How We Spend Money at Mattermark | Hacker News Reader

How We Spend Money at Mattermark

mattermark.com

20 pointsdmor7 comments

A rent to revenue ratio of 15% is crazy for most companies, and downright insane for a startup that doesn't have anywhere near enough revenue to cover payroll.

For comparison, according to Cushman & Wakefield, law firms, many of which have space in expensive buildings with prestigious addresses, spent about 6% of gross revenue on their real estate in 2014.

I hope the investors who are funding these kinds of startups have some exposure to real estate funds that own commercial space in the Bay Area because that's where a lot of their money is going.

They are paying 49 dollars per square foot/year for a fairly cheap (as far as market rates go) 11k sqft office at 564 Pacific.

Rent to Revenue ratios make little sense for growing startups. It will change.

1. A Lamborghini Gallardo might cost less than an Aventador but that doesn't mean it's "cheap." Nothing is "cheap" for a startup that's spending nearly three-quarters of a million dollars a month but bringing in well under half that.

2. Rent to revenue is even more important for unprofitable startups. Investor-funded startups are at high risk of failure because it's far easier to spend money in anticipation of growth than it is to actually grow revenues. What's more, your investors are likely going to encourage this because they're playing a game in which a few big winners will hopefully make up for a lot of losers.

Just Google "Zirtual" for a recent, ugly example of what happens when you spend too much and investors refuse to bail you out.

Rent to revenue is a nonsense ratio for a VC-funded startup. For the first few months, it is likely infinity. Too high? No. Meaningless. What about the first month they make money? 400% sounds pretty high, too. Comparing it to other expenses or headcount could make sense, but comparing it to revenue just doesn't.

> For the first few months, it is likely infinity.

> What about the first month they make money?

Mattermark has nearly $300,000/month in revenue and several dozen plus employees. It's not newly hatched, and it's a fairly straightforward B2B play in which customers pay for access to a service.

At what point would you suggest that metrics like rent to revenue become meaningful? 10 years in? When its revenue reaches some meaningless, arbitrary amount? When NASA announces the discovery of extraterrestrial life?

Just look at slide 12 at http://www.slideshare.net/DanielleMorrill/mattermark-2nd-fin.... Less than a year ago this company was projecting $400,000 in monthly revenue by June 2015. According to this post, it generated less than $300,000.

This is precisely why you pay attention to metrics like rent to revenue. "We're VC funded and the rules don't apply to us" doesn't work forever, and it often works for far shorter than expected when growth in revenue starts to lag projected growth in revenue and your spending has been based on projected revenue.

Just to be clear re: Mattermark Series A deck slide 12 it was a goal based on our growth rate at that time, not a prediction.

First, I commend you for being so open about your company's finances. A lot of people don't really understand how venture-backed companies operate, so it's really helpful to have real-world examples.

That said, it doesn't really matter whether you refer to your financial projections as projections, goals, etc. What I would observe is that the growth in revenue you targeted and presented to investors apparently has not materialized. At the same time, based on this[1], it appears your burn has doubled in less than a year, and your quarterly burn appears to be significantly higher than what you projected here[2].

This is a quintessential demonstration of what I wrote above: it's far easier to spend money in anticipation of growth than it is to actually grow revenues. I would add that it's usually doubly difficult for venture-backed companies to cut spending, even when it becomes clear it's the fiscally prudent thing to do, because it sends all sorts of negative signals to the investors you're going to be asking to continue buying into your growth story.

[1] https://medium.com/@DanielleMorrill/is-my-startup-burn-rate-...

[2] http://www.slideshare.net/DanielleMorrill/mattermark-1st-ser...

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