Why Are Tech Startups Having Trouble Hiring Top Talent?

Updated: March 04, 2011

It's a question that has plagued startups from day one, but especially today. More than ever, tech startups are finding it difficult or impossible to pay for the talent they need. Whether it's programmers or executives, these urgently required professionals are rejecting the overtures of today's startup businesses at an alarming rate. Several causes explain this growing problem, six of which are explored below:

Startup Economics

One of the main reasons tech startups can't pay for talent are the inherent constraints of the startup model. By definition, a "startup" is a brand new company - one trying to create revenue streams, not one that already has them. In many cases, the founder(s) work for free, driven by nothing more than determination and the deep confidence that it will all pay off somewhere down the line. Because early-stage startups rarely have money coming in, there isn't much cash to pay highly skilled professionals with. The professionals who do work with unprofitable startups have similar motivations as the founders and these (temporarily) take the place of compensation.

The Bootstrapping Model

Many startups cope with the limitations of being a new company by bootstrapping. In a nutshell, bootstrapping refers to the strategy of starting a company with the founder's savings and plowing any and all profits back into the business. Rather than rushing to extract money from the company as soon as it's made, founders with a bootstrapping mentality keep this money in reserves for corporate expansion. Although bootstrapped companies sometimes use early profits to hire talent, this money rarely equals what a top professional could command on the open market. It simply doesn't make business sense for a fledgling, six-month old company to tie up $10,000 of operating capital per month in a single programmer or web technician.

More Demand Than Supply

The main reason why today's startups have an especially tough time paying for talent is that demand far exceeds supply. In short, there are more startups who need big-time professionals than there are big-time professionals. Nothing proves this point more than a recent press release from Hubspot, who is offering a $10,000 bounty to anyone (literally anyone) who can refer a talented developer to them. Moreover, developers are being offered a free iPad just to follow through and sit down with Hubspot for an interview. And the lucky developer who gets the job gets a $4,000 gadget shopping spree on top of it. This is an extreme example, but it's emblematic of what's going on in startup hubs across America: there seemingly aren't enough talented tech workers to go around!

Smaller Angel & Seed Funding Rounds

Another problem (from the startup's standpoint) is that angel and seed funding rounds are smaller than in the past. During the mid-late 1990's, it was common for venture capitalists and angel investors to sink millions of dollars into the companies they worked with. Money flowed freely, with few strings attached and with even fewer questions asked. Today, angel investments into new startups are more subtle and pointed. As BusinessWeek explains, seed investors like Paul Graham's Y Combinator invest $50,000 or less in exchange for small equity stakes. Graham calls it "mass production techniques applied to startup funding" - in other words, investing small sums into many companies in place of the $20-$100 million, "Hail Mary pass" investments made a decade or so ago. Though there are many advantages to this new approach (including the founders retaining more equity) it does leave less money to hire technical help with.

Lucrative Offers From Established Companies

Unfortunately, the problem isn't just that demand exceeds supply in the tech talent pool. It's also that startups are competing for these limited human resources with the monoliths of the tech world. Google and Facebook, in particular, are engaged in a death match to hire the talent that the other company wants. The Seattle Times said the following of Google's expansion in February:

"To accommodate new employees that it expects to hire this year, Google is expanding its offices in Seattle and Kirkland. The company's been talking up its growth plan over the past month, saying it expects to add more than 6,000 employees this year globally. After that news came out, Google received a record 75,000 resumes in a single week. Locally, applications to the Seattle and Kirkland offices jumped 62 percent above the weekly average."

Keep in mind that companies of Google's stature can offer people what few startups can: total, unquestioned job security and immediate prestige. Those who don't share risk-taking ethos of startup founders are more inclined to take the generous offers of already successful businesses.

The Poor Economy

Although the economy is surely recovering, the fallout is still plain to see. After nearly three years of economic carnage and despair, highly talented professionals are hesitant to stake their livelihoods on speculative, unproven startup businesses - particularly when jobs are so plentiful at rock-solid behemoths like Google and Facebook. As the economy continues to improve, the economy should become less of a barrier between young startups and the talent they need.

Featured Research
  • Contact Center Implementation Best Practices

    Are you looking to add a contact center for your business but not quite sure of how to go about implementing one? You aren't alone, in fact, getting a modern contact center up and running efficiently and effectively is much more difficult than it was even five to ten years ago. more

  • Business Meeting Showdown

    It is no secret that communication and collaboration are at the heart of success and longevity for any business. However, as businesses become more global and more employees work remotely, video conferencing is being increasingly used as an alternative to face-to-face interactions. There are pros to both business travel and video conferencing such as personal connection and ease of use. However, there are cons as well ranging from travel delays to being technologically reliant. more

  • Mobile Communication Showdown

    It's no secret that businesses are becoming agiler and employees are spending more time away from their desks. The question isn't should we get rid of our landlines, but how quickly can we replace them?However, staying connected with your colleagues, clients, and customers is absolutely essential for cultivating long-term, lucrative relationships that will help your company achieve success. more

  • Signs you are Ready for Mobile BI

    With workforces moving more and more mobile on a daily basis, it is essential to ensure that your company is able to arm your employees with the analytics that they need to succeed. 89% of business leaders believe that Big Data will revolutionize business operations in the same way that the internet did. These numbers show the trend towards investing in a BI system. more

  • 15 Ways to Optimize Your Contact Center

    We live in a time where customer experience is seen as an important competitive differentiator. Given this, wouldn't you like to make sure that your contact center is fully optimized to meet your business needs? Deciding to upgrade and optimize your contact center is a big step, and one that shouldn't be done without due diligence and plenty of research. more