What the Tech Talent Wars Mean for Investors

Developers make more than they used to. Accounting for salaries, options, perks, and morale-boosting strategic decisions, developers are the most expensive part of most Internet companies. The cost of developers hasn’t just increased—the cost has become more of a variable cost than a fixed cost, and the increase is predominately in pay for the best, most expensive developers.

On the very high end, salaries for non-founder developers and technical people are reaching unprecedented levels:

• Zynga pays (some) developers based primarily how much they can profitably boost certain metrics.
• Google paid senior product managers tens of millions in retention bonuses to keep them from leaving for startups.

A few reasons for this:

1. Real-world social networks are more based on profession and less based on schools, employers, and locations. This creates more potential job offers for talented developers.
2. Angel investors effectively compete with anyone employing developers. If a founding team has a choice between a good salary and owning 50-80% of their best idea, they’ll often take the latter. To make startups relatively less compelling, companies have to offer higher base compensation.
3. Even late-stage startups are structurally able to offer larger stock-based compensation: the strike price of options granted before an IPO tends to be well below the IPO price, even when an IPO is imminent. Zynga, for example, is issuing stock at an internal valuation of under $12bn, when their likely public valuation will be $15bn to $20bn.
4. Cultural norms make mercenary behavior a bit more acceptable in the technology industry than in other fields. When a group of employees quits their job, creates a product that indirectly competes with their former employer, then sells back to their employer for millions of dollars apiece, it could create some serious ill will. But that’s precisely what happened when Google bought Aardvark, which was founded by former Google employees.

It’s inaccurate to merely argue that market prices have gotten higher. It makes more sense to say that the market has gotten more liquid, especially on the high end. There are some larger employers who offer stability and quality of life, rather than offering extraordinary programmers the chance to do extraordinary work; these companies will be less affected by this trend. Outsourcing, contracting, and service-based businesses will be largely unscathed—since they’re buying programming talent in order to sell it by the hour, it’s conterproductive for them to hire the absolute best people they can find, and far cheaper to higher people in the middle of the distribution who can get the job done.

This trend is a tax on software companies whose competitive advantage is their programming talent. And that’s a surprising number of companies: Facebook, for example, has great infrastructure and an unmatched social graph—but they’re willing to “lease” their social graph (and thus much of the benefit of that infrastructure) to third-party developers.

The companies in a good position to survive this are companies operating at the largest scale possible in their industry—Facebook and Google, and perhaps Twitter. They can survive for the simple reason that they can amortize the value of their talent over a larger base than anyone else, enabling them to pay more. If a good programmer can cut costs by $.01 per active user per year, Facebook breaks even paying that developer $7mm per year. Ravelry.com breaks even paying that person $4,000 per year. So Facebook can afford to match all but the most excessive counteroffers.