Is Bay Area Rent Too High? Lenient VC Funding is Part of the Problem

Excessive VC funding and lack of oversight makes it easy for startups to burn cash on recruitment.

vc funding

Startup culture isn’t the only thing affected by the money that Bay Area VCs throw around. As spending rises, office and apartment rent rises with it.

For the past few years, the startup scene has been booming. Venture capital funding saw a slight slowdown at the end of 2015 going into the 2016, but last year still featured a record-setting quarter. By and large, the industry’s recovery from the financial crisis and the dot-com bust has been aggressive and thorough.

With all of this money flying around, tech startups are faced with a new challenge: recruitment. How can they beat the competition without out-spending them? As funding gets bigger and bigger, startups are encouraged to invest in excessive salaries, over-the-top offices, and lavish benefits in order to pull top talent away from established tech companies and the well-funded startup competition.

vc funding

According to TechCrunch, increased salaries have also pumped up local rent. Tech companies can afford pricier offices, and tech executives can afford pricier apartments. Landlords don’t hesitate to raise prices at the sight of newcomers who can afford it.

The problem, besides the fact that this makes renting an office a pain for startups with a more humble war chest, is that the battle over wages cannot be won. It’s the opposite of a race to the bottom, but the idea is the same. No matter how much a startup invests in monetary compensation and luxurious interior design, it’s going to lose to the competitor that got a couple million more in their latest funding round. In the end, it’s a game that only tech giants like Google and Facebook can win. No VC-funded startup can compete in terms of pure cash.

According to the CEO of NowMoveMe, startups should play a whole different game. Startups can’t win over employees that are looking for Google-level perks; and even if they could, those employees wouldn’t be a good fit. In the TechCrunch article, CEO Miriam Diwan said that “the early years [of a startup] are a complete roller coaster, so it’s essential to have a team that’s in it for more than that.”

Long story short: it’s inefficient to burn money wooing employees that Google could snatch from your hands at a whim. On top of that, the more money startups burn today, the more they’ll have to burn to earn the same results tomorrow.

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The only way to break the cycle is to develop a new set of values. If startups do a good job of evaluating culture fit and mentality alongside talent and achievements, they can acquire the right employees for relatively little cost. It’s important to judge whether there’s a deep culture fit between employee and employer or whether the candidate superficially enjoys the startup’s supposed brand and culture.

At the same time, some responsibility falls on VCs’ shoulders to curb the unnecessary spending. If investors don’t want to waste their clients’ money, this would be a good time to give their portfolio a good talking-to about how to approach recruitment.