Southern Startups: Technical Hiring

Small Market Startups: Technical Hiring

This article is the first in a series of articles discussing the differences between running a startup in a developed startup ecosystem (like Silicon Valley or Seattle) and a less developed startup community (like Birmingham).  Deal Co-op operated out of Seattle during TechStars and is currently based in Birmingham, Alabama, so we understand the unique challenges of operating in both large and small markets.

Developed Startup Markets

Recruiting technical talent in an immature technology market fundamentally differs from recruiting talent in a startup hub.  The well-documented “Talent War” in Silicon Valley has elicited copious commentary from the tech community.  In short, as a result of intense competition among companies in established tech markets, it has become extraordinarily difficult and expensive to recruit technical talent in established startup hubs.  The level of competition in these established markets is a direct result of a boom in the number of tech startups.  Three factors have contributed to the rapid growth in the number of technology companies: 1) the costs of producing commercial software have decreased, 2) there has been a rapid expansion in the availability of early stage startup capital, and 3) in the wake of the recent economic downturn, the relative risk of becoming an entrepreneur has shifted.

The costs of producing a commercial software product have decreased, which has allowed small technology companies to build meaningful products without incurring extraordinary development and opportunity costs.  Previously, building a software product required large capital expenditures at an early stage of the venture.  Now, with a sufficient level of talent and motivation, entrepreneurs can build prototype software at a substantially lower cost.  This has caused a significant downward shift in the “cost of trying.”  It has never been less expensive (in both actual and time costs) to build a software product, so more people than ever are trying by starting companies and building prototypes.  Each of these fledgling projects needs technical talent to realize their vision, and in the aggregate, they have caused a dramatic upward shift in the demand for engineers.

Early stage funding has also experienced a dramatic recent expansion.  While the rationality of the current VC bubble can be debated, its existence is generally accepted.  JS Cournoyer has provided a thorough description of the effects of increased seed and growth capital on the labor market for technical talent.  In short, more capital allows more companies to maintain viability.  An increase in viable startups has prompted an increase in aggregate demand for technical talent.

Finally, starting a technology company is comparatively less risky now than it was in the past.  As starting a company has become less risky in absolute terms (attributable, at least in part, to the decreased costs of building software and increased access to growth and seed capital), traditionally “safe” career paths have become more risky.  Thus, the risk profile of starting a technology company and the risk profile of becoming a lawyer or banker have converged.  Individuals who previously would have chosen a more traditional career path with a low level of perceived risk have decided to start their own companies.  In the aggregate, these new companies increase the demand for technical talent.

Each of these factors disproportionately affects demand for technical talent in large established startup communities versus immature technology communities.  Established markets like Silicon Valley attract new companies and potential founders at a hugely disproportionate rate.  Many of these companies and potential founders relocate from smaller markets.  Thus, the pool of potential founders capable of capitalizing on the favorable shift in startup economics has been diluted in immature markets and concentrated in established startup ecosystems.  The concentration of viable startups in established technology markets exponentially amplifies the demand for technical talent in those markets.  By contrast, the relative dearth of potential founders in smaller markets retards the expansion in the number of startups, and consequently, the expansion of demand for engineers in less developed technology markets.

Immature Startup Markets

Small market startups face dramatically different challenges from their Silicon Valley counterparts in recruiting technical talent.  In less mature startup markets, the costs of identifying technical talent exceed the costs of recruiting that talent.  In large startup markets, finding an engineer capable of working for a technology startup is easy, because there is a large pool of engineers who have already proven their competence by working for other technology companies.  Identifying technical talent in small markets poses a challenge for two primary reasons: 1) a small absolute supply of engineers, and 2) the lack of other tech companies.

Small markets lack a substantial workforce of capable software engineers and developers.  The lack of technical talent in undeveloped tech ecosystems arises from two factors: 1) emigration and 2) culture.  Talented engineers often emigrate from small startup markets to startup hubs for several reasons.  First, immature technology markets cannot match the quantity of opportunities for technical talent in large markets.  Where there may be five technology companies in a small market, there are fifty similar companies in a large market.  For a talented engineer, staying in a small market with limited opportunities can be risky.  To mitigate this risk, engineers often emigrate to developed startup communities that offer more career opportunities.  Second, emigration begets more emigration.  As the quality of the technical labor pool in a market decreases through emigration, it becomes more and more difficult to build a viable technology company in that market.  This drives more potential founders to emigrate to developed markets.  As new potential founders leave, career opportunities for engineers remain static (or in some cases, decrease) and the risk of staying in a small market remains high.

Small markets often also lack a culture that encourages technical skills and produces talented engineers.  In addition to attracting engineers from small markets, large tech markets also build a culture that encourages technical proficiency.  Undeveloped startup markets tend to favor traditional industries and, consequently, produce predominantly non-technical role models.  The best and brightest in immature markets aspire to emulate their non-technical local role models.    By contrast, in developed tech markets, the economy thrives on the skills of engineers, and the technology industry produces successful technical role models for aspiring students.  The implicit cultural biases against technical careers (or in favor of non-technical careers), however, are eroding as the internet makes both technology and tech entrepreneurship more accessible in small markets.  In the long run, the access to technology and startups will yield an increase in the number of students in small markets who aspire to build technical careers, and the supply of engineers in small markets will increase.

In addition to the low number of talented engineers in small markets, the small number of viable startups in immature markets increase the costs of finding technical talent.  In addition to having pro-emigration effects, the small supply of technology companies increases the identification costs of every company seeking talented engineers.  Given that there are few engineers in immature markets that have had the opportunity to prove their technical ability within the framework of a technically sophisticated startup, small market startups are forced to seek talent working in related, but not correlative positions.  Often, talented engineers are underutilized in IT departments in more traditional industries or working on a freelance basis.  These are rarely high profile or well-publicized positions, so it can be a significant challenge to even compile a list of potential candidates.  The time costs of researching these potential candidates is the first significant cost of recruiting technical talent in a small market.

After compiling a list of potential candidates, small market startups still incur substantial costs in assessing the quality of the candidates.  In less developed markets, startups do not have the luxury of relying upon social proof.  Small market startups, instead, must expend resources to determine candidates’ talent and suitability.  By contrast, markets with a large number of technology companies create a large pool of engineers that have already proven their ability to work in a sophisticated technology company.

Conclusion

Deal Co-op has recruited technical talent in both Seattle, a well-developed tech ecosystem, and Birmingham, an immature tech market, and we ultimately experienced more success recruiting in Birmingham.  Seattle provides an incredible culture and environment that promotes the growth of technology companies, and we had no problem identifying talented engineers to join our team.  Unfortunately, the amount of exciting startups, combined with the Seattle tech giants, created a huge demand for developers.  We were ultimately priced out of the technical talent market.  Birmingham lacks the startup culture and technology institutions that define the Seattle startup market, but the city highly values entrepreneurship and provides a supportive atmosphere for startup companies.  Unfortunately, without an established  network of comparable technology companies, the up-front candidate evaluation costs are significantly higher in Birmingham.  In many cases, candidates’ current jobs offer no opportunity to create a useful ‘portfolio’ of past projects, so we bear the full cost of testing their ability.  The lower hiring costs, however, more than compensate for the high up-front vetting costs.  We have found that technical talent exists in our small market, and we face sparse local competition in hiring and retaining skilled developers.  Based on our technical hiring experiences, technical talent is harder to find, but more accessible to an early stage company in less developed markets.

It’s not easy to hire talented engineers in mature or immature startup markets.  Each environment poses unique challenges and imposes high costs on companies looking to hire technical talent.  Indicators about job markets in large and small markets, however, are trending in opposite directions.  Software production costs continue to decrease, VC continues to flow, and college graduates continue to eschew law school and Investment banking for a chance at founding the next Facebook or Google.  The market conditions that have caused the talent wars persist.

The market constraints, however, are shifting in favor of small market startups.  The same factors that have contributed to an unsustainably high supply of tech startups in large markets have begun to alleviate the unsustainably low supply of startups in small markets.  Southeastern markets, in particular, have experienced an exponential increase in VC funding over the last five years.  This funding, combined with the global decrease in the cost of producing software and the shift in relative risk profiles for traditional careers, has allowed more technology companies to remain viable without emigrating to a mature market.  The resulting increase in viable companies in small markets discourages the emigration of technical talent, thus increasing the absolute supply of engineers in small markets.  Additionally, the viability of technology startups as a career path, combined with the increased access to technical role models via the Internet, will encourage a shift away from the cultural biases that favor non-technical careers.  Thus, small markets will begin to produce more home-grown engineers.  Simultaneous long term increases in the supply of technical talent and technology startups will cause a substantial decrease in the costs of identifying and vetting technical talent in small markets.

Fred Wilson’s recent post, The Darwinian Evolution of Startup Hubs, describes the process of building a startup hub.  He posits that each market has a first generation of successful companies that provide a platform for the market’s growth and evolution.  The tipping point for the evolution of a startup community arrives with this first generation.  The Southeast has not yet reached this tipping point, but the boom venture capital has established the potential foundation for the first generation of influential Southern technology companies to emerge.  The emergence of these companies will catalyze a long-term process of building healthy and mature Southeastern startup hubs, and this process will ultimately cause a long-term downward shift in the cost of hiring technical talent.