If everyone is “hiring the best people” – where do all the others work?

I met an excellent entrepreneur on Friday who has built a company (bootstrapped) with about $5000 of his own investment to about $250K in revenues over 2 years. He was looking to get an investment from us to increase his sales presence and grow revenues 4 fold in 2 years. Like most others, he was enthusiastic, smart and intelligent. After sharing with me details about his market, customers, etc., we got to his unique value proposition.

“I only hire the best people. That differentiates us.”
I hear this multiple times from many entrepreneurs who have built a good business, in a competitive and crowded space. There’s not much (they claim) that can differentiate one company from another. I disagree with that premise, but more on that later.
It got me thinking though about the topic of this post and I had 2 questions:
1. If every company is hiring the “best”, where are “not the best” working?
 Even large companies claim to “hire the best”. So any entrepreneur who claims the people at larger companies in their domain have the luxury to hire and retain “second tier talent” is wrong.
2. How does one determine who’s “best”? What criteria does one use? SAT scores? References? Proven success?
When you are looking to hire, you have a lot of constraints for any  position. Assuming you have 10 potential “good” candidates for the role, with the right skill set match and experience, you still have the following hard criteria to consider among others.
1. Salary you are willing to offer. Everyone has limits. The “best” usually command a premium. Not every company can offer the highest take home pay.
2. Location of your company. Obviously if you are located in Palo Alto, you dont want the potential employee looking to stay at Boise, Idaho.
And others.
What typically happens is that the list of 10 goes down to maybe 5, because they dont fit within the parameters you set out above. So among the 5, who is the “best”? There are 3 soft criteria I think you should further look for:
1. Attitude: Consider a person whose attitude towards life, work and business fits with you and your company. If you are energetic go-getters, get more people like that. I know the conventional wisdom is to “round” out the team with complimentary skills, but that’s for skills NOT attitude.
2. Culture fit: What differentiates your company from others is also you and others in the company. The unique culture that you have all put together. Anyone you hire has to fit into and immerse in the culture of the company.
3. Values: Its important that the people you hire, share common values to others in the company. Its easy to say we value honesty, integrity, open communication, but few people really practice them on a daily basis. If you however hire people who share the same values, chances of “straying” away into quicksand are fewer.
I believe if you use these filters, then the “best” people are those that fit all the criteria, both soft and hard. Obviously not every company has the same culture, values and attitude requirements. So the people that work there are the “best” given those criteria.
Others who are deemed “not the best” are quite possibly the best at a competitor or another company who values and culture differ from yours.
Easy to say, but do you agree? Or is this too simplistic?