Last night, David Hornik of August Capital was kind of enough to invite me to speak with him on a Technology and Law class at Stanford. After the event, an entrepreneur I had been emailing with but hadn’t met yet came up to me. While his company is in a different space, I was struck with in many ways how similar its pre-launch operational and timing challenges in 2012 are to EchoSign circa 2005.
The biggest difference? Their pre-product pre-money was $12m in ’12. Ours was $6m in ’05. 100% inflation, in some sense.
So I started thinking of all the inflation I’ve been observing lately:
- Seed/Series A valuations seem to have grown about 100% since 2005. Today, if you’ve got a team with some previous success, the pre-money of seed/A rounds are all double digit millions.
- Come to think of it, Series C valuations have grown about 100% as well. Today, hot companies are doing rounds as 10x next year’s ARR. Back in the day, it was more like 6-8x this year’s GAAP revenues.
- The rent on our old office in downtown Palo Alto since 2005 has grown from $3.00 to $6.50 NNN per month, or more than 110% rent inflation in downtown Palo Alto at least since ’05. Exact same office. This is pure identical-asset inflation, like tracking the price of milk.
- Engineering salaries have also grown a lot. On the ‘low’ end, junior engineers salaries seem to be up 20-30%, but with rockstars, it seems more like 40-50% on the cash side. More relevantly, on the equity side, top engineers at an early stage seem to get about 100% more equity than in 2005.
Yes, the Cloud has made some things cheaper. But on balance everything else is so much more expensive, it seems like start-ups can actually be almost 2x the price to get to a similar amount of time. I really wonder what you can do in SaaS these days on a $2m Series A round. It was hard enough back in the day.
The good news? The SaaS world is 10-20x bigger than it was in 2005. So, in a sense, that’s deflation. It means companies can get bigger, faster, justifying the inflation on the hard costs. So on balance, I think it’s a good deal. People, offices, companies — they’re all worth more if the markets and opportunities are much larger.
But AWS, Heroku, and all the rest apart — sure that’s cheaper — but all other fixed costs seem to have massively inflated since 2005. Many have basically doubled.