they are all-in on a single asset and that's very risky.

jcrubino 12y ago

Anyone want to discuss competitive sober strategies for startups? I see four main issues that the money is being used for 1. Location 2. Business Scaling 3. Work-Place Incentives 4. Founders Optimistic Self Valuation These issues are all necessary to a high degree but what viable options are there that give startups a competitive environment to offer and work with?

Voodoo463 12y ago
I am intrigued of what others might add or discern from this list.

teddyh 12y ago

Title has now changed to “Free Spending by Startups Stir Memories of Dot-Com Era Excesses”. Still can’t get through the paywall.