
Startups Spend with Abandon, Flush with Capital - gdilla
http://online.wsj.com/articles/startups-spend-with-abandon-flush-with-capital-1412549853
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ChuckMcM
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
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.

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7Figures2Commas
> 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
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.

~~~
Animats
"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/welco...](http://www.theguardian.com/technology/blog/2011/oct/14/welcome-
to-silicon-valley-shuffle)

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gdilla
to get through the paywall
[https://www.google.ca/url?sa=t&rct=j&q=&esrc=s&source=web&cd...](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)

~~~
timedoctor
That did not work it says you have to subscribe or log in

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hemantv
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
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.

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jcrubino
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
I am intrigued of what others might add or discern from this list.

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teddyh
Title has now changed to “Free Spending by Startups Stir Memories of Dot-Com
Era Excesses”.

Still can’t get through the paywall.

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

