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It is insanely expensive to build a startup in San Francisco right now, by Tomasz Tunguz of Redpoint Ventures


Stashed in: 106 Miles, Silicon Valley!, Redpoint, San Francisco!, Awesome, @ttunguz

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Reblogging Tomasz's thoughtful essay on how freaking expensive it is to run a business now:

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.

According to data from Jones Lang LaSalle, office prices in San Francisco have nearly doubled in five years from $36 per square foot per year to $63.

startup real estate costs chart 2015 tomasz tunguz redpoint ventures

Typically businesses allocate about 150 square feet of office space per employee. Given the market rate for office space, hypothetical 20 person Series A startup will spend about $200k per year per employee in 2015.

startup wage costs chart 2015 tomasz tunguz redpoint ventures

In parallel, startups and incumbents vying for talent in the increasingly competitive job market have bid up the median wage of a San Francisco technology worker 15% each year, from about $90k to well over to $180k in 2014. Wages include salary, benefits, stock options and perks.

per employee costs startup chart 2015 tomasz tunguz redpoint ventures

Wages constitute the majority of the increase in startup expenses. Real estate costs add only 5% of per employee costs.

startup opex chart 2015 tomasz tunguz redpoint ventures

The combined inflation of real estate and wage costs have a dramatic impact of the operating expenses of startups. The chart above compares the op-ex (excluding marketing spend) of a hypothetical 20 person Series A startup and a hypothetical 80 person Series B startup over the past five years. In both cases, the op-ex figures double from $2.5M to $5.0M and from $7.9M to $15.6M respectively.

The cost savings startups achieve from cloud computing infrastructure or other technology cost reductions are dwarfed by the steady cost increases of labor in particular. These heightened costs of doing business may explain some of the increase in startup round sizes.

dollars per investment chart 2015 tomasz tunguz redpoint ventures