The Founders; A Test of Common Sense

I am in serious talks with the founders of a startup. I’m not very interested in their business model, although I think it’s decent, but we do have aligned interests.

They require premises to run their business out of and I need to invest some money into property having recently sold a couple of buildings. So the prospect of gaining tenants in exchange for equity in their company sounds like a good opportunity.

With that in mind, I offer to buy a suitable property for their business to run out of, they become tenants at no cost, instead relinquishing equity in their company instead of rent. Thus reducing their need to raise so much funding.

They start looking for suitable properties which, if possible, could have extra space for me to operate out of. After a few weeks, they come back and ask if I have a budget in mind, I answer no, there is no budget.

A few weeks later and they phone asking if I can view a property with them in the heart of Covent Garden. I explain that I’m in London the next day, so go ahead and book the viewing.

We meet before hand and walk together to view the building. It turns out to be a 17,000 Sq Ft, 5 storey block with a separate mews house in the grounds. The building was formally owned by Andrew Lloyd Webber’s; Really Useful Company and has been unoccupied for around 2 years.

The asking price is £25M and the startup want to take 2 floors for themselves. Two floors represents around 40% of the entire building, so around £10M of the value. At standard commercial rents (around 8%) this represents around £800K rent per year. I’m a little surprised, but after the site visit we adjourn to discuss numbers over drinks.

I ask two questions:

  1. In your original business plan, what was your budget for rent?
  2. What do you value your startup at?

Neither answer was forthcoming and both answers I had to prize out at some considerable pain to both parties. However the answers turned out to be; A rent budget of £40K per annum and a valuation of £1.5M for their business.

So, I then ask how they would relinquish equity in exchange for rent on the proposed building, as even at their inflated valuation of £1.5M for their company, relinquishing 100% equity would only pay for 2 years rent providing they found an additional £100K to prop it up.

They responded by explaining I had not set a budget, therefore they assumed I would be generous and their really was no limit to the value of the property.

So, what have we learned from all this?

Being a “Big Data” lover, I’ve learned more about the statistical distribution of the Common Sense quotient among the London startup community.

The founders, I believe, have learned a little more about how investors work as well as more insight into how to run the numbers in a business plan!

Despite the absurdities of yesterdays events, I’m still mentoring them and will still consider the company for equity release tenants. After all, a tenant only has to make rent, so their company doesn’t have to have outstanding growth for me to realise profit. Plus property always has long term growth, so even if left empty would increase in value.

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