Friday, November 12, 2010

I'm calling it now: The engineering talent bubble

My 6th grade composition teacher would dock me 10 points for throwing my thesis right up into the title, but I just want to go out there and call it now: we are in the middle of a bubble of valuations for individual software engineers.

What do I mean by bubble? For my purposes, a bubble exists when prices of some commodity are increasing at a blistering pace that becomes disconnected from reality. Most of the time we fail to recognize a bubble because we think "this time it's different." This time is NOT different.

What are the signs of the bubble? Two key things I see include:
  1. Google paying outrageous retention bonuses to keep people from leaving for Facebook (see here)
  2. Startups, less than two years old, with very little user traction and no revenue, getting acquired simply for talent, at valuations that give even the front-line engineers a seven-figure outcome. (I won't provide any links here because I don't want to point too many fingers)
Maybe even more importantly, though, the key anecdotal indicator of a bubble is when it becomes "common sense" that prices will always go up or sustain the current market. That is what I am seeing more and more every day now - software engineers saying they're sure they can start a "company", sit in their apartment for a year, and then get acquired by Facebook for $10 million.

The unfortunate thing about a bubble is that it always bursts. You can argue that this bubble won't burst, because the number of software engineers is relatively fixed, and the demand is going up pretty drastically these days. However, a few years ago, people argued for the real estate bubble by saying "they aren't making any more land". That bubble didn't burst because supply expanded, it burst because demand collapsed as the ability to pay fell through the floor.

This is going to end, and badly. There are a lot of engineers who are going to make serious life choices based on current trends, and in a year or two, when this blows up, they will find themselves unemployed and without savings.


kushal said...

Even at radically higher salaries, Google is still paying engineers a small portion of the value they create, especially since the right engineers can theoretically create whole new lines of business. And these salaries are still well below what people would make on Wall Street.

I have a hard time seeing the bubble in that? Yeah, it sucks that talent acquisitions basically reward starting a failed company and discourage just staying at the company in the first place. And, yeah, it sucks that startups can't compete for talent financially. (Luckily they're about a million times more fun and exciting to work at.) But if you had a lot of cash and not enough engineers wouldn't you start spending like crazy to get some?

On the flip side, until Americans get excited about math and science or looser immigration laws, the supply of intelligent software engineers will remain limited. The trend seems to be pretty strongly in the other direction.

bmetz said...
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aweissman said...

Thank you JTB for both defining the word bubble and then describing its specific application in this current instance.

Test said...

I'm not sure if you can call an 'engineering bubble' especially when the US has one of the lowest percentages of graduates in engineering. There is plenty of growth still in engineering - maybe you are correct and there will not be huge $10 million bonuses for startups, but there will still be plenty of opportunity for software engineers. We have tons of web applications that are being built and wil continue to be built. Especially with the QE of the United States, you can bet there's going to be a bunch of rich folk wanting to make more startups.

If there is a lack of engineers, they have to pay them higher salaries. 7-digit salary is kind of insane, but supply will definitely increase if they start paying everyone high salaries. We'd want more engineers if anything else - there's plenty of work left to do.

I heard china has tons of engineers - maybe they will take over and fix these high salary problems.

harryh said...

Remember the adage about the most productive engineers being 10x more productive (at least) than an average engineer. I think at least part of what's going on is we're seeing salaries starting to (at least a little bit) reflect that reality.

It's not all engineers being caught up in this phenomenon. It's the good ones.

crasshopper said...

I'm glad you're going out on a limb and making a concrete prediction.

I'll be checking back in two years.

Sweta said...

The only way to stop the trend is to burst the buble now instead of later...Is that what is needed ..unemployment of millions