The Low-Tech Drag on High-Tech Businesses That Needs to Change

05/09/2017 11:58 am ET Updated May 27, 2017

A real estate developer has somehow become the most powerful person on the planet and swears he’ll fix the economy and create tons of jobs -- the old fashioned way: by building walls. Somehow missing from his agenda: real estate itself.

Real estate is the biggest drag on modern businesses. Surprised? Follow along.

In NYC alone, companies fork over upwards of $35.5 billion just on rent. Not to mention another roughly $11.8 billion sitting in security deposits. The story is no different in San Francisco.

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That’s a ton of companies spending a ton of money on space. Do they need to?

Imagine a $15 billion incentive program to jumpstart companies. If you really want to get the economy going, Mr. President, tear down the old school way real estate works!

Don’t count on it.

A Typical Startup Story

Let’s pretend a startup has secured $2 million in seed financing after a year of trying. Awesome!

This isn’t a happy-happy story though. There will be problems. Millions get spent fast. Not on parties and product launches. On people.

In New York City, the average employee costs like $100,000 all in. So a little 10-person company is going to spend $1 million the first year just on people.

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"People are really the main expense these days in tech,” says David Jones, who used to run talent acquisition at Jet.com and Bridgewater Associates.

But startups aren’t about money. They’re about time. If you have enough money to pay your people for two years, you have two years of runway to make something happen.

There are some other things you’ll have to cover. All those servers for your app will run $1,000 per month in the early days. But that’s it for now.

Wait! You Forgot Something!

People need somewhere to work. If you have 10 people, you are going to need around 1,000 or 1,500 square feet. You’ll typically have to spend about $7,000 per month for your office. No big deal until the landlord looks you in the eye and asks for a 12-month security deposit. Completely typical.

That’s $84,000 by the way.

"We're always discussing big checks to be sent to landlords,” says Edward Shenderovich the veteran VC behind DeliveryHero, Tradeshift and Knotel through his firm Kite Ventures. “It never fails to be deeply frustrating."

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But there’s more than rent. You’ll spend $10,000 to $30,000 at IKEA. You’ll end up paying an interior designer. Eventually, you’ll realize you need an office manager at $5,000 a month. Then there’s utilities. Cleaning. Other annoying stuff.

Whoa. At this point you are laying out $180,000 in the first year on various real estate costs. Your runway just changed. Now you’ll be out of money by the end of next August, not the end of next year.

A Final Surprise, It’s Much, Much Worse Than That

The geniuses at YCombinator were recently doing a discrete project on ways to reduce the cost of starting companies. They focused a lot on real estate and eventually realized that about half of every employee’s pretax income goes to housing. That’s $500,000 of your company’s budget that ends up paying housing rent plus $180,000 of the first year office costs -- $680,000 out of $1.2mm. More than half the company’s budget. Yikes.

We live in an age where it’s getting cheaper to start companies. But one thing has not changed much -- let’s hope we see more and better ideas for making the real estate less of a headache.

This post was written by Amol Sarva (@amol) and Justin Reynolds (@umxoxi).

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