Many people believe the economics surrounding Silicon Valley are out of whack. Everything from venture capital investments and the price of talent to office space and housing costs seem disconnected from the wider world.
Last year, legendary tech entrepreneur, Shark Tank celebrity, and Dallas Mavericks owner Mark Cuban highlighted some of the issues about all the money being poured into private, opaque companies in an editorial with the ominous headline, “Why This Tech Bubble is Worse Than the Tech Bubble of 2000.”
He wrote that, because so many Angel-blessed and crowdfunded companies — that “essentially boil down to an app” — are private rather than public, much of the cash floating around the Valley is not ever going to return profits to the investors. “I have absolutely no doubt in my mind that most of these individual Angels and crowd funders are currently under water in their investments. Absolutely none,” wrote Cuban. “I say most. The percentage could be higher. Why? Because there is ZERO liquidity for any of those investments. None. Zero. Zip.”
He paints the picture of a world in which value has been overtaken by potential and so much of the activity is being funded by hope. Everybody is looking for the next Uber, Snapchat, or Instacart without realizing that they are more likely investing in the next Pets.com.
And this flood of money has distorted the whole ecosystem throughout the Bay Area. Real estate prices in San Francisco have soared so high that even highly paid software engineers can’t afford to live there anymore. Last year, the median sale price for a home in Silicon Valley was $1.1 million, according to a Redfin real estate study, and one-in-four people in the Bay Area had begun looking for a home in another region of the country. Three more-affordable West Coast locations — Sacramento, Southern California, and Seattle — were the most popular for those looking to leave.
This is despite the fact that the median software engineer in Silicon Valley was pulling in $112,000 in 2015, per PayScale.com. This is vastly higher than people doing the same work in Seattle ($100,000), Boston ($83,000), Portland ($79,000), Denver ($75,600), Austin ($75,000), or Chicago ($74,200).
And even this high figure may still be artificially low. This is because the market rates were allegedly held down for years by price-fixing and collusion among large firms, which reportedly paid out nearly $325 million in a settlement less than two years ago to 65,000 tech employees who had filed a class-action lawsuit. As that long-term correction continues to shake out with annual increases, and as more and more money floods the Valley, who knows how much higher the rates will rise in the next few years?
On top of this are the — sometimes obscene — perks that companies must offer in what has been likened to an arms race in the Valley. With an unemployment rate of just 3.6%, as of last fall (less than half the national level), software engineers aren’t having trouble finding work. So to lure talent, Google maintains a fleet of buses to transport some 6,000 employees to their office, Facebook programmers are reimbursed for daycare, and Zynga offers on-site dog-sitting and free pet insurance. These are real costs that, especially for smaller firms trying to keep up, means that even the high developer salary aren’t capturing the true cost of Bay Area talent.
But while being a software developer in those other markets generally means your salary is more than enough to live on comfortably, those in Silicon Valley may still be living paycheck-to-paycheck. Redfin CEO Glenn Kelman explained, to Business Insider, the takeaway effect this is having on the talent pool in the Bay Area.
“There’s so much headhunting, and so few companies have money like Google and Facebook,” he said. “It used to be that you really needed proximity to a natural resource to be successful in business. Now that resource is software developer talent, and you have to consider, ‘Where do software engineers really want to live?'”
If tech talent can’t even afford to live in the world’s greatest tech hub, something must be askew. And Kelman, in an op-ed for CNBC, noted that it isn’t just the developers that are leaving. It is the companies themselves.
“At a recent conference, the founder of one technology titan asked another if it was even possible to build a platform-technology company outside of Silicon Valley,” wrote Kelman. “It was a fair question, given the dominance of Google, Facebook and Apple. But from where I sat, it seemed easier to build a company of that size today almost anywhere except Silicon Valley. Others have had the same thought. A spate of start-ups and now venture funds have recently left Silicon Valley for L.A. (Snapchat), Chicago (Keepsake), Seattle (Sherbert) and even Ohio (Drive).”
There is a case to be made for paying the astronomical wages demanded by software engineers living in Silicon Valley — or even more. Weeby.com CEO Michael Carter, for example, adopted a strategy of paying his top developers $250,000 per year in an attempt to get the best of the best, like those represented by top-tier coder talent agency 10x Management.
There is a business case for such excess. CNET’s Daniel Terdimen notes that Instagram started out with fewer than 10 developers and was later sold for $1 billion. WhatsApp, with just 32 engineers, cashed out for $19 billion. At these levels of return on investment, almost any salary is justifiable. It isn’t so different from the sports world in which LeBron James or Kobe Bryant are invaluable due to their unique ability to win their team a championship — and hopefully more than one. “The point in an innovation economy isn’t to spend less, it’s to make more,” writes Kelman.
Even Infosys, an Indian outsourcing firm that made its name by leveraging low-cost labor, is looking for such talent in Silicon Valley. It has expanded its Expert Track for “gifted coders from innovation hotbeds” to find the right people in the Bay Area, something modeled on a formula created by the likes of IBM and Intel. Wipro, another Indian outsourcing giant, has set up a similar program.
But while most basketball players aren’t LeBron James, most developers aren’t creating the next Instagram. Most are the nuts-and-bolts coders and programmers who do the equivalent of playing solid defense and making open jumpshots in the NBA. And there are a lot of companies that are starting to wonder why they are paying the Silicon Valley rate when developers at the Austin rate — or even less — can produce the same quality of work.