The Evolution of VC Funding Rounds and Its Impact on Tech Companies

The rapid expansion of venture capital (VC) funding rounds in recent years has sparked significant debate within the tech industry. This article delves into the reasons behind the increasing size of these funding rounds and explores how these changes are influencing companies today. We will also discuss how this trend is affecting the hiring landscape, especially in the United States.

Why Have VC Funding Rounds Become So Large?

The proliferation of large VC funding rounds is primarily driven by asset inflation, particularly in sectors that have seen a surge in property values, such as housing and rent. This inflation has led to a significant rise in wages within tech companies, making it increasingly challenging for startups to attract and retain top talent.

Wage Inflation in the Tech Sector

In the past, an annual salary of $100,000 was considered high, but this is no longer the case in regions like the Bay Area, New York City, Seattle, and Portland. In these areas, a $100,000 salary is barely enough to make ends meet, especially for individuals not living with roommates. For example, one would need to pay around $4,000 per month for a decent apartment, leaving only a meager disposable income, assuming the salary is not taxed.

The Cost of Keeping Top Talent

These high living costs have translated into higher funding requirements for startups. To remain competitive in the hiring market, startups need to offer salaries in the range of $500,000 annually or even more. Companies like Google, Facebook, and others frequently match or surpass these figures, making it even harder for startups to secure top talent.

Special Circumstances

While there are indeed exceptional cases where startups have unique propositions or exciting projects to work on, these situations are relatively rare. Most startups struggle to attract and retain top talent without substantial financial investment.

The Implications of Large VC Funding Rounds

The large funding rounds have several implications, including changes in the size of startup teams and alterations in hiring strategies. Traditionally, a team of 5-10 people was optimal, but now, a $10 million round is equivalent to what a $5 million round was a decade ago and what a $1-2 million round was 20 years ago.

Overseas Hiring Strategies

Due to higher costs and more competitive markets, overseas recruitment has become a necessary strategy for startups. This was not the case even a decade ago, when overseas talent acquisition was more of a curiosity than a necessity. To remain competitive, many US-based startups now have to consider international talent to fill key roles.

Root Causes of the Shift

The Federal Reserve's actions have partly driven these changes. Despite loud proclamations of raising rates and draining the balance sheet, the real impact has been limited. For instance, the Fed's balance sheet reduction so far is only around $200 billion as of Q3 2018. However, the markets do not believe the tightening story and continue to maintain easy conditions.

The Current Market Sentiment

Long-term US bond rates remain persistently low, and the yield curve is close to inversion. This means that the markets are betting against the Fed's tightening strategy, hoping that it will soon reverse, and that the Fed will start lowering rates, potentially ushering in another round of quantitative easing (QE).

Conclusion

The increasing size of venture capital funding rounds is a complex issue influenced by multiple factors, including asset inflation and wage inflation. While this trend presents challenges for startups, it also opens up new opportunities in the international talent pool. Understanding these dynamics is crucial for tech companies navigating the current landscape.