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:
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.
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.
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!
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.
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.
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.
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