Don’t Sign That Lease Without Reading This!
These days, the risks have flipped: It’s tenants who need to assess the financial stability of their prospective landlords.
Here are today’s highlights:
Goldman Sachs says the creator economy will be worth $480 billion by 2027.
Ami Kassar says it’s important to assess your cash needs for next year, but you can’t build a good forecast from bad or insufficient data.
Venture-backed startups are discovering the “dread and loneliness” that comes with shutting down (also that businesses need profits).
Wall Street CEOs are terribly concerned that new regulation requiring them to hold more capital will end up hurting small businesses.
Read this before you sign: “There's a lot potentially at stake if a company signs a medium- or long-term deal at a building that'll face issues when its loan matures. Distressed buildings could be taken back by their lender, throwing tenants into chaos and uncertainty. Some landlords are even giving the keys back on buildings they no longer see as financially viable to retain. Tenant brokers today frequently are advocating for subordination, non-disturbance, and attornment clauses when their clients are signing an office deal, said Giles Wrench, vice chairman of financial services at Jones Lang LaSalle. Those agreements spell out the rights of the tenant, landlord, and any interested third parties — a lender or other investors, for example. Such clauses could prevent a tenant from being evicted if the building goes into foreclosure.”
“There's an estimated $47 billion in office loan debt coming due in 2024, according to Moody's Analytics. Among commercial mortgage-backed securities loans backing office properties, Moody's estimates three-quarters of that will struggle to refinance next year. ‘We’re seeing the same themes over and over again for tenants, corporate users, and even small businesses: They want to reduce risk. What is the risk of doing a deal with a landlord that’s maybe on shaky ground?’ said Michael Lirtzman, head of U.S. office agency leasing at Colliers International Group.”
“Before a deal is even close to being signed, brokers say they're having to exercise more scrutiny on behalf of their tenants, and they're doing so earlier in the process. [Katy Redmond, managing director of integrated portfolio services at JLL] said with companies her team works with, there are questions in requests for proposals to landlords about a building's capital stack, to try and gain a clearer picture of things such as a property's financial condition and whether there's an upcoming loan maturity.”
“On the whole, landlords that are in a relatively stable position financially are willing to share those details, brokers say. For landlords that aren't as transparent, those buildings might be eliminated in a space decision. ‘It’s a massive red flag if you run into a landlord that’s being opaque,’ Wrench said, adding many companies, especially highly regulated ones like banks, can't afford to take on that risk.” READ MORE
Are you still scoffing at the creator economy? “Barney Banks shot a cute video of himself changing his son’s diaper. His mother-in-law suggested he post it to TikTok. His partner agreed. So he did. ‘In 24 hours, we had 100,000 followers from changing that one diaper and five million-plus views,’ said Mr. Banks, a former professional dancer who is now an e-sports host. ‘Why? It seems like certain areas of content creation explode on the scene at different times. I hit the parenting and content creator spike.’ Today, a little more than a year and a half after that post, Mr. Banks has 1.7 million followers under the TikTok handle @iammrbanks and has amassed 48.6 million likes on his posts. He now has sponsorship deals with Pampers, baby food companies, and clothing brands as well as an agent to negotiate all of it for him.”
“This is the randomness and power of the creator economy, a loosely defined amalgam of people who post content, amass followers and likes, and get paid for their reach. What’s not random is the size of the creator economy. It is projected to be valued around $480 billion by 2027, according to Goldman Sachs Research.”
“‘A lot of people think the creator economy is people on Instagram posting about beauty products and making money from it,’ said Derek Goode, senior vice president of creator marketing at 160over90, a brand agency owned by the entertainment company Endeavor. ‘That’s a sliver of it.’”
“‘The creator economy is anyone making content and making money off of it,’ Mr. Goode said. ‘It could be someone at home doing Spanish lessons on a subscription platform. It could be doctors selling advice. You see a ton of this in the fitness space. It’s much larger than influencers on Instagram.’” READ MORE
Do you know how much cash you will need next year? “I hung up, and the next call was less fun. This entrepreneur’s business is going through a pivot, and she knows that next year will be a down year. She, too, knows that she will need cash. Her reasons for needing the cash are very different from the growth entrepreneur’s, but similarly, she has only a gut sense of her true need. She’s in the logistics business, which boomed during Covid-19 but is now returning to reality. Not only is she coping with the lower volume, one of her leases has expired, and she needs to move, which will be costly.”
“If you think about the two calls, both entrepreneurs know they have a need, and they were right to look for help. But they have one thing in common: They lack a well-thought-out forecast and projection that shows clearly what their cash needs will be next year. We need to understand the need before we can sort out what might be the best lending approach to pursue (assuming there is one).”
“Forecasting and projecting are challenging for 95 percent of the business owners and entrepreneurs we work with. The problem, in part, is that building a good forecast from bad or insufficient data is impossible. And unfortunately, many small businesses run off poorly put-together books and financials.” READ MORE
As VCs cut off the cash, startups are making a remarkably quick journey from unicorn to zombie: “It has fueled an astonishing cash bonfire. In August, Hopin, a start-up that raised more than $1.6 billion and was once valued at $7.6 billion, sold its main business for just $15 million. Last month, Zeus Living, a real estate start-up that raised $150 million, said it was shutting down. Plastiq, a financial technology start-up that raised $226 million, went bankrupt in May. In September, Bird, a scooter company that raised $776 million, was delisted from the New York Stock Exchange because of its low stock price. Its $7 million market capitalization is less than the value of the $22 million Miami mansion that its founder, Travis VanderZanden, bought in 2021.”
“Getting a full picture of the losses is difficult since private tech companies are not required to disclose when they go out of business or sell. The industry’s gloom has also been masked by a boom in companies focused on artificial intelligence, which has attracted hype and funding over the last year.
“But approximately 3,200 private, venture-backed U.S. companies have gone out of business this year, according to data compiled for The New York Times by PitchBook, which tracks start-ups. Those companies had raised $27.2 billion in venture funding. PitchBook said the data was not comprehensive and probably undercounts the total because many companies go out of business quietly.”
“Amanda Peyton was surprised by the reaction to her blog post in October about the ‘dread and loneliness’ of shutting down her payments start-up, Braid. More than 100,000 people read it, and she was flooded with messages of encouragement and gratitude from fellow entrepreneurs. Ms. Peyton said she had once felt that the opportunity and potential for growth in software was infinite. ‘It’s become clear that that’s not true,’ she said. ‘The market has a ceiling.’” READ MORE
Are any of your key vendors venture-backed startups? “Silicon Valley payment management company Bill has slashed hundreds of employees from its payroll, continuing a relentless year-end layoff blitz in the tech sector. Bill CEO and founder René Lacerte laid out the reasons behind the layoffs in a note to staff sent Tuesday, explaining that the layoffs come as part of a broader corporate restructuring intended to ‘deliver improved profitability without relying on interest-rate dependent float revenue.’ ‘Unfortunately, this reduction is necessary to rightsize our organization and to focus our resources on the highest priorities for the company and our customers,’ Lacerte wrote in the letter to staff. Around 15 percent of company staff—nearly 400 employees—will be affected by the company’s layoffs.” READ MORE
The hot topic in Silicon Valley? People are sharing their p(doom) predictions, the likelihood that artificial intelligence will kill us all: “Dario Amodei, the chief executive of the A.I. company Anthropic, puts his between 10 and 25 percent. Lina Khan, the chair of the Federal Trade Commission, recently told me she’s at 15 percent. And Emmett Shear, who served as OpenAI’s interim chief executive for about five minutes last month, has said he hovers somewhere between 5 and 50 percent. I’m talking, of course, about p(doom), the morbid new statistic that is sweeping Silicon Valley.”
“P(doom) — which is math-speak for ‘probability of doom’ — is the way some artificial intelligence researchers talk about how likely they believe it is that A.I. will kill us all, or create some other cataclysm that threatens human survival. A high p(doom) means you think an A.I. apocalypse is likely, while a low one means you think we’ll probably tough it out.”
“I’ve been to two tech events this year where a stranger has asked for my p(doom) as casually as if they were asking for directions to the bathroom. ‘It comes up in almost every dinner conversation,’ Aaron Levie, the chief executive of the cloud data platform Box, told me.” READ MORE
Do you ever get a little skeptical when Wall Street banks say they oppose new regulation because they fear it’ll end up hurting small businesses? “The heads of America’s largest banks, including JPMorgan, Bank of America, and Goldman Sachs, are seeking to dull the impact of the new rules, which would affect all U.S. banks with at least $100 billion in assets and take until 2028 to be fully phased in. Raising the cost of capital would likely hurt the industry’s profitability and growth prospects. It would also likely help nonbank players including Apollo and Blackstone, which have gained market share in areas banks have receded from because of stricter regulations, including loans for mergers, buyouts, and highly indebted corporations. While all the major banks can comply with the rules as currently constructed, it wouldn’t be without losers and winners, the CEOs testified.”
“Those who could be unintentionally harmed by the regulations include small business owners, mortgage customers, pensions, and other investors, as well as rural and low-income customers, according to Dimon and the other executives.”
“‘Mortgages and small business loans will be more expensive and harder to access, particularly for low- to moderate-income borrowers,’ Dimon said. ‘Savings for retirement or college will yield lower returns as costs rise for asset managers, money-market funds, and pension funds.’” READ MORE
FOOD & BEVERAGE
Founded by a software developer, Green Wolf Foods made Time’s 2023 list of best inventions for its vegan salami: “It’s a stunning rise for Bay Area-based Alex Volkov, the founder of Green Wolf Foods, an innovative company creating and distributing vegan products, and looking to alter the meat-substitute paradigm. We talked to Volkov about that success, the challenges of running a small business, and where he sees the plant-based market moving next.”
“My background is actually in software development; I worked at a tech startup here in the Bay Area. But at some point I was asking myself, ‘What will I do next? What is it that I want to do more in my life?’ And being vegan for many years, I felt like I really wanted to align my professional career more with my personal values. One of those things that I enjoy doing in my free time is cooking, and I cook dinners for my family and my friends, usually barbecue.”
“By experimentation, I figured out that if I’m trying to make a product that looks exactly like, for example, a salami, it has to be eight times more fatty, or have half the protein amount, and you have to add all of these emulsifiers and other ingredients. That was my biggest criticism of the products that I was already seeing. So when I set those boundaries for myself, the development of the product was a lot more natural. I just substituted some things out that didn’t make sense to me and it actually worked.”
“Meat products are still cheaper, because we have invested so much of our resources over the years to support them. If we can invest even a third of that over the next 10 years into plant-based products, we’re going to have such drastic, different results, and they’re going to be so much better for us, for our future, for our kids, and for their surroundings.” READ MORE
THE 21 HATS PODCAST
We Need to Go Back to Marketing for Humans: This week, Paul Downs tells Jay Goltz and Jaci Russo about the latest developments in his year-long campaign to stop relying so heavily on Google AdWords. At a specially arranged, two-day marketing event, Paul got to sit down with a series of architects and designers who had already been vetted and who he hopes will become repeat customers. So far, Paul says, the results look promising.
“Plus, we also discuss: Do you write your website copy to please Google or to please people? Is there any way around skyrocketing property insurance rates? Why has Jay decided he no longer needs a chief financial officer? How big a disadvantage to owners are the new laws forbidding employers from asking job candidates about their salary histories? And would you reject a candidate simply for trying to negotiate a starting salary? I know someone who would.
You can subscribe to the 21 Hats Podcast wherever you get podcasts.
Thanks for reading, everyone. — Loren