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. SEEDTABLE

November 29th | #52

This week in Europe: Great Talent is like Flying First Class

A few weeks ago, Paris-based Welcome to The Jungle raised €20 million (on top of an €8 million raise last year) to “make recruitment easier” by proposing a wide variety of high-quality content to help companies showcase their culture and young professionals find work. 

Smart? Sure. Unique? Hell, no. 

Welcome to The Jungle is just one of many, many (many) startups that raised money to take on the $157 billion that the talent recruitment space is worth. 
Some companies in the recruitment space
I guess that $157 billion is an attractive enough incentive.

Today’s edition is going to look at the talent and recruitment industry, analyze why there is a craze for “talent” and why all this is stupid. 
 

How and why you should identify Great Talent

The best way to figure out if someone is great at their job is if after working with them, you can’t go back to working with a “normal {role}” anymore.

You should know a few people like that. That engineer who can figure out a way to implement a complex feature in a few days, that designer who can take a shitty wireframe and turn it into a beautiful, high-converting landing page or that marketer who can grow whatever you put in front of them. 

Just like it’s impossible to go back to sitting next to Joe on a middle seat in row 47 after flying First Class, you’ve been spoiled by great people.

Great companies are exclusively built by these great people. Can we agree on that? So the logical consequence is that the only way to build a great company is hiring lots and lots of great people.

The cool (and the shitty) thing about hiring is that hiring is a loop. 

(Sidenote: I feel like a stupid-er version of Ben Thompson and aggregators, but yeah. Loops again.)
 

Talent loops at the company level

When discussing tech ecosystems, I believe that Gresham’s Law applied to Talent Markets makes it so that you are either growing (and attracting talent) or decaying (and pushing talent out).
Talent follows talent of a similar caliber, and when Good Talent is concentrated on a single geo area, money and opportunities gravitate towards that point as well. 
Because a company is just like a city, but at a smaller scale, the talent dynamics stay true from one level to another.

There’s one difference though: the size of the geographic area. I usually characterize an ecosystem’s talent loop like this.
You probably hate this chart.
But this is how it really looks like. 
Granular view of a tech ecosystem.
A tech ecosystem is just a bunch of talent loops in the form of companies, in the same geographic area.

As I said the difference is scale. Moving from one city to another (exiting a talent loop and entering a different one) is hard. But getting a new, better job in the same city is not. You just need to change your commute. 

Exiting a talent loop (quitting a job) and entering a new one (joining a company) is an order of magnitude easier at the company level than at the city level so it happens 10x more often.  

Great companies know it, obsess about it across the organization, and fight for it with a ferocity that’s hard to understand for mediocre companies. 

That’s how important talent is. 

The simple solution to the Talent problem

Startup compensation is simple. You have four options:
  1. Become among the best in the world at identifying mispriced assets.
  2. Convince incredible people to work for less.
  3. Pay top of market, whatever that market is.
  4. Build a mediocre team.
As Zack Canter mentioned, everyone thinks they are doing 1 or 2; but nearly everyone is actually doing 3 or 4.

Who is doing 3? You know who they are because you can name them. Big Tech, Basecamp, Buffer, Lambda School, Stripe. You think Stripe has problems hiring great people? 

Who is doing 4? By definition, most startups. Even though Europe has more engineers that the US, great talent is scarce, has opportunities and is interested in solving complex problems. 

What’s the point? 

First you need to understand how recruitment works. Typically “talent platforms” charge companies a percentage (between 10 and 20%) of the first year salary of every employee hired through the platform. If an engineer’s salary is $100,000/year, most talent finders would charge 15% of that, or $15,000.

I don’t mind if companies hire mediocre talent. Fine by me, specially if they are my competitors. The problem is that there is a $150 billion industry built on top of a ridiculous inefficiency: charging a company 15% of a hire’s first year salary for doing 4 when you could be doing 3.

And that’s the point.
 

Consolidation times are coming.

Just like I correctly called the consolidation of the scooter market in Seedtable #28 back in June (OK, I'm done bragging), I’m calling consolidation here as well.

It will take longer than scooter. The European ecosystem is growing and will keep growing, which will keep this whole charade afloat because most of the capital flowing into the ecosystem gets deployed to hire talent. But this growth is not infinite, and consolidation will play out sometime in the next 24 months. 

Why? Two reasons.

First, the VC game. All (or most) of these companies raised VC money. Welcome to the Jungle wasn’t the only one. Spanish JobandTalent raised $70 million just three days ago. Raising money comes with ping pong tables and nice, distracting offices, but it also comes with growing at a stupidly uncomfortable pace to get to that liquidation event.

Once you raise money, you are in for the ride. You just have to pray that it’s a rocketship and not a Toyota Prius. In short, because these companies raised, they can’t be a boutique recruitment agency with nice profits paying yearly dividends. They need to be market winners, and there can’t be 1000 market winners.

Second, the recruitment industry is a “success of the successful” scenario. Companies only pay for a successful hire and pay zero if the position isn’t filled. This means that “selling talent” is a risk-benefit balance between sellers and buyers which riggs the game to the better players.

Boring Explanation on Why Talent Recruitement is a Success of the Successful Case


Note: you can skip this.

Finding and qualifying talent is a very expensive and resource-intensive game that has the potential of paying zero. You could spend $X and Y hours finding that perfect Rails engineer, only for a company to hire from their own pipeline leaving you with nothing but the cost already incurred. 

If you are new to the game, and you are not sure how good you are at finding talent, you need to protect yourself or risk going bankrupt. This means charging a high percentage to spread your bets, charging an upfront fee to start the search or only working exclusive positions with no competition.

But if you make it virtually riskless for a client by charging a lower percentage, removing the upfront fee, offering a guarantee, delaying payment terms and not requiring exclusivity, then selling your services is extremely, extremely easy. 

This is only possible if you are REALLY good at finding talent, or if you have a big war chest you can spend while learning to be REALLY good.

In short, the better position you have (because you are good, or because you have money in the bank), the better terms you can offer companies because you can derisk your customers and put risk on you because (a) you have enough money to sustain it, and (b) you know you can spend resources on filling positions.

And this loop only strengthens over time.

The more companies you sell to (because its easier), the more open positions you have available, the more attractive your platform becomes for talent. This makes it easier for you to find that talent so you can offer even better terms to clients, and the loop starts all over again. 
As a result of these two forces – VC economics and success of the successful – we’ll see consolidation over the next few years.

If you are a startup founder, don’t play this game. Remember great talent is like flying first class – both are things money can buy, the difference is that talent is worth it even when you can’t afford it.
 

Bonus: The real opportunity is outside tech


Of all the companies I shared, there’s one common denominator: they all cover tech. Everyone works where they are familiar, so most tech people want to solve tech problems. 

But I think that there is a gap in the recruitment market, and that gaps is miles away from hiring engineers.

Broadly, there are two big untapped opportunities in the space.

Opportunity #1. Find a specific niche of specialized jobs, and build a marketplace around them. Even better if the industry communicates over the phone right now. I’ve seen this being tackled by a couple of companies, but I’m sure there are many, many more.
  • WeMaintain is a French marketplace connecting elevator repairman with buildings. They raised €7 million back in April.
  • MedGo is another French company. They raised a Seed from Kima Ventures in 2017 and since than have grown to 40+ employees and over 10,000 installs in Google Play.
  • Coople has 20,000 registered companies, 400,000 registered workers and recently raised $32 million.
  • I’d love to see something like this being built around trades.
Opportunity #2. Build the {instert_step} layer of recruitment. Hiring is overcrowded, but the rest of the talent process isn’t.
  • Onboarding layer. The first 30 days of a hire have a strong impact on their tenure. No one is paying attention to this.
  • Immigration. Many companies need to hire from abroad, but hate the immigration process. This industry is also built on inefficiencies, but government inefficiencies, which are extremely hard to fix. Jobbatical is working on this.
  • Remote layer. Becoming the “country” for remote workers is an insane opportunity. I’m talking insurance, taxes, accounting, pensions – basically everything a decent country provides.
Request: this is a new section I’m trying. Whenever I critique an industry, I’m going to try to take a stab at the opportunity behind it. I’d love your feedback. 

 
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💰 MONEY STUFF
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