A Local Fragmentation Tax: Labor, Capital, and Attention

As I’ve been musing about on Twitter, oftentimes in the current Bay Area ecosystem, I don’t understand how very early-stage companies recruit teams to join them because there are so many opportunities (which is great) and so much capital in the ecosystem. At the seed-stage, when investing in a small team, oftentimes those founders turn into near-full-time recruiters. Even when a startup approaches product-market fit or even scores a larger Series A investment (and therefore, more cash, runway, and security), teams struggle to fill their open roles because talent is so fragmented.

But it’s not only human capital which is fragmented — financial capital is also fragmented. One way to sum up the current environment? Mass Fragmentation. We are currently in a state where both human and talent capital is hyper-fragmented.

My bias is that, overall, I think it is bad for innovation. That said, there are some strong arguments as to why it may be a net-positive. For instance, on the human capital side, having more money in the ecosystem empowers more people to start companies, to own their equity, to embark on new experiments; it also encourages new capital bases to invest in the ecosystem, to invest so early as to invest in teams and people who are already known to them. There are valid arguments to “let a thousand flowers bloom” and the participants (and maybe society, at-large) could benefit from.

I am in the camp that this Mass Fragmentation is a net-negative.

Let’s start on the financial capital side. We’ve all seen the tweets and articles about the continued explosion in microVC funds, vehicles which are less than $100M. More and more people are starting funds and acting as access points to help a wider base of LPs sell money to entrepreneurs. As a result, there are more companies forming, which means the “hot team” that could’ve formed five years ago with a core of 8-10 people may now result in three separate startups forming with $2M in seed funding each. At the same time, as many of the traditional VC funds have grown in fund size, they largely haven’t been able to recruit the types of folks they want or need because the best investing talent either has the option to create their own fund (and this is continuing) or work as an executive in a high-growth company and make a ton of money.

On the human capital side,  startup culture is fully mainstream — social cues from The Social Network, Shark Tank, and others encourage everyone to start companies and to be an owner. And there’s plenty of capital to supply them with oxygen, as we see on TV and Twitter each day. Yet, many startups cite “recruiting” as their #1, #2, and #3 core challenge. The traditional VC funds (and even some of the newer ones) have recruited their own “Recruiting Partner” or talent head to help with this function, an arms race where all of them are likely fighting for the same pool of talent.

All of this would be somewhat OK, but location matters, too. While the Bay Area is an incredibly dynamic place, the cost of living here, the cost of mobility here, and the cost of attention puts new pressures on the forces above. When large tech companies and the big growing startups can offer enough compensation and $1M RSU grants at hiring, many folks may opt for this path in order to cover their rent, mortgage, and childcare, among other expenses. To compete, growing startups have to pay salaries which somewhat compete with incumbents. We’ve all by now read about the housing crisis in the region. It’s also difficult to physically move around in the Valley, with more people moving here, more cars on the road, no real increases in public transport capacity, congestion, rubber-necking, and transit choke points are starting to look and feel like LA sprawl on Google Maps.

And finally, there is the cost of fragmented attention. The “salon culture” of conferences, events, private dinners, happy hours, and coordinated social media campaigns is all with good intentions, but we may be at the point where the increase in the number of new companies with cash to spend and new investment vehicles eager to brand themselves for deal flow. To be clear, the intentions here are mostly pure, but in aggregate, it presents the ecosystem with an “Attention Tax.”

And, when this tax  is combined with fragmented financial capital and fragmented human capital, it creates more noise and makes it harder to find the signal. Consider startups working on the blockchain, for instance — while many have been seeded in the local ecosystem, on a global level the communities of developers working on the most interesting projects are more likely to reside in places like New York City, China, and Europe. Or, consider that some of the best VC firms in the world have quietly amassed portfolios with a concentration in non-Silicon Valley companies, choosing instead to hunt for deals in the corners of Europe, China, or across America, where the entry price makes more sense for VC-style returns. These founders and investors face other challenges by not being in the Bay Area right now, but they also enjoy some timely advantages in this time of Mass Fragmentation.

Haystack is written by Semil Shah, and is published under a Creative Commons BY-NC-SA license. Copyright © 2017 Semil Shah.

“I write this not for the many, but for you; each of us is enough of an audience for the other.”— Epicurus