
The Rising Costs of Scaling a Startup in San Francisco - paulsutter
http://tomtunguz.com/rising-costs-of-startups/
======
peteretep
Staffing costs and salaries are why I'd think long and hard about starting up
in San Fran with my CTO hat on.

I am a long-term open-source and commercial dev, former serial CTO, with an
additional specialization in recruitment software, but I also work as a
recruiter. Recruitment in SF sounds like a nightmare for everyone involved.
Agency fees are relatively low (10%ish, compared with 15-20% in the UK), but
the service the candidate gets (incessant LinkedIn spam for inappropriate
roles) is poor, the service the employer gets (scatter-gun approach, loads of
shitty CVs, very little value-add from the recruiter, other than they'll spam
LinkedIn for you) ...

I'm guessing it's a combination of the generally slightly immature state of
the US agency recruitment market (compared to Europe; not meant as a
judgement, just a fact), insane competition for candidates, very small take-up
of and limited competition in job-boards/channels, and the big competition
with corporate recruiters against FB, Google, and so on.

Every so often I wonder about trying to break in to the SF market (rather than
London, which is where I put 90% of my time), but I wonder if the effort would
be worth it, given what feels like the dire state of the market.

All the recruitment startups I can see are trying to build a better ATS to
remove the agency recruiter (Lever.co, Greenhouse.io, SmartRecruiters.com,
TheResumator.com, and even ZipRecruiter (an ATS disguised as a multi-poster)),
yet no-one seems to be trying to fix agency recruitment.

Sorry for the slightly rambling post - happy to give free advice to anyone
trying to recruit (see my profile), but it sounds like a real uphill battle in
the Bay Area...

~~~
smikhanov

        > immature state of the US agency
        > recruitment market compared to Europe
    

You really have no idea about mature recruitment markets. The UK recruitment
industry you represent needs to be replaced with a number of short Bash
scripts, so that people like you (yes, you) will lose their jobs and suffer.
The sooner it will happen, the better for everyone.

I'm a Russian living in London and always mention Russian recruitment industry
as an example of smoothly-functioning market with most inefficiencies resolved
in a way you would expect in a modern economy. In short, agencies in Russia
only deal with hiring top-level execs, equivalent to someone on £200K+ salary
in the UK (i.e. less than 0.1% of the country's labour force).

The rest is handled directly by companies directly through two of the largest
websites -- job.ru and hh.ru (it actually feels weird to describe this on a
forum that talks about disrupting something all the time!) The traffic on
those websites is enormous, the number of applicants for any vacancy is much
higher than any recruiter I used in the UK ever brought in.

It costs the company a fraction of recruiter costs; it shows the applicant the
company name immediately so he or she can do their own due diligence without
listening to things like "top-tier investment bank" that you and your
colleagues have invented. It's better for everyone. Compared to that, UK
recruitment looks like car boot sale compared to eBay.

Best companies like Yandex normally also advertise on their websites with few
questions dropped into a vacancy to filter out non-qualified people (see, for
example
[http://company.yandex.com/general_info/jobs/develop_cpp.xml](http://company.yandex.com/general_info/jobs/develop_cpp.xml)).

Now, please, tell me about the added value recruiters in the UK bring anyone.

~~~
_random_
Yes, unfortunately in London either:

1) recruiter effectively steals a percent of your starting salary;

2) company is so cheap they cannot afford a recruiter;

3) big tech companies are paying extremely low in comparison to the primary
sector - finance (and the most interesting stuff will still be developed in
USA).

~~~
peteretep

        > 1) recruiter effectively steals a percent of your
        > starting salary
    

This is absolutely true for contractors, and absolutely not true for permanent
staff.

I have only lengthy experience to back this up, rather than anything I can
link you to, but:

* For a contractor, companies budget a maximum amount to spend per day. How that gets cut between the recruiter and the contractor, they don't care about. If you're going through a recruiter, you could be charging the employing company exactly what they're being charged by the recruiter, and pocketing £70-£120/day difference.

* For permanent staff, it's accounted very differently. Companies large enough to have people employed in an HR capacity will treat recruiter fees and salary very differently. Salaries will normally have an upper-band, the salaries of other employees and future employees will need to be taken in to account, the precedent set will need to be taken in to account, generally payroll and hiring costs are accounted for differently, and so on. A three-person company will see it all as cost, but a larger company will treat the recruiter fee and the salary as completely different. Additionally, it's in the recruiter's interest to get you the best salary they can, as they take a percentage from the employer. They will know the limit the employer will pay, and will try and get you the best salary they think the employer will go for; generally they are far better negotiators than developers!

~~~
_random_
_" better negotiators than developers"_ \- well in my experience they are
always trying to "tempt" with a mere £5k boost and never going for the top
bracket offered. It is in their interest to play it safe.

------
skuhn
I think that if you dig a bit deeper, real estate really is a major driver of
the cost of doing business in San Francisco. Particularly now that companies
and employees are more resistant to the process of migrating elsewhere after
the startup phase.

A startup's office space is just one way that venture capital is getting
funneled directly into a landlord's pocket. And office rents are rising like
crazy, while pushing lots of other types of businesses out (particularly in
SOMA).

If a landlord thinks they can come out ahead by evicting a long time tenant
and refurbishing a mechanic's garage into office space, then you're clearly
paying a much higher rent than that space used to command.

Salaries are still a larger overall expense for just about every startup, but
consider how much of that employee salary goes straight to rent. 30% in pre-
tax dollars is completely normal at this point, and I expect for some people
it's even more. Ownership is out of the question for anyone who hasn't had a
stock windfall at a previous company (or who lived here 20 years ago). When a
1 bedroom in a shitty neighborhood is over $3000/mo, there's a minimum to the
salary you can accept -- even doing the normal salary-for-equity trade with a
startup. Just to hit 30% of pre-tax dollars, you need to make $120,000/yr for
that 1 bedroom.

There's no reason for landlords to stop until they've milked the tech economy
dry. In most cases they're entirely within their rights to charge whatever the
market will bear, and there is currently no shortage of people willing to pay
more for less.

In the long term this will hurt San Francisco and the tech industry. The money
won't last forever, and eventually the city will be so expensive that the
benefits of locating here become irrelevant. SF landlords can't levy a tax on
the innovation of the entire tech industry forever.

~~~
ilyanep
The people who are to blame are not the landlords that are merely reacting to
market conditions, but the NIMBYs who refuse to let _any_ development occur in
the city or anywhere on the peninsula.

~~~
skuhn
I'm not blaming them, as I mention the majority is likely acting within their
rights. I agree that part of the solution is to create more housing -- but
it's also too late for that solution to work before there is a downturn in the
startup economy. If there's a next time, it might help then.

Even at San Francisco's current relatively frenzied building pace, there will
only be another 4000 units or so this year. That will not make even a slight
dent in rent for a city of 700,000+ people.

The other problem with building more units is that a lot of the available
space sucks. There are whole huge swaths of the city that may as well be on
the moon for how accessible they are to locations with offices (SOMA,
Financial District, etc.). You can build condos in Candlestick Point, but how
are people going to get to work?

The infrastructure of public and private transit in the city (and the larger
region) is woefully inadequate for even half the number of people that
currently live here, let alone if the population significantly increases. And
these kinds of projects work on 10-20 year timetables. So again, it's way too
late for this to be fixed in this economic cycle. Maybe next time.

~~~
keithpeter
_" You can build condos in Candlestick Point, but how are people going to get
to work?"_

Bus service? Public not the Google Buses. Will always help to encourage
movement out of a crowded city centre and (relatively) low capital
requirement. Do some deals on season tickets/passes/carnets

~~~
skuhn
Sure. The newest subway line runs down Third Street right to Candlestick Point
(about 5 miles away from downtown). It would take over an hour and requires
walking a mile.

Or you could take the single bus line, which cuts your walk down to half a
mile or so. You'll have to transfer to another bus that goes on the highway to
downtown (so it will be absolutely awful during rush hour). Expected transit
time is again 1 hour.

Muni's on-time rate is 60%, so these are pretty optimistic numbers. Bus's
don't keep to their schedule at all -- if they get to a stop early, they take
off. The supposed 15 minute interval is laughable given the city's traffic
patterns, it's just as likely for three buses to arrive simultaneously because
they were all stuck in traffic for an hour.

The city's infrastructure is simply not built for outlying neighborhoods to be
viable living destinations for people who commute into the city for work. The
highways are clogged and poorly designed (and don't connect through the city).
The surface road stoplight system is one of the worst synchronized I have seen
in the US. The bus and subway system is poorly run and starved for money on
basic necessities. The subway system itself is terribly designed: all the
lines run through the same underground portion, on the same rails, so the
slightest hiccup blocks up every line.

It's all solvable if you throw a lot of money and political will at it, but
neither seems to be there. At least all of the buses are supposed to be
replaced within a few years: they SORELY need it.

------
bradleybuda
From the article: "The cost savings startups achieve from cloud computing
infrastructure or other technology cost reductions are dwarfed by the steady
cost increases of labor in particular."

I don't have hard data, but my intuition is that this is not the case. The raw
price of storage / compute has only declined a little bit since 2009, but the
number and variety of development tasks you can outsource to (broadly
speaking) "cloud services" has dramatically increased.

In 2009, Heroku was still a relatively primitive platform with only Ruby
support - today, it can save you the cost of a sysadmin or two. Mailgun didn't
exist and SendGrid was just coming out of TechStars - if you wanted email in
your app, you needed a dev to build it. Twilio couldn't do text messages yet,
and we didn't have Stripe for payments or Mixpanel for analytics - both were
glimmers in their founders' eyes.

The sheer amount of grunt work you need to do to get you app up and running
has plunged since 2009 - now you can buy these core services for 1-2% of what
you had to pay to develop them. These wins are most pronounced for seed- and
A-stage companies, but they substantially cut your development and operations
costs throughout your scaling lifecycle.

I'm willing to bet that if you plot the median number of employees it takes to
reach a seed, A, B, or even C round, you'd find that the leverage gained from
this ecosystem of services more than makes up for increasing personnel costs.
Of course, startups everywhere benefit from these cost reductions - this has
nothing to do with San Francisco - but it certainly makes the increase in
salaries and real estate expenses an easier pill to swallow.

~~~
pinaceae
"don't have hard data, but my intuition..." and everything beyond this
sentence is just blabla.

the author has a well laid out case, researched and backed. you come in with
feelings.

------
cbryan
Where is this person getting their salary data from?

~~~
lexap
I love how this is the most important comment on hacker news and gets the
least upvotes.

This guy also has these ridiculously generic datasets and the geekerati goes
nuts because he's a vc.

------
lexap
Ummmm, salary data source???

------
gumby
This is very interesting but it really is San Francisco data. Silicon Valley
is a lot cheaper and faster on several dimensions than SF (only a small amount
cheaper on salary, though that salary goes a lot farther). And while SF is a
nicer place to live than most of the valley, who has time for that nicer life
while you're busy building a business?

------
franklinho
Key point to take away from this is: Wages constitute the majority of the
increase in startup expenses. Real estate costs add only 5% of per employee
costs.

The market has driven up salaries ridiculously high.

~~~
littletimmy
That's one way of looking at it. The other way of looking at it is that the
tech sector is one of the most profitable sectors in the US economy that rakes
in millions _per developer_. The salaries are high because they should be: the
companies are raking in record profits, why shouldn't the employees see some
action?

~~~
peteretep
If that was true, salaries would be high everywhere. They're high in SF
because of competition for workers, and because of the high cost of living.

Here's an open secret: companies willing to allow remote working are able to
hire in a -fraction- of the time it takes to hire onsite, and often
substantially cheaper.

~~~
frostmatthew
Unfortunately not many companies are willing to consider that - even Slack[1]
isn't interested in remote workers.

[1]
[https://twitter.com/mrmrs_/status/567832899854065664](https://twitter.com/mrmrs_/status/567832899854065664)

~~~
peteretep
Something that works really well in London, and might work well in big urban
areas, is partial WFH. If someone can work at home 50% of the time, they can
live 5 hours away and just come in on a Tues morning, leave on Thurs eve, or
are willing to put up with a 2 hour commute as they only do it half the time.
I managed a mid-sized tech team at a company that did this, and it gave us
access to many many candidates who didn't want to live in London, but lived as
far away as Edinburgh...

------
courtson5
The market has also drove San Francisco based startup valuations to
ridiculously high levels - you have to take the bad with the good.

All else being equal, a Silicon Valley/San Francisco based startup is able to
achieve a much higher valuation than an equivalent startup outside San
Francisco. However, this Silicon Valley/San Francisco based startup has to
deal with higher real estate and salary costs.

~~~
peteretep

        > All else being equal, a Silicon Valley/San Francisco
        > based startup is able to achieve a much higher
        > valuation than an equivalent startup outside San
        > Francisco.
    

How sure are you that that's true, and if you are, why do you think that is?
Is it really so hard for a founder in - say - Vegas - to get on a plane to SF
frequently enough to neutralise any location advantage? If so, sounds like a
massive opportunity for a VC to get some really cheap deals (and hence my
skepticism).

~~~
walshemj
No because its the deals that get by bumping into some one at a bar or
socially.

flying in for a few 9-5 days a month is not the same.

