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Comment by AlexeyMK | Hacker News Reader

One solution that is not being discussed is for VCs to offer office space for start-ups.

VCs have longer time-horizons (a typical VC fund will be spent over 5 or so years) and appear more stable to landlords. In addition, one of the toughest problems for VCs as I understand is dealflow - when it comes to a super-competitive round, Andreessen or Sequoia will often push other VC firms out of the round by throwing their prestige around.

SF Office space could make the difference to a hot start-up looking to raise their Seed or Series A and move to the city, especially coupled with a time horizon of only 12-24 months. It may not be enough to lead a competitive round, but may certainly enough to get a piece of it.

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I once heard a story that Disney spent twenty years and several billion dollars on developing Celebration and made about as much money as one of their third tier animated movies...something in the 100 million dollar range. Which may or may not be true, but it does accurately portray the long time horizons of real-estate (e.g. thirty year mortgages) and the relatively low returns compared to startups.

For a VC firm the real-estate market and rising rents have a limited effect on the success of their investment portfolio and the returns from real-estate don't justify investing money that could otherwise be put into their core business of investing in startups. A $100,000,000 can fund a lot of startups. It's not going to buy a sound diversified portfolio of San Francisco office properties.

OMFG, you reinvented the startup incubator!

It's pretty common for a VC to give a start-up a corner of their office space here in London. There are a few in my office, seems crazy it's not more common place in SF.

A very clever idea...they dont even need to offer it for free..they just need to sign the lease or buy the building and lease it to their portfolio companies.

Edit: this would be a really clever idea for a fund to raise a round just to buy real estate to lease to their portfolio companies. It will give investors a chance at indirectly investing in startups with secure value backing the investment.

It's a clever idea when the market is going up, and a really dumb idea when the market drops underneath them. If they are locked into a very high rate, and the market goes down, which is always does at some point, then people will be questioning the decision since they would either need to force their companies to pay a ridiculous rate, or lose money trying to sublease it at market rate.

The last thing VCs need to be is a landlord.

I dont agree and landlord is hardly the word I would use for NNN lease tenant Management.

In a market downturn in a worst case scenario...this real estate has underlying value besides its immediate income producing potential. It will likely retain more value than their actual startup investments.

Source: Im a former commercial real estate leasing broker and former commercial real estate underwriter.

The high rent problem emerges only when the market is over-heated, and subsides when there's a correction.

Anybody doing that would almost certainly be buying high and left holding the bag when an economic downcycle arrives.

I disagree. The same way a VC expects a few investments to cover the rest...they only need one rrapidly growing company to cover a downturn.

Any VC fund that doesnt diversify their investments to cover market movements wont survive very long.

Plus, even with a bubble bursting, commercial real estate in prime locations will retain much of its value. It will definitely outperform the startup market.

Are we talking about owning or leasing and then sub-leasing?

VCs that plan to use LP money to own and operate a commercial real-estate project are likely to get a "no, thank you", as LPs have access to REIT sector with much better purchasing power, IRRs, cashflows and operator experience.

If the VC firm is leasing and then sub-leasing, the reverse selection bias works against it, as the rapidly growing company is going to be the one moving out the soonest, needing higher square footage and shopping around for entire floors (or buildings, or campuses) will give it much better rate per square foot.

With that said, if anybody was doing it, it would be A16Z, considering how much Silicon Valley land and commercial real estate belongs to Arrillaga family.

It's a good idea, and I know it's been done at least once before. For instance, the youweb incubator operates this way.

Wouldn't this distort the VC's portfolio? Institutional investors give VCs their money to put into high-risk, high-reward investments, not real estate leases. How would they justify this?

Higher percentage equity for less money.

Institutional investors give VC's money part of which their investees then put into real estate leases anyway. Cutting out the hassle for the startup that should be focusing on product seems efficient in more than one way.

And the institutional investors likely also have a sizeable commercial real estate portfolio, so it's just a bunch of money going around in circles. I think the general term for this is 'the economy'. We probably group similar assets in to 'industries' because certain schools of thought believe this generates more economic activity, also for convenient accounting.

> We probably group similar assets in to 'industries' because certain schools of thought believe this generates more economic activity, also for convenient accounting.

Accounting is much easier than it used to be, so we can afford to be a bit more inconvenient. Maybe it's time for a vertically integrated startup service provider. Don't VCs already do things like arrange legal services for their portfolio companies?

How likely is a startup to trade points for office space? As in, a different class of VC which backs the company not with cash but with a location.

Another way to do it would be a startup specializing in office space. Oh, wait? 42floors?

Startups already trade points for office space, by selling points to investors and using the proceeds for office space (among other things.

The seed-stage VCs don't have the funds to plunk down a few million to lock in a lease, and by the time you raise an A round or further you're pretty much expected to have an address.

I guess Plug & Play Ventures is the outlier here, having started in real estate.

This makes sense especially since the limited partners are probably already significantly invested in commercial real estate. What would make more sense is just to get the limited partners involved.

On a related note there is no reason VC could not do the same with talent. The could be hiring talent and feeding that into their portfolio. They could also facilitate easy movement of people between companies in the portfolio so that you get better team fit. The only problem with all this is it takes effort.

It's certainly an interesting idea, and I have to admit it's one I've pondered over in the past as being an 'opportunity' for a small competitive advantage in closing a deal.

The biggest problem is capital tie-up. Buildings are expensive, in Cali, they are even more expensive. I've always wanted to try this idea though, perhaps in a large converted-warehouse or even a traditional down-town office-space somewhere like Austin.

Again though we must ask ourselves, what's more likely to help a start-up, office-space (in a time when more and more companies are moving towards virtual working arrangements), or an additional 100k/200k? Just some food for thought, like I said, if done right, it could be a very good perk to offer, but it's hard to justify the cost.

Cough And, shameless self-promotion, I'm looking to move into the VC space in an entry-level analyst/associate position if anyone has any exciting opportunities. Or even boring opportunities, I like boring too. :)

Don't mean to derail from topic. What's value of an average seed round in SF right now?

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