The Arms Race for Talent

Sure, the next-generation web is cheap.  It is about cheaper bandwidth, cheaper hardware, free software, and better tools.  In other words, you get much more done with much less than in years past.  I have written about this in a prior post, Web as Platform.  Anyway, has anyone noticed the arms race for talent out there?  Sure it is cheap to get a product up and running but to scale any business you need talented employees in engineering and product.  I have heard numerous stories over the last few months about smaller, innovative startups having a hard time bringing on qualified engineers as Google and Yahoo are offering 3 year packages of a $1mm or more in salary, restricted stock, and signing bonus.  I must admit, this is a pretty tough environment to compete against.  In fact, as you look at the landscape, everything that Google and Yahoo is doing is about stockpiling talent.  Let's not forget that all of those tiny acquisitions of small startups is about bringing on the best talent possible. 

So then the next question you may have, is how do I compete for this talent?  It goes back to selling the vision of your company, the ability to make a huge impact in a small and thriving organization, and outlining the equity opportunity.  Those seeking the comfort of a nice paycheck at an established company need not apply.  All that being said, despite the next generation web about being cheap, the costs are rising quickly as the big dogs with hordes of cash are not afraid to spend it to stockpile their talent.  As you look at the bulk of your costs over the next couple of years, it is clear that your budget will reflect a huge percentage of cost in bringing the right people on board.  No matter how you slice it, despite this mantra of cheap, it is not as cheap as we all want because personnel costs are rising, not decreasing.  This next phase of ramping up companies is not about how much you spend on marketing as most services today are spread word-of-mouth.  It is not about technology spend as it is way cheaper than years past.  It is about finding and hiring the key people who know how to scale a back end infrastructure, who can create and deliver innovative product, and who know how to leverage word-of-mouth to create a huge opportunity.  And you must do this when Google and Yahoo are not afraid to be the George Steinbrenners of the web.  The good news is that just because you spend the most on your payroll, you don't always win.  Just remember Billy Beane and his Oakland A's.

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This post was written by who has written 358 posts on BeyondVC.

13 Responses to “The Arms Race for Talent”

  1. Joe S. Jan 15, 2006 at 10:40 am #

    Do you have any evidence to support this statement: \”No matter how you slice it, despite this mantra of cheap, it is not as cheap as we all want because personnel costs are rising, not decreasing.\”

    I don\’t. In my business (software) personnel costs have always been the largest % of my expenses (as in any business). I dont find any increases to this, nor decreases, but I dont believe they are rising. I am wondering where you see this.

  2. Ed Sim Jan 15, 2006 at 10:58 am #

    yes, on the margin, for the average employee, you are right in terms of costs staying flat, but for the key people it is changing. in a number of companies, I am seeing engineering costs for key talent going up due to the inflation of salaries and overall compensation (cash, restricted stock, guaranteed contracts) from the Googles and Yahoos. In addition, this is not just for VPs or Director level people. This arms race is going deeper into hardcore engineering talent. We have lost a couple of key people from existing portfolio companies because we could not compete with comp packages. In addition, a few startups I have been speaking with either recently lost some key talent or lost recruiting battles based on significant differences in compensation. While I cannot give names of individuals, this is a definite trend I am seeing.

  3. David Foster Jan 15, 2006 at 12:16 pm #

    Ed, do you think the people that your portfolio companies are losing to Google, etc are *realistically* assessing the value of their options or restricted stock grants? Seems to me that anyone assuming a future % growth in Google stock price based on the historical growth is likely making a big mistake.

  4. Jeremy Wright Jan 15, 2006 at 1:03 pm #

    Certainly many of my friends who run companies that are hiring SDE’s and team leaders, and friends who *are* SDE’s and team leaders are seeing an increase in packages for key people.

    But, not to the extent where it’s an old school arms race… Yet. The reality is that there are still very few truly qualified people out there. More than in the 90s, to be sure, as quite a few of the smartest started doing their own companies and ventures and are now not only smart but incredibly experienced to boot.

    But, there isn’t a massive amount of high-quality talent out there, and I’d estimate the price being paid is about 2-3 times what it was 6-12 months ago. And that’s not even for the superstars. A friend of mine was a recipient of a 1M+ multi-year deal from Google just recently, and he felt he could have gotten more if he’d held out a bit.

    That BusinessWeek (or Wired? Can’t remember…) story from a year or two ago about the coming labor shortage may have been more spot on than most people wanted to admit.

  5. Charlie Wood Jan 15, 2006 at 1:36 pm #

    Step 1: Locate your company somewhere other than Silicon Valley. I have access to some of the world’s best engineers, who have built some of the most trafficked sites in the world. Austin rocks. :-)

  6. Chris Yeh Jan 16, 2006 at 3:04 am #

    One critical thing that Google has also done to bolster its recruiting is to offer what people perceive as a better place to work: A geek meritocracy, stocked with every kind of amenity, where people are encouraged to spend 20% of their time working on whatever they are passionate about.

    Not being a Google employee, I can’t say to what extent this is PR versus the truth, but I think that one thing a startup can do to improve its chances in the talent wars is to create a truly extraordinary and appealing work environment. And it is possible to do so without spending a fortune.

  7. socal_rocks Jan 16, 2006 at 3:22 am #

    It’s not just quality engineering talent. It’s _all_ talent. Sure, great engineers are tough to find, but it’s almost as hard to find great bus dev and product managers. I would argue that a good bus dev or product manager is worth 2-3x, but convincing a board that those salaries are justified is a challenging proposition.

  8. Gavin Doughtie Jan 17, 2006 at 1:48 am #

    I’ve taken 30K+ pay cuts to work someplace I thought was interesting, even when I doubted its chances for breakaway success.

    Something’s in the air today, too:

    link to understandingxml.com

  9. Matt Jan 17, 2006 at 3:13 am #

    Not being in SV does seem to help a lot. As much as people want to work for Google, working for Google means moving. There’s absolutely no amount of money you could pay me to live in California (although a chance to work at Google would have gotten me pretty close to sufficiently motivated, regardless of the comp package, back before LEL moved into its current phase).

    Ultimately no startup is going to be able to compete in a comp auction against a determined, cash-rich, post-IPO behemoth. The secret is to make sure we can get (and keep!) people as excited about working for us as they’d be about working for one of those other companies that might conceivably make a counter-offer some day.

  10. Charlie Crystle Jan 17, 2006 at 1:21 pm #

    We’re recruiting talent away from high-density population areas; our target is high-quality people with experience who’ve had enough of urban living, and want a purpose-driven company experience. Regional attraction–cost of living, quality of life, schools, and in our case, the smell of manure on Amish farms in the Spring…you get the picture. Google might offer $1 million, but until they get out of the Valley they can’t compete on quality of life. Nor are they going to suck up all the talent.

  11. James Jan 18, 2006 at 6:38 am #

    The packages offered by large enterprises are starting to become even more lucrative in terms of not only stability but stock purchase plans, time off, etc.

    I am surprised that you don’t think that one technique to hiring top talent is in figuring out a way to achieve work / life balance.

  12. Tony Wright Feb 10, 2006 at 5:14 pm #

    This is a great post! Sadly, I think the arms race for talent is one of the things that will be blowing up the next “bubble”. I always get amused when people say, “this time, the dotcom boom will be a healthy one!”.

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