If you need a large team of very gifted engineers, start in a college town that isn't Palo Alto or Berkeley.
That $130k/year makes trying a startup less risky. It gave them an opportunity to save so they can live off savings. It also means that they can recover quickly from any debt they incur.
It also establishes a benchmark for a startup's value creation. If early employees can't reasonably believe that they're going to get significantly more than $130k for their efforts, either the idea/execution is too small or the founders may not play well with others, which causes other problems leading to failure.
It's also obvious that developers are more expensive to hire anybody in San Francisco than in Des Moines or Minneapolis.
Also, please note the bias towards founders in these discussions. A tiny team of founders is a good start, but you eventually need actual employees.
Does harder hiring in the SF Bay Area hurt or does it merely help weed out things that don't have a chance for some other reason?
As far as later stage employees go, successful silicon valley companies go elsewhere for what they can get elsewhere.
I think that you should start where you think that you have the best chance of success. I don't think that "harder to hire" or "more expensive" captures sufficient detail, but it's your company, so that's your call.
Also, careful with words like "later stage". You're "later stage" as soon as you hire the first person who isn't getting a founder's stake in the company. For us, that was weeks, not months, after the birth of our company.
To me, "later" isn't until the biz is well beyond self-sustaining, when there's very little risk of failure.
I'm not disputing harder to hire, I'm asking whether harder to hire is a negative or a useful indicator.
The conventional wisdom is, "go to the Bay Area, it'll be much easier to find smart developers." It is, in fact, very easy to find smart developers in the Bay Area. Unfortunately, they work for Google.