After checking up on their brood last month, some of the tech industry's most prominent investors scolded startups about burning through their venture capital allowance. But dad's new rule about spending wisely has not reached founders themselves, reports the Wall Street Journal.
The paper offers no shortage of examples of small companies that were given piles of funding and then wasted that cash by outspending each other on salaries, office rents, office decor, office perks, marketing, public relations, and 10-year office leases that will likely outlive the startup itself.
Costs add up quickly. The average salary for a software engineer is about $126,000, up 20% from 2012, according to tech-jobs site Dice. Top engineers' salaries can be double that or more.
Justin Kan says startups are paying high salaries partly because they can. Mr. Kan, who started Exec, a personal-assistant service acquired earlier this year for less than $10 million, raised $3.4 million for his first round of financing. Justin.TV, which he started in 2006, raised just $300,000 in its initial round.
"When you raise a lot of money easily, it's easy to try to solve your problems by spending money," he says. Exec was quick to pay high salaries, he says. "I regret doing that."
That spend-money-to-make-money message paired perfectly with the mandate from investors to grow-now-profit-later. And a huge factor in fast growth is hiring and retaining employees, which is where the perks and insane offices come in. The Journal mentions one CEO who granted an employee's wish for "an octagonal, mixed-martial-arts cage-fighting ring":
Then there are the perks. Free catered lunches cost about $12 a person each day. A $2,000 custom-designed standing desk may seem unnecessary. But some investors and founders say that such intangibles can help startups nab the best talent, who may be considering several job offers.
"No one wants to lose a candidate over the last emotional mile," says Dustin Dolginow, a partner with Atlas Venture. [...]
Matt Galligan, co-founder and chief executive of Circa 1605 Inc., which runs a mobile application for news, says rent on his 3,000-square-foot office in SoMa has roughly doubled since the company moved in two years ago. But the rent and renovations to expose the brick walls weren't "unnecessary burn," he says. His 12 employees "are spending nearly a third of their life there," he says. "It helps for it to be a positive experience."
If founders really want to keep things pozzy and emotionally upbeat, they might want to focus more on making sure those perky jobs are around in a year, especially if interest rates drop and the IPO market freezes.
Sam Altman, the president of Y Combinator, an incubator based in Mountain View, Calif., says he is more concerned about the cultural risk created by "fat startups."
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?"
What message has Y Combinator been sending that this entrepreneur thought rolling up in a Porsche was cool?