Priceonomics

GitHub's San Francisco Office. Source: Adam Nash Twitter.

During the “Dot Com Bubble” of the 1990s, stories abounded of lavish spending by startups on office space. Herman Miller Aeron chairs, landlords who demanded equity in addition to boatloads of cash, and long term contracts all led to many startups going insolvent when the funding environment for “dot coms” dried up.

These stories primed us to think that office space is expensive and financially risky for a fledgling company. But is that true? How much do startups actually pay for office space? Given that most of them are now located in San Francisco (the most expensive city in the US to live), it must be expensive to rent office space for a startup.

To answer these questions, we surveyed Y Combinator companies to ask how much they pay for rent. Fifty four companies responded to our informal poll. The median company that responded has 10 employees and spends $6100 a month on rent. 

$6100 is a decent chunk of change. But for a company with 10 people, that’s only about about 5-10% of overall spending. Even in San Francisco, one of the most expensive real estate markets in the world, office space is a relatively minor expense compared to salaries.

Digging into the numbers

Roughly 10% of Y Combinator companies responded to our fairly unscientific email survey. We asked them how much they pay in rent, their location, how many people they employ, the square footage of their office, and how many employees their office could comfortably fit if they grew larger.

A quick note: asking the founders of a company “how much they pay for rent” is somewhat imprecise. For example, according to our lease, Priceonomics pays $2700 per month for our 1200 square foot office in the Mission district of San Francisco. However, we’re contractually obligated to pay $300 a month to cover “building operating costs,” so our lease is effectively for $3000 a month. Companies might also negotiate leasehold improvements (like putting in a new carpet) that could be paid by either party. Despite the wiggle room, however, the numbers we present should be “ball park” accurate.

The median price of office space among the startups in our survey is $6,100. The distribution ranges from companies paying only a few thousand dollars a month to others paying tens of thousands.

Source: Priceonomics survey of Y Combinator startups

Of the 54 companies in the survey, 30 of them are in San Francisco, 15 are in the South Bay (the area around Stanford traditionally called “Silicon Valley”), 2 are in the East Bay, and 7 are “Other” (New York, London, Ann Arbor, Seattle).

Source: Priceonomics survey of Y Combinator startups

It’s interesting to note that 56% of YC startups in the survey are located in San Francisco. All YC startups are “strongly encouraged” to locate near Mountain View, the location of Y Combinator, during the program. This means that after they get funding, the majority of these startups pack their bags and head up to The City. The only other cities with more than 5 companies in our survey were Palo Alto (7 companies) and Mountain View (5 companies).

How expensive is office space in these three cities? Remarkably, suburban Palo Alto office space costs almost twice as much per square foot as urban San Francisco does. It could be that Palantir has been scooping up all available office space, but it seems that Palo Alto commercial real estate has been pricier than San Francisco for some time.

Of the 30 startups located in San Francisco, more than half are located in SOMA. The other two most popular neighborhoods are the Financial District and The Mission.

Obviously, companies with more employees need more space. Across the survey, the median rent expense per employee per month was $692. In Palo alto, the rent per employee per month is $950 per month, compared to $643 in San Francisco and $713 in Mountain View.

How much space does a startup need? The median startup in the survey currently has 2,345 square feet of office space to house their 10 employees: a spacious 233 square feet per employee. However, growing companies tend to rent more space than their current needs (otherwise they’d constantly be moving). We asked the startups how many people could fit in their current space before things got too crowded, and they responded 17 employees. This implies startups are using a rule of thumb that each employee needs about 130 square feet of space before the space is too tight.

Conclusion

Priceonomics office in the Mission. $3000 per month for 1200 square feet.

So now we know how much startups pay for office space. If you have enough revenue or have raised enough capital to have 10 employees, your startup can expect to pay around $6,100 in rent per month. That may seem expensive, until you find out how much you have to pay those 10 people. (It’s a lot, and perhaps a subject for a future post.) For a startup, the cost of office space is a drop in the bucket compared to salaries.

This post was written by Rohin Dhar. Follow him on Twitter or Google Plus. To get occasional notifications when we write blog posts, sign up for our email list. 


Published Feb 26, 2014


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