Startable - Healy Jones’ & Prasad Thammineni’s Blog

Hiring talent is one of the most challenging things facing a startup. Hiring the best programming and technical talent is even harder. Taking data from The Entrepreneurs Census, which I wrote about yesterday, we can get a glimpse into how hard it is to hire programmers in Boston, Palo Alto and New York.

It may be easier for startups in Boston to hire programmers than startups in Palo Alto

Startups in Boston may have a better time hiring programmers, as measured by how long it takes to fill an open position and by the percent of startups that have open positions.

Hiring Programmers in Boston vs Palo Alto

The two thirds of startups in Boston were able to fill open positions in under three months - verses about half in Palo Alto and 63% in New York City. (OK, the difference between New York and Boston is probably statistically insignificant.) Three months is a lifetime for many software and web startups; being unable to add a critical developer in that period of time could derail product launches and critical feature updates. Heck, a lot of startups are out of business in 6 months to a year, so if you can’t fill your positions by then who knows if it’s even worth still looking…

The data collected by the study would fit with anecdotal evidence that I have heard from friends starting companies in Palo Alto. Many people have told me that it’s impossible to find talent in the SF Bay area… especially at a reasonable price. I know it is hard to find good people in Boston as well, but this study would suggest it is a bit easier here than in Palo Alto.

Compensation of programmers in Palo Alto is higher than Boston and New York

And of course the other important part of the equation is how much it costs to hire talent. From the study:

Compensation for Programmers Palo Alto Boston

Doing some really crude math, it looks like programming talent in Palo Alto is 13% more expensive than Boston and 36% more expensive than New York. (I very roughly calculated that the average comp in Boston was $66.85k, Palo Alto 75.65k and New York $55.75k; I assumed the comp for each salary range was in the middle of each range for my calculation. Again, the numbers are small so the difference may not be statistically significant.)

The other data point in the above compensation chart that I’m trying to get my head around is low end and high end. The high end is easy enough to understand; you have to really pay up to get good talent in some cases in Palo Alto (and NYC). This doesn’t surprise me too much, but it is interesting that the high end is zero for Boston. Maybe due to a small sample set? I just don’t know enough.

The low end is also pretty intriguing. I’d bet that most of the sub $50k programmers are working for equity. It looks like regions OTHER than Boston have more programmers working for a pittance, trying to get equity. Does this mean that Boston has less of a founders culture???

Pretty ironic and not really very important, but Gmail decided to add in this little advertisement to the top of an email conversation that I’m having with someone about this post… it looks like Google is hiring developers in Boston!

I recently got a copy of a new study called “The Entrepreneur’s Census,” created by Matt Shapiro of Yale. There are some pretty interesting data points in the survey regarding startup in Palo Alto, Boston and New York City. As a person interested in growing entrepreneurship in Boston, something cool I took away from the census is that

Founders move to Palo Alto to start companies

and

Boston founders are likely to be students to came to Boston and then started companies

First, a little info on the census, as taken from the report:

The study originated in January 2010 as a project to understand the recent increase in entrepreneurial activity and investment in New York City… In March, we undertook the task of gathering granular information regarding the venture communities in Boston, Palo Alto and New York… We received response from 307 entrepreneurs. Collectively, these businesses have created more than 1,300 jobs and paid more than $7 Million in annual rent.

I believe that, as Scott Kirsner says, Boston’s greatest renewable resource is the students who show up every year. While a number of the people who found companies in Boston seem to be here because of their education, I’m not convinced that enough is being done to keep students in Boston after they complete their education. We need to actively support some of the efforts underway to make people feel more comfortable starting businesses in Boston, like DartBoston, Greenhorn Connect, TechStars and the Mass Challenge. (and I think something else that would make students feel more at home would be if the local road system/drivers could be a bit less third world and behave a little more like the rest of the country. Street signs and lane markers would be a good start.)

Secondly, there has got to be a way to make Boston more of a destination for starting new companies. I am convinced that Boston is by far the second best place in the entire world to start a software/internet business (I am saying that this is a really good thing!) and somehow the area to get more people to realize this.

Thursday Bram has written a piece targeted at small business owners entitled “An Introduction to Venture Capital.” I was a source for this article. She’s done a nice job asking some of the tough questions about raising VC, such as “When does Venture Capital Make Sense” and “How Do You Actually Find Venture Capital.”

Thursday is a journalist and writer and her work appears in a lot of small business focused blogs and journals. Check out her piece on venture capital!

There is a ton of chatter about the US Government’s new plan to tax venture capital funds’ carried interest at ordinary income (instead of at the lower capital gains tax rate where they are currently taxed.) Some pretty thoughtful people have been suggesting that this will either not be a big deal at all or will be pretty damaging to new company formation in the United States. (Or that VCs will just hire good lawyers and figure it out how to avoid taxes anyways.)

I tend to be of the belief that tax policy does pretty often drive many rational people to certain outcomes. (In other words, taxes do influence behavior for a lot of people.) I also think that a lot of venture capital firms are started by successful entrepreneurs who really don’t have a great plan as to how they are actually going to make money as investors. (In other words, many first time VCs who start funds may not be acting completely rationally.)

So, my initial gut reaction to new fund formation would be that if an entrepreneur really thinks he or she can be a great VC, then they are going to go ahead and start a new fund. This is in spite of any tax policy impacting their decision.

But as I thought a little bit more, I did realize that there was another group that gets carried interest in a number of new funds - the anchor LP. As I understand it, when a wanna-be VC group is raising capital, they often “sell” a piece of the initial firm to the first, big investor(s). These initial investors get both a piece of the GP and a piece of the LP, while the rest of the fund’s LPs are only limited partners. The GP gets the carried interest, and is thus currently taxed at capital gains rates. I believe that a lot of these anchor investors are big banks, funds of funds and very high net-worth individuals who would benefit from lower taxes (I also think that pension funds are pretty active in this marketplace, but they would not have the same tax interests.)

If these initial anchor-new-fund-tenants are negatively impacted by a higher capital gains rate, then we may see a lower new venture capital firm formation in the coming years. I do believe that the venture business could benefit from some real business model innovation, and I’m not sure this innovation is going to come from existing  funds.

So it is possible that this tax change could hurt venture capital in the US if it makes it harder for new, innovative funds to get off the ground. And this would then make it harder for entrepreneurs to get their startups funded. (Of course, there is also the angle that there are too many venture capitalists in the US and fewer new entrants would drive up returns for the industry… but I’m not going to go there in this post!)

Looking for the historical impact of capital gains on venture capital fund formation

However… we have had a period of lower capital gains tax for the past several years. And, in theory, if my above reasoning is correct, this should have driven a higher number of new fund formation during the period when the capital gains tax rate was lower. In May 2003 the long term capital gains tax rate fell 25% (to 15% from 20%). So one would have expected more funds to be formed during this time. But I did a little digging around on the NVCA’s web site and was able to find the number of new venture firms by year. I plotted them against the capital gains tax rate and I didn’t really see anything that isn’t probably totally explained by the overall economy/NASDAQ.

New Venture Funds vs Capital Gains Tax Rate

Am I missing something? It looks like capital gains didn’t really have any impact on the venture capital fund formation. Of course, this is not enough data to make any real statistical take-away. I think it’s pretty clear that the stock market is driving venture capital fund creation.

Note that I’m not a tax expert, and that I’m also no longer an venture capitalist! Please let me know if I am leaving out some sort of a huge piece of info. Another piece of data that would be really helpful is if anyone knows what % of new funds have to sell part of the GP to get the first fund off the ground. Finally, I’m only really trying to talk about new fund formation in this post. Taxation could have an impact on other parts of the venture capital landscape beyond new fund formation.

A good piece on how VCs do not want to read a huge word processor prose-style business plan: http://upstartadvisors.wordpress.com/2010/05/19/4-reasons-not-write-a-40-page-business-plan/

The punchline is that the post’s author surveyed 50 VCs and angels and 95% of them did not want to get a big word document!

16 Ventures, a firm that helps SaaS companies with their marketing, has just posted a piece comparing 3 different SaaS vendors’ pricing pages. The key takeaway - don’t lose the marketing message on the pricing page; it’s not just a checkout page but it’s another opportunity to hit home the main marketing message. I am committing this foul on my own pricing page…

Worth checking out for people launching their own SaaS service.

http://sixteenventures.com/blog/is-your-pricing-page-a-momentum-killer.html

Scott Kirsner recently let me know about a great upcoming event in Cambridge - the Momentum Summit (http://www.momentumsummit.com). The conference is bringing together experienced local entrepreneurs and letting them share advice with the local startup community, and sounds like a good opportunity for people like me to hear from people who have done it before. The conference seems to have a internet/online business angle, which is also pretty perfect for me!

Some of the people speaking have done some amazing things; some of the execs who caught my eye are:

Gail Goodman, Constant Contact CEO

Steven Kaufer, TripAdvisor CEO

Trynka Shineman, VistaPrint CMO

David Cancel, Performable CEO

According to Scott, the purpose of the event is to “ to bring in some of the most successful CEOs, founders, marketers, and salespeople from our region, and have them share their advice on how small companies developing great products can build really big customer bases.”

As a guy trying to grow OfficeDrop’s customer base into something really big, it sounds like a good conference to me!

I also think that the proceeds will benefit a local non-profit, Stay In MA (a scholarship program for Massachusetts-based college students), which is an added bonus.

Congrats to the awesome team at Localytics, a mobile apps analytics provider, who has just raised a solid angel round. This is yet another Boston TechStars company that has gotten funding. Raj and the team are kicking butt over there!

The WSJ is reporting on an effort by Senator Jack Reed’s efforts to lump venture capital firms in with PE shops and hedge funds. This legislation will require VC funds over $100 million to register with the SEC. Senator Reed’s point is that, to quote from the WSJ piece, “I don’t think we have the regulatory capacity to evaluate everyone’s business model to see if they’re venture capital-heavy or private equity-heavy.”

I do see his point. The problem isn’t venture capital firms, which pretty much not going to be a systematic risk to the US financial system (as I’ve mentioned before) but instead Hedge Funds pretending to be venture capital firms. Hedge funds can hire pretty good lawyers. I’d be shocked if many couldn’t find a way to “look” like a VC on paper… at least in the eyes of an overworked underpaid regulator who only has a few minutes to decide what sort of a beast a fund is, based off of some form submitted by a slick law firm.

I wonder if there is some sort of industry self-regulation that could work here? Would it be possible for the NVCA to judge if a firm is actually a venture fund or not? Not sure how that would work; just throwing it out there.

The folks over at Wordstream have just raised additional capital. $6 million in a Series B from Sigma and Egan Managed Capital. Sigma is the return backer; the Egan is the new player in the deal. MediaPost has an interesting story about one of the reasons Egan decided to invest. Worth a read. And congrats to Wordstream, another Boston area company, on the fund raise.