Rich and I were bemoaning the current state of the economy yesterday, and eventually, the conversation turned to outsourcing, not jobs, but storage, computing power, databases, applications, etc. You know, cloud computing.
Remember after the Bubble burst in 2001 how people were in a tizzy, some rightfully so, about the exodus of tech jobs overseas? That experiment hasn’t played out yet, but a couple things have happened.
First, wage pressure in places like India has driven up labor costs beyond the levels predicted, so the sunk costs of laying fiber, taking down office space and outfitting it with the latest technology has taken longer to recoup than anticipated.
Second, the domestic tech job market has recovered to acceptable levels, thanks to Web 2.0 and flush venture capital firms looking to fill out their funds.
Speaking of VCs, you rarely see $50 million dollar rounds taken by technology startups anymore, as was commonplace in the Bubble. Early rounds rarely top $10 million, and there are fewer rounds taken by young companies. This is good if you’re a founder, since you may get to keep a larger stake in your baby if it ever reaches that liquidity event. It’s also good if you’re an investor, since your exposure (and your investors’ exposure) is lower, and I suppose it’s good because it signals corporate and investor responsibility.
Before we sing and hold hands, let’s look at why it’s cheaper to run a startup. As I’ve mentioned before, FaaS, or Foo as a Service (my copyright), means you can use cloud computing to save overhead that used to cost millions. Cloud computing includes hosted applications from companies like NetSuite and Salesforce.com and infrastructure services from Amazon (and others) like SimpleDB, EC2 (Elastic Compute Cloud) and S3 (Simple Storage Service) to name a few.
To get started, you no longer need to take down racks at your local colo, fill them with leased Sun boxes and install a host of software. All that stuff can be got in the cloud now. You can outsource just about every operational aspect too, including applications and specialized personnel like finance and HR. Even rent is no longer a necessity because broadband makes web working a cinch and services like shared office space make meetings cheap and easy.
It’s logical that rounds of venture funding would be smaller, since FaaS offerings are significantly cheaper than their predecessors. So, guess where the majority of your costs are?
Labor is the one expense that doesn’t depreciate and hasn’t gone down in price since the Bubble. I have a friend who manages a network operations team at another software company. I routinely gasp when I hear what n00bs get paid to carry a pager for him. Labor is getting more expensive, thanks to inflation and demand.
This isn’t news, but what FaaS has done is underline how much labor costs, relative to the other aspects of a business. You can only outsource so much of your work, so in the end, you’ll need some FTEs. Jason Calacanis, whose tips on saving money running a startup raised ire around the blogosphere, reportedly pays his Mahalo employees $30-35,000 a year.
If this is true, it seems laughably small, especially in the Bay Area. Of course, compensation packages at startups are options heavy, a tried and true way to turn your employees into investors. Still, before that liquidity event, people have to eat and pay rent. Regardless, my guess is that even at these highly discounted rates, labor is still the highest cost by far at Mahalo.
So, with a recession upon us and economists predicting a gloomy future, what happens when revenue shrivels? The end game is that labor is expendable. One of Calacanis’ money-saving tips boils down to making it easy for your motivated employees to work more, i.e. allow, possibly encourage, your workforce to overwork itself.
Labor in tech companies is at-will. So, it’s easy to end a contract. Not so much with other vendors, e.g. the ones providing you cloud computing. Yet another reason why labor gets cut first.
The irony here is that tech companies have worked for years to make cloud computing a reality to lower costs, mostly for startups, essentially underlining the fact that tech labor is really expensive, and potentially working themselves out of a job. So, when the economy goes south, tech labor is cut loose from both customers and FaaS providers, who face the same economics.
Bit of a Catch-22, wouldn’t you say? Reading over this post, it’s a downer, eh? That wasn’t really my intention, but it’s a reality for people in tech.
What do you think? Am I oversimplifying? Did I miss something important? Sound off in comments.