The Edifice Complex, a silent killer

I recently read the book Starving to Death on 200 Million which chronicled the 2 year rise and fall of The Industry Standard.

One of the key takeaways from the book was the extent that bad real estate deals made the company unfixable. Even though they had a great brand and it would seem there could have been some form in which the company could have lived, bankruptcy was the unfortunate outcome.

What’s interesting to me is how many times the behind-the-scenes details of what killed succesful companies boils down to terrible real estate deals.

In fact, I would argue that one of the clear dividing lines between who lived and died in the dotcom shakeout was who could most effectively wind down their real estate deals. Companies like WebVan, Kozmo, and Garden.com were all stuck with massive physical distribution infrastructure.

A real estate broker once explained to me that one publicly traded dotcom leased two or three complete buildings in San Francisco… with nowhere near the number of employees to fill them. The broker explained to me that they did this to demonstrate growth in amount of square footage they leased as a leading indicator of revenue and headcount growth. These real estate leases were “proof” that they would hit their earnings projections. Think about this for a minute.

On the other hand, Google leased a bunch of cheap/crappy real estate next to the freeway in Mountain View, and eventually moved into some nice digs originally built by once high-flying SGI (Note for my younger readers: SGI was a company that made really expensive purple servers that ran some brain-damaged Linux clone called “Irix”).

Similarly, Facebook was once spread across a bunch of small offices in downtown Palo Alto, and is now in the former headquarters of Sun Microsystems. (Note for my younger readers: Sun Microsystems was a company that made really expensive purple servers that ran some brain-damaged Linux clone called “Solaris”. They also made Java, and put the dot in dot-com.)

I have several more anecdotes along these lines, but frankly the stories are all the same. It all boils down to this: when the sht hits the fan, there are several levers you can pull to manage your cash burn, but significant long-term real estate obligations are a one-way ticket to bankruptcy court.

So why does this mortal sin get committed time and time again?

One dotcom CEO I got to know characterized the phenomenon of hot companies building/buying huge buildings and decking them with expensive furnishings and signage as “the edifice complex”.

Like a lot of silicon valley aphorisms I have heard over the years, “the edifice complex” is a glib thing to say in conversation, but therein lies some biting truth.

Update:
Daniel Zarick pointed me to this highly relevant post.

 
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