Labor Arbitrage Comes to Silicon Valley

July 24, 2017

Last week, I wrote about the decline of investments in San Francisco startups. On Hacker News, this post engendered a lengthy conversation on the challenges facing founders and start-up employees in San Francisco. In short, the cost of living in San Francisco and the Bay Area has reached untenable and unacceptable heights for many.

The average one-bedroom apartment in San Francisco costs $3500 per month. That is simply astronomical. It’s 30% more expensive than Manhattan.

I don’t know what the right long-term solution is. I don’t know enough about the history of the laws, the demographics, the politics, the influence of inexpensive capital and the real estate investment market to opine. But, as they always do, founders of finding innovative ways of navigating these challenges.

The most salient change is labor market arbitrage. Labor market arbitrage is not new. Israeli founders have been doing this for years. Many Israeli companies hire go-to-market teams in Silicon Valley, but build research and development teams in Israel.

Today, it’s quite common to meet startups who house their product and engineering centers in Portland, Vancouver, Toronto, Beijing, Waterloo, Paris, or London. Some companies are even relocating their headquarters to these geographies after getting off the ground in the valley.

The advantages of these remote locations include lower salary costs, higher standards of living for employees, greater ability to retain employees, less competition and consequently higher retention.

In addition, many of these geographies offer tax advantages to start up companies. Equally importantly, the persistent visa issues that have become more challenging are moot in many of these places.

Historically, the challenges associated with remote teams have outweighed the benefits. But today, the equilibrium is shifting for many founders. distributed teams are more common, and companies know what to expect when managing remote offices. Collaboration tools have improved. Next-generation chat, video calling, and project management software help keep teams in sync. Perhaps most importantly, there are now many examples of very successful businesses with distributed teams.

The good news for startups is fundraising market is largely efficient and regional differences in investment profiles are minor. As startups blossom in many more geographies than they have in the past, investors will look to spread their blanket of capital more broadly.

The conversation on Hacker News illustrates the cost of living challenges for founders and employees are real, painful, and an important shaping force of Startupland whose consequences are changing the way startups are built.

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