Primary v. secondary talent markets

Tobi Lutke (CEO, Shopify) was once asked "why locate Shopify in Ottawa of all places?" Numerous term sheets from Silicon Valley VCs stipulated that he would have to move Shopify to the Bay Area in order to receive funding, and he turned all of them down. Why?

We all know the Bay Area to be singularly the best place to be if you want to build a tech startup. It's what we call a primary talent market. It is the densest high-tech ecosystem in the world, thanks to a geographical fluke that grants it some of the best weather and outdoors activities in the world, historical flukes that led to the earliest *silicon* companies locating there, and some of the best universities in the world.

As an employee, being in a primary talent market has lots of benefits. Due to the geographic density of offices, if you're feeling bad about your job, you can just leave it knowing that finding another one will be easy. The average tenure of employees on R&D teams in the Bay is on the order of 1-2 years. Increasing your salary and your responsibility can be as easy as quitting.

The same things that make life great for employees makes it tough for employers. Investing in training your employees makes less sense, since they can too easily leave for other companies. Competition for talent is fierce and the cost of living is high, requiring companies to pay proportionately. New grad software engineers in the Bay Area regularly receive > $200k/yearly offers. This makes it so that only the "best" companies and engineers can locate there.

This isn't just true for tech. Other examples of primary talent markets include: NYC for finance, LA for entertainment, Boston for biotech, and more. All of these markets exhibit similar phenomena where you see a “crowding out” of smaller, less-competitive players.

Interestingly enough, there are many mega-companies that have been built in greenfield or close-to-greenfield talent markets. Amazon was built in Seattle, only competing with Microsoft. Nike was built in Portland. Shopify in Ottawa. Besides the obvious examples in the Bay Area (Facebook, Google, Netflix, Apple), there are obviously hordes of smaller tech companies. However, one finds that a geographic region seems to support only a few mega-companies at a time. The Bay Area is no exception.

At the time that these mega-companies were built, one could consider their talent markets to be secondary talent markets. Just because they are primary markets now doesn't change the fact that during the critical growth period these companies had to figure out recruiting, hiring, and overall culture in such a market. Unfortunately, there's very little advice out there on how to operate in secondary talent markets: early all the advice on careers and startups you can find is given by folks associated with high-mindshare companies in primary talent markets, like Apple, Netflix, Google, Facebook, etc.

Operating in a secondary talent market might sound like settling for "second-best", but there are significant advantages to doing so. If a company can become the best employer in a region, then they accrue the benefits of being hirer-of-first-choice for all the talent produced near that region. They can even recruit outsiders attracted by the low cost-of-living. Most importantly, because the switching costs are much higher for employees, the company can invest much more into training their employees for the job, with the knowledge that average tenure at the company will be much longer. This is a win-win for both the employee and the employer.

One should not discount how different operating a company may be if you can expect people to stay there for 5, 10, or 20 years. Instead of hiring for present skills, you can hire for future potential, knowing that training your employees will pay significant dividends. Instead of half-baked projects that die after the inventor leaves, one can expect long-term projects to actually come to fruition. And the historical knowledge of why decisions were made, incommunicable process knowledge, and other types of knowledge that only come with experience can continue to accrue as people stay at the company longer.

DeepMind was built on this model. Investors asked them to move to the Bay Area, but they realized that there were no good talent sinks in all of Europe for the excellent math/CS grads from the likes of Cambridge, Oxford, ETH Zurich. Recursion Pharmaceuticals is the same. And the example that inspired this essay, Shopify, is another.

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