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MAY 10, 2000


Building a Nest for Fledgling Dot-Coms

Debra Larsen's TechSpace gives Big Apple startups all they need to get going

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Some three years ago, New York commercial real estate broker Debra Larsen realized she was on the wrong side of the business. Her client, an e-commerce software company, couldn't find space. "Everything we looked at was wrong -- wrong location, wrong aesthetic, wrong technology infrastructure," Larsen remembers. "They finally had to sign a three-year lease for a space they knew they'd outgrow in six months."

It was the same story for most of her Net-startup clients. Larsen knew what they needed: High-tech spaces with relatively short leases on terms that companies with no income -- but great prospects -- could afford. She also saw that these aspiring Net highflyers needed help with the mundane details of running a business.

MOVE-IN CONDITION. So Larsen founded TechSpace and became a landlord to dot-coms. In 1997, she rented a large commercial loft in a trendy downtown Manhattan neighborhood and sliced it up into high-tech cubicles -- a ready-made dot-com clubhouse. The entrepreneur had tapped into a burgeoning market: Serious investment money was starting to flow into the dot-com sector, yet no one was serving that real estate niche at the time in New York.

Furthermore, Larsen offers her tenants services ranging from the most basic clerical functions to business-plan development. She has also added a mailing facility and travel services. TechSpace can help companies analyze their financials, negotiate contracts, design logos and business cards, and handle their payroll and benefits system. Eventually, the outfit will even help a company find and design new space. "All you have to do is bring your computers," says tenant Stephen Werther, whose beauty-products review company, 2glow.com, moved in with seven employees last January.

Larsen's idea was prescient. In the last few years, the influx of dot-coms has driven Manhattan commercial rents to astronomical levels, and landlords now exact even harsher terms to offset the risk. Unlike many of her clients, Larsen isn't living off venture capital. TechSpace isn't profitable overall because it's investing heavily in new spaces, but its New York revenues more than cover current costs.

LANDLORD-CUM-INVESTOR. Fifty-five percent of the company's earnings comes from rent, according to Larsen. Phone and Internet charges make up a further 25%, while the last 20% comes from fees for office services. Larsen says the plan is for revenues to come equally from rent and services. Apart from fees collected from preferred vendors and strategic partners, TechSpace doesn't charge yet for most of the high-end services.

Moreover, Larsen gets a monthly rent check plus the option to take a 10% share of new tenants' next round of funding -- gentler terms, she says, than those of most landlords or incubators. Tenants sign month-to-month leases, so they have to cough up only two months' rent for a security deposit. Most property owners require as much as two years' rent for leases that average 10 years (see BW Online frontier, 4/24/00, "Selling Their Souls to Be in Silicon Alley"). She asks to participate in only one financing round. "The way we're taking equity is better for us and them," Larsen says.

She looks for tenants who will be strong enough to graduate to their own spaces within two years, though 8 to 10 of the company's original tenants remain. "We're looking for entrepreneurs who want to -- and can -- do this by themselves," she stresses.

DESIRABLE RESIDENCE. The formula seems to be working. Within a month of opening its doors in spring 1998, TechSpace was booked up. Since then, Larsen figures she has turned away 1,000 applicants. To date, 100 companies have come through TechSpace, which currently houses 35 tenants, each with an average of 10 employees.

Larsen plans to open four more locations -- in San Francisco, Boston, Toronto, and a additional one in New York. Safeguard Scientifics, a minority shareholder of the Internet Capital Group, invested $56 million in TechSpace last October. In January, Larsen used $14 million to start the company's venture-capital arm, TechSpace Xchange. So far, Larsen says she has put $5 million into six of her tenants through the Xchange.

On a recent Friday evening, TechSpace's industrial loft isn't completely deserted. A few stragglers linger at their computers, while a couple of people blow off steam over a game of pool. The ambience comes with the rent. A former model and real estate broker for eight years, Larsen describes every arc and bend of TechSpace as a deliberate creative decision. The cafÈ chairs come from the Museum of Modern Art store. A garage door -- a metaphor for the mythical garage where baby companies come from -- separates the main conference room from the reception area.

TechSpace "was a hard sell to raise money at first," she says. "People thought dot-coms wouldn't want to congregate in one space." They were wrong. 2glow.com CEO Werther, who has already struck strategic deals with two other TechSpace tenants, says having close neighbors provides opportunity. As Larsen figured out, even Internet entrepreneurs are happier doing business with someone they know.


By Stefani Eads in New York


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