David Bergeron of T3 Advisors

David Bergeron of T3 Advisors - Podcast Transcript

Scott Orn:	Thanks for tuning in to Founders and Friends Podcast with Scott Orn at Kruze Consulting. We’re doing our best-of series as we rebrand the podcast and also pull everything over to Kruze Consulting. We’re going to have a ton of new podcasts coming out pretty soon. It’s going to be pretty exciting. This is the bestof with David Bergeron at T3 Advisors. David was a hilarious guest and he dropped a ton of knowledge about the real estate market in San Francisco. Tons of great tips. I hope you enjoy this. AVAD guest actually refused to come on after he did such a great job. So I hope you enjoy this. So welcome to The 1 California Podcast, David. David Bergeron from T3 Advisors. I really appreciate you coming by.
David Bergeron:
Scott Orn:	Yeah. So you are … is it too much to say you’re the King of San Francisco Real Estate?
David Bergeron:
Scott Orn:	That’s perfect. Awesome. So we’ll start. Where did the passion for real estate come from? What drove you to the business?
David Bergeron:
Scott Orn:	No. That’s spot on. I think you’re 100% dead right. You’re so modest. It’s amazing. So David and I are friends through [inaudible 00:00:53] a couple of other common friends and we were talking one day and we were like, “Oh my God, I get asked tons of real estate questions by startup founders,” and so I thought it’d be great to have David over. He can answer every question that I get asked and we can also just hear how he got on the business and all that kind of stuff. Does that work for you?
David Bergeron:
Scott Orn:	Scott thanks for having me. It’s a pleasure. It’s a great question and it’s less exciting and sexy than you may think. I find that hard to believe.
David Bergeron:	No. I actually grew up … both my parents are in real estate. Not initially but sort of later in both of their careers. My Mom and Dad both got actually into residential real estate. So I’m from Portland, Oregon. Go Blazers! And I sort of grew up around it a little bit kind of through middle school and high school. Ended up going down to school here in California. Went to Stanford. Had a fantastic time there. Learned a ton. Realized I don’t know anything about the world and have no clue what I want to do after school.
Scott Orn:	graduation? Was that like the day you were walking down the aisle for
David Bergeron:	Even the whole time. I was just lost. Indefinitely. But I think what … I had the good fortune of going to Stanford, playing football there. Had an amazing time there. And we were the best kind of 5 and 6 team in the country. I’m convinced my senior year …
Scott Orn:	What year did you graduate?
David Bergeron:
Scott Orn:	2004. Oh okay. You’re a little younger. That was in that period where Cal can never actually beat Stanford.
David Bergeron:	No. They did. Aaron Rodgers was there at that point in time. It was awful. So and then after I graduated, I actually started a coterm program and a masters in communication and actually able to focus on social media which was pretty interesting at the time because it was very very new. Facebook was just starting. So that was really interesting and I ended up getting drafted into the NFL.
Scott Orn:	You never told me any of this stuff. This is amazing.
David Bergeron:
Scott Orn:	I’m humble. So I ended up drafted at the Philadelphia Eagles. Are you kidding me?
David Bergeron:	Yeah. Moved back to Philly and spent a couple of years sort of like bouncing around the NFL and had a fantastic time.
Scott Orn:	What position do you play?
David Bergeron:	I played middle linebacker. And then I quickly realized that I’m not super athletic or fast so I needed to teach myself how to long snap as well.
Scott Orn:	I was going to make a joke about that. Did you actually long snap?
David Bergeron:
Scott Orn:	Actually long snapped. Oh my God.
David Bergeron:	Actually, I taught myself like the latter half of my senior year to long snap and then ended up actually being the starting long snapper for an NFL Europe team. The Cologne Centurions that I played for one spring out there when I was allocated by the Panthers.
Scott Orn:	Wow.
David Bergeron:	So I was doing everything that I could to stay in that league. It was a ton of fun.
Scott Orn:	Don’t they have like a tenure career in the NFL for long snapping?
David Bergeron:	There are. There’s like 32 guys that have the tenure career and there’s no turnover ever. So it’s impossible to break into. But once you’re in, it’s kind of the best.
Scott Orn:	For people who don’t know who are listening, the long snapper like snaps the football on a field goal and then they got to snap it like 10 to 15 yards and you got to be super accurate and you can’t choke.
David Bergeron:	That’s right.
Scott Orn:	If you choke, you miss the field goal and you lose your job and the season’s over.
David Bergeron:	Totally. There’s zero glory as a long snapper but only downside, you can only do things poorly that are identified by your spectators or coaches but in theory, it’s a very repeatable action that you can master and guys do. And they have a fantastic career for many many years long snapping.
Scott Orn:	That’s amazing. So you did the NFL and then you had to get a real job at some point?
David Bergeron:	I had to get a real job. Yeah. And my girlfriend at that time was working for a consulting firm and we’d met in college. It was actually a really funny story. We were freshman dorm co-presidents. That’s how we met. Which is like totally dorky but we ended up kind of dating all through school and she was working for a consulting firm and traveling a bunch and had some family actually in Boston. [Crosstalk 00:04:51] So she’s my wife’s Aunt. So we’re like, cool, let’s do the Boston thing for a while and didn’t really know what that meant. I was you know, now, I could go anywhere. Like I was like working on my next career. My “second career” at 25 and so we said, alright. Both of us grew up on the West Coast and spent most of our time there. So we said, the East Coast would be cool to spend some time and New York just sounded too scary. So we just figured we’d give Boston a shot. And we had some family there.
Scott Orn:	You’re like, “I want to go to the coldest place possible.”
David Bergeron:	That’s right. Where’s the highest misery factor quotient on the planet? That’s Boston. So we moved there and I was like just trying to meet people, figure out what I could do for kind of this next career and kind of what would sort of fit my skill set et cetera and had a bunch of conversations with a lot of really interesting people and over the course of those two or three months, I was exploring different job opportunities. I got introduced to Roy Hirshland. Actually from Guil and so I went and met Roy who had founded T3 back in 2001 with two other guys.
Scott Orn:	That takes a lot of guts to start the firm back then because 2001, corporate commercial real estate was terrible.
David Bergeron:	And of course but they were fortunate to start in August so they had no clue what was coming in September. And we’re like, this can be great. We’ll start this great company. It’s going to be totally easy and then 9/11 happens, right?
Scott Orn:	I didn’t even think about 9/11 either because I was thinking startup meltdown and how tough that was.
David Bergeron:	That was bad and then 9/11. So it was in a lot of ways a really really interesting difficult time to start a company but I will say that having those guys go through that and sort of that be part of the founding core of what this company was built on, gives us incredible fortitude and ability to really really work through difficult hard times.
Scott Orn:	Yeah. I can totally get that because Vanessa built Kruze Consulting by herself for the first two years and it’s like, she’s done every job. She knows when everything needs to go and she’s like, just scar tissue like crazy. She knows all the tough spots. And like when that’s part of your DNA, the next set of employees pick up on it and they’re tough too and you only hire, only tough people make it.
David Bergeron:	That’s right. Kind of being battle-tested I think makes us just that much better when things get tough both for ourselves and our own company but almost more importantly for our clients. It’s like, we get it. We’ve been there. We’ve built companies through tough times.
Scott Orn:	It’s like, let me tell you a couple of stories.
David Bergeron:	And so I met Roy. I sat down with Roy. We had a great discussion. It was one of those like, I thought it was a networking meeting honestly. I thought he’d tell me some … he was introduced to me as being extremely well-connected to the venture capital community in Boston as well as the entrepreneurs. And so I was like, that’s cool. And so went and met him and had this kind of like fantastic AHA moment where he sort of described to me what he was doing and what he was building, I had no idea this existed. I’d never heard of this version of real estate services ever before. And two hours in the meeting, I was like, “Alright, this is now really interesting. How do I work for you?”
Scott Orn:	You’re also probably a competitive guy coming out of sports.
David Bergeron:
Scott Orn:	No. They’re looking for like your thing. I’m sure people can already tell through the podcast that you’re a very personable person.
David Bergeron:	It was a good match. It was a great match. And Roy, he is the life of the party. He is extremely inspirational, I-want-to-go-run-through-a-wall-for-you type of leader. So that resonated well with me and sort of my upbringing. Kind of through team sports. So I thought he was great and the other two folks were Mark Cote and Greg Hoffmeister were also both actually college football players that Greg played at Dartmouth and Mark played at Harvard. So I was like, if nothing else, they’ll at least like get me as being the football guy trying to now have a real job and so I felt like there would be some protection and safety in that.
Scott Orn:	They turned out to be the toughest critiquers of you probably.
David Bergeron:	Of course. So that was at least sort of my mental math I was going through when I jumped right at that and jumped in in 2007 and kind of the rest is history. I mean, obviously a weight hit and that was like an interesting time. I didn’t know any different at the time. Like it was just sort of, I was like, this is great. I’m early in my career. It’s all about hustle and attitude and effort and so it didn’t really matter that the market was good or wasn’t good because I didn’t know anything different. And so we just kind of ploughed through that time and had a bunch of great really interesting projects and clients and I think it was such a collaborative type of environment that we all worked together through all that and had year after year great years and banner years through 2008, 2009, 2010. And then we got to a point where my wife was actually graduating from Harvard Business School and we were at that sort of like crossroads where we actually loved Boston and we were like we could have a life here and stay here. And I was at a point in my career where you start developing some great relationships and sort of the repeat business starts occurring.
Scott Orn:	Boston’s kind of small town too.
David Bergeron:
Scott Orn:	It’s a very small town. Once you’re in, you’re in.
David Bergeron:	Yeah. And there’s a great community out there and there’s a crew of folks that I became really good friends with that play basketball in the mornings over at Shad at HBS and just that were like uber connected throughout that city from kind of a finance and tech perspective. So I felt like we had like an establishment there that we can sort of lean on and build life on and have a family and be Bostonians forever. But also knew that T3 had like bigger visions and large grandeur to really continue to build this thing globally and having my ties back to the West Coast and the connections back to Stanford and the desire to not shovel snow for the rest of my life, I was like, I raised my hand. I’m like, “Hey guys, what if we actually open a West Coast office?”
Scott Orn:	Oh you’re the guy who did the West Coast?
David Bergeron:
Scott Orn:	I’m the guy who did the West Coast. Good for you. That’s amazing.
David Bergeron:	And we did a really good job Roy and Mark and Greg and I spent about a year coming out here, traveling every 6 to 8 weeks and meeting with folks like you. Entrepreneurs and venture capitalists to make sure like this idea would work out here. And number one it would work and number two that someone else wasn’t already doing it.
Scott Orn:	Explain the idea. What is the idea?
David Bergeron:	So the idea is pretty simple. Like at the most fundamental level, like T3 wants to help build great companies that changed the world. Like that is our sort of like headline kind of we rally the troops around that. And from our perspective, the traditional real estate model from a services perspective was completely broken and historically, it was built to service the folks with the money. Like it’s the landlords, it’s the asset managers, it’s the big owners of these buildings and big portfolios.
Scott Orn:	Surprise, surprise. Things are tilted in their benefit.
David Bergeron:	Exactly. And so what we wanted to do is actually to build a company that was built for the entrepreneur and built for the entrepreneurs and investors and basically sat down with folks who only worked as CEO’s or only worked as venture capitalists or were bankers themselves servicing this industry. And they said, if we could design a real estate services company that exclusively worked for you and the companies you build, what would it look like?
Scott Orn:	Get rid of the conflict of interest.
David Bergeron:	Get rid of all the conflict of interest. And in addition to getting rid of the conflict of interest was get hyper focused on their business. So the widget of real estate is very commoditized in a lot of way. I mean I think a lot of what we do and a lot of what sort of the mentors I’d been around, guys like, Ted Wang and others who have done a really good job over the years like building a brand within a very commoditized industry have been able to identify like an expertise and a niche and sort of they put in their 10,000 hours on a very specific skill set that no one can take away from them and you can’t fake.
Scott Orn:	I actually think, this is a little digression but because our business is a little bit like that too. People think startup CFO or accounting is a commodity but actually when you’re actually working in the industry and I’m sure you feel the same way about startup real estate, you see all the people doing it wrong like almost everybody. And then you’re like, wait, this is not a commodity. You may think it’s a commodity but that’s because we haven’t explained our value prop to you well enough and we haven’t like actually communicated why we’re different, why we’re better. And then once you kind of internalize that, the sky’s the limit because you can actually explain why you’re different from the crowd who 80% of the time is doing a bad real estate deal without maybe even knowing it or messing up your books and screwing up the entrepreneurs, screwing up the startup.
David Bergeron:	And the reality is, these are really important decisions early on in the process. I mean you can argue that a seed-funded company or a Series A-backed company like what do I have to lose? They’re only signing up 12,000 sq. ft. lease or we only have $700,000 in the bank. What’s the big deal?
Scott Orn:	Our financials are so easy.
David Bergeron:	And the reality is, that is the inflection point, we have an opportunity to set things on the right path. And if you can sort of set yourself up for success in a way that you’re kind of like with the way you’re thinking strategically about these internal processes and outwardly how that’s going to affect your business both from a recruiting perspective, from a retention perspective, from a headache perspective, from a productivity perspective for you and your management team, eliminate those distractions as early as possible and you will set yourself up in a way their competition isn’t.
Scott Orn:	I’m nodding vigorously and we have a saying, because we put them on the right software systems, build the right practices and we say, you can scale to 100 in place now easily without changing anything. And it’s the same thing. So with that in mind, what are kind of the core advice you give or core services you provide to get them on the right track for real estate?
David Bergeron:	So the biggest thing we’ve done is we’ve invested in people. We fundamentally believe that with higher real estate expert and advisor and what you’re getting, you’re not getting a different product or a different software, you’re getting a head on the top of two shoulders that really give you advice and what we want to do is make sure the advice that we’re giving from our perspective is second to none and that there’s no other master we’re trying to serve. There’s no other sort of interest that we’re trying to sort of appeal to and again, eliminating any sort of distractions and again, people are human, right? So if they’re paid or incentivized to do things that sort of benefit them personally, they’re going to do that. You can’t fault them for that.
Scott Orn:	And I also think like a lot of times startups are started by a team of fairly young people or fairly inexperienced in startups like maybe even they’re an older seasoned team but they’re corporate people and so they don’t know the conflict. They don’t know that like hey wink, wink, Mr. Real Estate Professional’s getting a deal over here and they don’t really care what’s happening with your deal.
David Bergeron:	And so what we want to do is basically build a team that would actually fight for the little guy and would go to the mat for that last dollar when if you’re working in an office that is playing both sides of the fence, you want to kind of play nice in the sandbox a little bit. That’s part of the business. Companies have built fantastic businesses doing this for a long time. It just doesn’t behoove our client base. So that’s why we want to do it different. So back to the people and it really was thinking about how do we go find experts that are practitioners who have ran real estate at Twitter, who have helped scale places and been in finance at Goldman Sachs and other big private equity firms and technology companies.
Scott Orn:	Basically on the owner’s side if I hear that.
David Bergeron:	On the owner’s side and on the end-user’s side. So we’ve brought in folks who have actually worked on behalf of technology companies. So they understand like how the politics works around this decision-making. Like what are the challenges culturally when you do move and how do we think about like the little things that matter that people and engineers may complain about? How do we just like cut all that noise out, solve that Day 1 and have no sort of qualms or sort of reservations about what we’re doing? So that’s where we kind of get to this like, it’s almost like this outsourced real estate department for you and what we don’t want to do is pretend to be experts in things that we’re not. So we have a very collaborative approach which is when you hire T3, when you work with T3, you have access to our entire firm and that’s on both coasts. And each person we’ve brought on …
Scott Orn:	Is that because you do a lot of startups that are kind of big enough to have multicoastal presences?
David Bergeron:	Yeah. It’s both that but it’s really just more of on access to expertise. And what I want to make sure is that if we have someone who is just fantastic at sort of workplace consulting and really understands how to lay out map out a team and you got a floor plan of 5,000 sq. ft., how do you make sure that 5,000 sq. ft. is set up as effectively as possible to drive the proper collaboration? Eliminate the distractions and make sure your sales team is super productive.
Scott Orn:	So you don’t have to develop sitting next to the sales guy who’s yelling into his phone.
David Bergeron:	That’s right. So the idea is to not let them guess but actually provide historical anecdotal evidence. Here’s what you should do, it’s been done this way before and let’s make sure it fits kind of what your requirements are because every company is going to be a little different but let’s actually add value to this conversation versus being a yes man or totally reactive. And so that’s where you get this venture folks that really understand their discipline and again, I joked that I sort of … we have this Avengers of real estate approach where just like we have these superheroes that have fantastic expertise in very specific domain knowledge and I want them to be the one to answer your specific question about that. Not me. And so you really get this network effect that …
Scott Orn:	So it’s not like just like just purely negotiating a deal. It’s a lot of like actual real services where you’re advising them and figuring out how to lay stuff out or what they can do special with a certain space.
David Bergeron:	Absolutely. I think the reality is real estate’s a pretty true market from kind of Econ 101 perspective like supply and demand really drives the price and availability and sort of negotiation leverage in real estate. And so there’s certainly latitude to do different things and obviously become strategic in a negotiation. We fight as hard if not harder than most for on behalf of our clients. But that’s within a certain band of opportunity. I think our vision is like the traditional real estate brokerage model’s completely … it’s defunct and it’s a dinosaur. It’s going to die in the next 10 years and what we want to be doing is developing the next generation of real estate advisor and that’s what T3’s really able to do. What is it beyond just the transaction and beyond just identifying? Where can I find 10,000 sq. ft. in San Francisco? That’s going to be effectively commoditized today and will continue to become more commoditized as all these technology companies solve this in multiple verticals.
Scott Orn:	Is it then become like who are the trusted advi … it’s like … it’s the relationship right? It’s like, oh I just know to call David whenever one of my companies is growing out of their space or whatever. And then you have that pipeline. You have those relationships and so it’s kind of like a done deal before it’s even a done. Because they know you do a good job.
David Bergeron:	Yeah. And again, that trust is earned not given. That’s why for us, we really over-index and invest in our early stage clients and we believe like that’s where again, the most impressionable opportunity to like set them up for success can be accomplished.
Scott Orn:	I remember you told me that last time. Because we do the same thing. I tell our clients sometimes that we’re making a bet on them in the same way VC because we only have so much capacity. And so it’s like we only want to work with the best ones that we know are going to get … you never know but we think will get to a Series A and Series B. And you guys are doing that all the way through IPO.
David Bergeron:	That’s right. And you want to sort of bring those resources and bring that knowledge base down to the most basic three folks and a dog out of a garage. That’s the company that could be the next fantastic again, back to we want to help build great companies that change the world. That’s where they start. And so we had to get all the way down there.
Scott Orn:	Totally agree. So this has been amazing. What are like a few takeaways? So there’s going to be a lot of startup CEO’s listening to this. What are a few takeaways for them when they’re thinking about space or maybe they’re growing out of their existing space like what’s your hit list? What do you tell them?
David Bergeron:	In today’s market, there’s kind of an interesting time where you’re seeing a flood of sublease space come back on the market.
Scott Orn:	I thought this was going to happen like six months … I didn’t mean to interrupt you. Yeah. Talk about why that’s happening because I have a theory.
David Bergeron:	It’s a good question but I think there’s a lot of theories on why it’s happening. I think there’s a combination of sort of macro factors from the venture capital side and sort of reduced investments that are now occurring kind of slowdown in Q4, obviously a relative big drop in Q1. Obviously the public markets are having sort of a volatile time right now which makes people a little hesitant. And to be honest, every client of mine at some level is like the CEO or founder is like convinced the end is looming and wants to make sure they’re not the last one.
Scott Orn:	I tell everyone that.
David Bergeron:	And so there is now this thought of making any sort of long term decision is terrifying. Justifiably so. If you’re signing a two-year lease is an eternity for most companies, let alone a five or seven-year lease which what you have a lot of the landlords in this neighborhood trying to push right now. And you’ve just got these influences that are the landlords and owners have been making a ton of money the last 4 or 5 years and they’re doing a fantastic job or running their business.
Scott Orn:	They got used to it.
David Bergeron:	They got used to it. And you effectively have this sort of like pipeline effect where it’s like the pension’s funds and the teachers unions and the firemen are given their money to venture funds who are funding the next great company and all the money’s ended up in the landlord’s pockets. There’s like this wealth transition.
Scott Orn:	Yeah. There’s been a ton of money flowing into VC like 30 billion last year which is a big number relatively speaking. I think it was like 20 billion in 2010, 2011 and 2012. So 50% and then they’re all doing late stage deals and probably I don’t want to put words like 9 months ago, a late stage company would have no problem signing a big lease because they knew they could just sublet it to somebody or maybe they didn’t even sublet it. They just let it sit there because they’re going to grow into it. And now everyone’s facing these hard decisions.
David Bergeron:	Now you’ve got kind of almost 2.5 million sq. ft. of available space on the sublease market. That’s up 50% in the last quarter. So you’re seeing kind of this flood occur and we’re almost back to ‘09 levels to around 3 million sq. ft. of sublease space in San Francisco. We’re nowhere close fortunately to the …
Scott Orn:	The prices are still way up though?
David Bergeron:	The prices are still up. The ‘01 levels were close to 9 million sq. ft. So we’re certainly not there yet which is good and you will find some traditional folks who will sort of say, oh this was all anticipated and fixed growth that a lot of these later stage companies were taking to grow into overtime. So a lot of it was even planned before anything had occurred. There’s some truth to that. That’s an absolutely valid argument. But I will say that once there’s companies that are having difficulty fundraising again and or missing kind of their sales metrics and have to start getting creative with their cash, they’re going to be the first ones to say, “I know I signed a lease for $75 a sq. ft. I’ll give it to you for $50 because I can get out of my 45,000 sq. ft. lease and down to the 12,000 sq. ft. that I really need and still make out better than I am from cash flow perspective.” So but you kind of get the tipping point there is once these sublease rates fall below the direct market rates, around kind of that 25% to 30% discount rate, that’s when the whole thing starts to become suspicious. And that’s when you start to have this, okay, now, despite big landlords have had great banner years the last 4, 5 years, that delta starts to become a real delta and that’s when I know we’ve made a lot of money and we can hold our top rates on our best buildings for 9, 12, 15 months at rates that may not even be justified from the demands side of the market but we can hold that as long as possible. At a certain point that breaks. And then the market actually starts to turn. And you’d have a decrease in downdraft.
Scott Orn:	It’s pretty interesting right? Because your startups come to you and they say, hey, should I sublease or should I actually sign a new lease? And the answer sounds like right now would be sublease.
David Bergeron:	Absolutely. The beauty is, there’s more gorgeous office space, tech friendly beautiful polished concrete, amazing furniture, views of the Bay and the TransBay Terminal. There’s a ton of awesome space out there that’s been built in the last 4, 5 years. It’s like, go leverage that. Don’t invest your own money or your own investor’s money into doing that yourself because that’s the capital cost that you can’t take with you. That landlord is going to keep it. There’s no way you’re going to see the end of a 5-year lease probably. You’re either going to die or your company’s going to triple and so …
Scott Orn:	Can you talk about that for a second? Like how do startups get out of their lease if they are growing superfast? Like I think a lot of … this is a question I get all the time. Like oh gosh, we signed a lease that’s 3 years long but we’ve already outgrown it in 6 months. What do we do?
David Bergeron:	So you always want to make sure and back to kind of your sort of advice and tips. Like one of the most important things for tech companies to have is have the most aggressively fantastic sublease language you can get in your lease and there’s different varying levels of what that means. But at the most basic level, you need to have the ability to sort of transfer or sublease the rights of your space without the landlord encumbering your ability to do that. That may be via acquisition. That may be via you go out of business. That may be via you need to double your space and you still have remaining terms. So you really need that flexibility as you continue to grow and it’s one of the most important deal terms in the lease that you really need to make sure you’ve got.
Scott Orn:	And landlords are okay with that, right?
David Bergeron:	95% of the landlords will always give you some version of sublease language. Again, you can get more aggressive on things like profit splits. If you sign a lease 4 or 5 years ago and you start a 7-10-year deal, you may be in a $22 split.
Scott Orn:	Oh so you’re making money? I didn’t think about that.
David Bergeron:	And now you’re like, oh my God, the market’s now 65-70 for my space. Now, some landlords will say, we want 100% of those profits. Some landlords won’t ask for it and actually give you 100% of the profits. Market standard right now in San Francisco is to split those profits 50-50.
Scott Orn:	That seems fair.
David Bergeron:	After netting out sort of transactional cost and brokerage fee, et cetera. But that’s an important thing to have in there because that gives you real value and it also gives you leverage if you want to terminate, right? So you say, fine. I’ve got another 3 years off my lease. I need to double my space. I’ll give you the space back. I want you to rip my lease. I’m $10 on the market. You can lease this and no problem. It’s a great space. And very often you’ll have a landlord if they feel like they’ve got a bird in hand and have the ability to lease it to someone else at a higher rate and not have to split the profits with you as the tenant, great. They’re going to do that.
Scott Orn:	And they can lock that new tenant to a longer lease?
David Bergeron:	That’s right. So it kind of gets back to as long as the rates are rising, everyone’s got a lot of flexibility, right? Kind of back to like the housing crisis a little bit. So the correction will occur here shortly and that’s where the realities of subleasing at a profit in my mind will become few and further between. And those opportunities will be tougher to find.
Scott Orn:	It’s good for the startups in that they’ll be able to find awesome sublease deals.
David Bergeron:	The other thing I would say that we always tell our early stage companies is like take less space than you think you need. It’s always easier to find someone to backfill or a buddy that like come shack up with you or but if you … being tight and being crammed is actually being really positive from an environmental perspective for most companies. To feel like there’s some hustle required like we got to still earn it.
Scott Orn:	We got to bunker together.
David Bergeron:
Scott Orn:	Yeah. And there’s a lot of energy that’s created by that. I like that. That’s a really good …
David Bergeron:	And so a lot of people will say, you need a 150 sq. ft. a person and you should think about extrapolating out 3-5 years of your growth plan and like well, I know you’re 20 people a day but we should probably take 18,000 ft. Well, no you shouldn’t because that’s insane. The amount of cash you’ll be burning on those first year, two or three until you actually get to like sort of a tipping point like this is actually the right size of space can be really dangerous. And so again, take whatever you think you need and chop 25, 30% off the top and find something that’s like that size.
Scott Orn:	That’s really good advice and especially like I think that’s probably counter to what a lot of people will say probably because again, most people in the real estate industry are on the landlord’s side so they want you to take more space. Whereas you’re a startup-centric, you’re actually like, “Hey, I’ve seen a lot startups be successful and once they’re successful, they’re living, breathing, sitting next to each other in the bunker together and that’s what makes them successful.”
David Bergeron:	And there are few things more exciting to your company for a cultural perspective than to have to move every 12 months because you’re doing so damn well. Like, “Holy shit we grew out of our space again. We’re crushing it. Guess what guys, we need new space.” And like yeah there’s some downtime and some disruption but that is like far easier to solve for.
Scott Orn:	Not with like the Cloud and all that kind of stuff now. We don’t even have any physical, the only physical infrastructure we have are tables and computers. Everything else is in the Cloud.
David Bergeron:
Scott Orn:	It’s like by tomorrow morning, you guys would be gone. We’re not carting a data room across the street.
David Bergeron:	Which really changed the flexibility and so again, like even if you’re signing a longer term lease, obviously you have to deal with the liability and like you got to find someone to sublease it but again, if things are going well, and you’re taking 10 or 20% haircut in your rent but you’re killing your numbers, you’ll happily do that. Versus signing up for 4 times of space you need day one and now having to fire six sales guys because you can’t afford to meet payroll next month. That sucks.
Scott Orn:	So if I’m to summarize, the ability to sublease, like friendly language for yourself also the … I think this is super smart like take less space than you think you need like it sounds like you said, 15%-20% haircut something like that. That’s really good advice. And then also like look at subleases if you’re new. Like if you’re a new client of David, you shouldn’t be thinking about subleasing. Not even doing a direct deal.
David Bergeron:	The third thing I would say is, you want to be very careful around back to kind of your world which is security deposits. And really being …
Scott Orn:	That’s money you’ll never get back folks.
David Bergeron:	Yeah. So letters of credit are actually a good thing from a tenant’s perspective. A lot of clients sometimes don’t understand that but there’s some local owners around here that may or may not be in good financial standing next 3 to 5 years and if they BK, your deposit may be gone if it’s not a letter of credit. So there’s protection on both ends.
Scott Orn:	And for folks who don’t know that, when you’re doing a letter of credit, oftentimes the startup will actually put like 50k. It’s basically collateralized by the banks. So the bank will divide it out into a new bank account and say like, this is our $50,000 cash that backs our letter of credit. The bank will then write the letter of credit to the landlord and what David’s saying is, if you just gave that landlord your cash, the bank is going to fight for it. The bank’s not going to mess around. The bank is a big player. They have legal teams. All that kind of stuff. If the landlord goes bankrupt and you gave them your cash instead of letter of credit, that cash is probably gone.
David Bergeron:
Scott Orn:	You’re an unsecured creditor. You’re not going to get it.
David Bergeron:
Scott Orn:	You end up in bankruptcy court and number 17 on the list. And so … So it’s gone. That’s a phenomenal point.
David Bergeron:	And by the way, I’ve also had landlords say, “No, no. I want cash.” I’m like, no you don’t. Because if this company goes out of business, they actually have the same problem.
Scott Orn:	They do but in my … I’ve been through like bankruptcy with companies and the landlords are just like, it’s like they don’t respond to anything. [Crosstalk 00:32:09]
David Bergeron:	But I think from an argument perspective that I always make, again, back to securitizing the company in my client’s side, is it actually behooves both sides. There’s a small service fee to set those things up but I think they’re well worth it.
Scott Orn:	Totally negligible.
David Bergeron:	They’re well worth it. But being very clear and aware early on in the process what that security deposit may look like, because I’ve seen deposits get north of 12 months in the city as of late. For some of these larger clients, you have landlords investing big dollars to build up the space. That’s real money. And if you’re signing a big lease at a high rate, that can be millions of dollars. You need to know that before you get to the execution of the lease.
Scott Orn:	It’s also going to be something that you have to work into your fundraising plan. That’s really …
David Bergeron:
Scott Orn:	Yeah. Okay. Those are three awesome tips. What’s something … your constituents are the startup founders and then like venture capitalists because they’re really backing the companies. What’s something that makes the VC’s, like when you go meet with VC’s, what do you tell them that makes them really happy? Is there like a … I mean these three points are really good advice but like, is there something that the VC’s that just like, they get that little smile on their face?
David Bergeron:	They love to hear that the end is near for the landlords. The market’s going to crash and space is really cheap. So that’s an easy win when we can start talking about kind of why that may be happening and they got to quit writing check. I’d even had landlords ask for VC’s to actually guarantee the lease of the portfolio company which is insane.
Scott Orn:	Never going to happen.
David Bergeron:	My other last point, never ever ever ever personally guarantee a lease as a founder. That is like crazy. But especially not a lease and it’s absolutely not market and don’t let anyone ever tell you it is because it’s insanity.
Scott Orn:	Yeah. You’re right though. And a lot of venture capitalists have been doing it for a long time. So like back in ’01, ’02, ’03, it was actually driving … the leases were driving a lot of companies into bankruptcy because the company would actually like they would fire a big group. They cut and they would be healthy again. But they have this huge lease payment. That was the first time the VC’s got really scarred and so they think about that. They remember 15 years ago. So I’m sure that does make them happy.
David Bergeron:	I think the other side that the VC’s often like to hear about is there’s also this way to kind of like leverage your network in a way that allows you to sort of cohabitate together. And I think what you’re seeing the, WeWorksTheWorld, the RocketSpace and there’s a bunch of really great examples of businesses being built on the fact that we are as an economy changed the way we work and there’s this new movement on people thinking about their workspace and the ability to be mobile and the ability to not be saddled with the big long term lease and so thinking about at the early stage, working out of either a friend’s office or like you guys have done here, shacking up with another company is a really really smart place to start. And again, talk about like creating no overhead or exposure is signing month-tomonth leases and tell your team of even 30, 40, 50 people you can make that work and frankly, I’m seeing a lot of our big clients that are going into new markets and setting up in London or in Tokyo or Singapore that say, we’re going to establish new sales team there. We’re a 30 billion publicly traded company. We could certainly go sign our own lease but I love the flexibility and test to market when you’re in a new market to understand exactly where you want to be, what you want your center to be, what the demographics look like and sort of make sure you really nail it. So we can take some of those learnings that are working really well for big tech companies and bring them down to the local startup scene.
Scott Orn:	That’s great. I also think there’s a huge cultural benefit to like working with another group. You share best practices like crazy, like Thoughtbot has taught us so much about like marketing and web design. And then we actually refer a ton of clients over at Thoughtbot and the clients who actually work with Thoughtbot are so happy. It’s like unbelievable. It’s like the greatest thing ever. So I’m a huge fan of that.
David Bergeron:	So one quick plug for some of what we’re doing that’s really interesting is at the most basic level, real estates commodity we work in. And for so long, none of the other sort of competitors of ours have ever like sort of leveraged that commodity the same way attorneys give free legal advice and a lot of investors will make personal investments. So we 3 or 4 years ago, decided to open what we’re calling, I mean they’re these studio concepts that we have in Boston, Palo Alto and are opening here in San Francisco on May and the idea is to basically bring that ecosystem together. So you’re talking about kind of that cross-pollination being productive for any company, is to get sort of thought leaders both from the venture side and from kind of like EIR technology side along with some design folks and like really kind of bringing these folks together to work together. I mean we’ve seen it work. I mean we had a member in our Palo Alto studio literally identify a venture investor and get their Series A landed for $10 million from actually arguably the top venture capital firm in the world because of their involvement in the studio. Like they met that person at an event we hosted. And so there’s just some great serendipity that occurs when you get these people together to have sort of mutual like friend circles and interest desires and goals sort of working together and again, you can’t force it. You can’t ever put a number to it and assess a timeline on when’s the ROI going to be for being a part of this studio but we’ve got dozens of examples of that stuff happening and back to again, finding friends that you can work with and work for in a way that doesn’t distract your kind of your core business can be really additive and helpful during the early stage.
Scott Orn:	That’s phenomenal. Okay. We got to wrap it up. You got to go. Real quick, where can people find you?
David Bergeron:	So website’s just T3Advisors.com. My email address is david@t3advisors.com and yeah that’s easy.
Scott Orn:	Awesome. David Bergeron, T3 Advisors, thank you so much. You dropped a ton of knowledge here. This is awesome.
David Bergeron:
Scott Orn:	Love it. Thanks Scott. Bye.
David Bergeron:	See yah.

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