Silicon Valley and the Talent Crunch

Silicon Valley, like any other industry town, has its own rhythm: vacillating between boom and bust. The severity of the bust (or boom) might change, but the cycles don't change very much. These days, Silicon Valley is feeling very optimistic. A very active angel community, a resurgent venture investment climate, and a plethora of emergent platforms … whichever way you look at it, these are good days to be an entrepreneur. With newer venture funds coming online by the week, it isn't surprising to see a sharp surge in funding and the number of new companies.

It's hardly a surprise, then, that there's an unquenchable demand for talented engineers and designers. Why? Because there has been a sharp upsurge in early-stage investing in Internet companies. Early-stage investments accounted for nearly 11 percent of new deals during the third quarter of 2010 vs.1 percent during the third quarter in 2010. Add to that the number of companies that were funded during the first six months of the year, and talent is getting scarce in Silicon Valley. Job-related search engine Indeed points out that job postings related to the IT industry are up more than 60 percent for 2010.

That's precisely the downside to all the Valley's ebullience.

The Giant Sucking Sound

Over the past few days, I've talked to many people involved in the industry—friends, sources, and entrepreneurs—and most of the conversations I've had have been about people: finding people, losing people, or other people problems. Here are some conversation snippets that get the point across:

Some large Web company tried to hire my engineer, and I had to boost the salary by 50 percent.

I just lost my key developer to Zynga.

Twitter just hired two of my employees.

I have four openings at my startup, and I can't find people.

Welcome to the harsh new reality of technology and its talent crunch. In the real world, we have double-digit unemployment, but on this side of the country, everything seems like it's 1999. You can thank four companies for that: Facebook, Twitter, Zynga, and Google (GOOG). These four companies are sucking up all kinds of talent: designers, engineers, marketing people, and infrastructure folks. They're able to do so by offering them above-market salaries, insane perks, food, and a cachet that's nice to have during dinner conversations.

It's only going to get worse; Zynga has leased 270,000 square feet of space in San Francisco. The same news story also mentions that Twitter is going to be looking for new office space of around 200,000 square feet.Add to this the new offices for Google, and you're looking at three Web giants that are going to be hiring a lot of people to fill the extra space they're renting.

Here's what Zynga, Twitter, and Facebook have to say:

We (Zynga) are in high-growth mode and will continue to hire for the foreseeable future.

Facebook is looking to grow at a healthy pace, but is unlikely to double its employee base over near one year.

Twitter currently has 300 employees. "Based on our current trajectory, at some point we're going to have to look at other options because we won't be able to stay on the two floors that we currently have," a company spokesperson told us.

Guess what? It's all going to come at the expense of someone—including your startup!

Startups Are a Team Sport

In my opinion, there are three reasons why Internet startups succeed: a good idea, market traction, and, most important, an awesome team. That's why companies that are started and built up during the worst of economic times are very successful. Google, Paypal (EBAY), Flickr (YHOO), and Facebook are good examples of companies that trace their roots back to doom-time. These were good startups that had traction during tough times and hence were able to attract decent investment dollars.

The reason they went from good to great is they were able to attract talented people. Because there were talented people in these companies, more engineers wanted to work there, and thus created a talent cluster that kept growing. Of course, it helped that there were fewer startups and companies competing for their attention as well.

Talented teams help spark creativity and innovations that are long-lasting and have a massive empirical impact. Google's early engineering innovations are behind products such as Mapreduce and Hadoop. Flickr's influence on social sharing and communities is undoubtable, and it goes without saying that the work of folks at Facebook will live on, whether as Cassandra or something else.

Just look at the former employees of Google, Flickr, and Facebook and you see they are doing amazing things: Ex-Facebook engineer Charlie Cheever is now co-founder of Quora, ex-Flickr architect Cal Henderson is now working with Stewart Butterfield on Glitch, and Bret Taylor left Google and is now CTO of Facebook.

Silicon Valley's Migraine

In boom times, it is hard to recreate similar talent clusters. As the number of startups goes up, the talent pool starts to thin, making it difficult for companies to create the momentum that turns a startup into an Internet giant.

We are beginning to see it at work, and as more companies get funded, it only exacerbates the problem. More startups competing for fewer talent resources will mean that the cost of doing business is going to go up, which in this era of on-demand infrastructure from the likes of Amazon Web Services (AMZN) means salaries, which are essentially the single biggest component of any startup's spending. Add cash-rich cool-places-to-work like Zynga, Facebook, and Twitter to the mix and things are going to get irrational soon, if they aren't already!

Proof of this coming crisis: I have more than 600 messages in my LinkedIn in-box, and they are all related to jobs!

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