The Opportunity Cost of Hiring For Startups

October 6, 2022


minutes read

Benjamin Marsili

Benjamin Marsili

Founder & CEO

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In today’s time where startups are dominating the professional sector, more and more employment opportunities are being created in this domain. With this surge of opportunities also comes a surge of candidates applying to hop on the bandwagon of the “startup” culture, which is generally viewed as a more relaxed one compared to big corporations.

According to US C.B, In 2015, startups created over 2 million jobs in the U.S. alone. This is a good sign since with the increasing skilled population, start-ups are fast-forwarding the process of employment generation which leading, big-shot corporations would’ve been relatively slower at doing.

Office team working

How Do Startups Go About Hiring?

One of the most expensive startup costs is payroll, averaging around $300,500 for five employees across the U.S. according to data from Smart Asset. Due to the constraint on budgets and resources that the cost of hiring puts, we see many fresh startups hiring from social platforms such as LinkedIn and Indeed, where sourcing and screening is a more guided process

One of the most expensive startup costs is payroll, averaging around $300,500 for five employees across the U.S. according to data from Smart Asset.

It is because of this that, only upon gaining some traction, which eventually allows for increased job positions and resources to pay for them, startups engage with agencies or freelance recruiters which help them fill the openings, this usually comes at a later stage but can be implemented from an earlier stage too, however, causing financial burden.

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An example can be mentioned of a Startup that was spending 100,000 dollars per month while their average turnover was just 110,000 leaving them with barely enough to survive.

It should also be noted that startups, in general, recruit far less in both amount and frequency than larger corporations do. As an example, we can speculate that this can be due to the fact that some startups go in with a “do-it-all rockstar type of attitude which entails the startup consisting of a small core team which ends up performing all the tasks from finance to marketing HR themselves and over-working with very less delegation of responsibilities. Although such a jack-of-all-trades demeanor saves a significant amount of money it is possible that in the long-run it may hinder the growth of the organization by causing slow development and scaling.

working at a coffee shop

What Is the Opportunity Cost for Startups Then?

“Opportunity Cost” according to microeconomic theory is the loss of the benefit that could have been enjoyed if the best alternative choice were chosen instead.

The resources that already-restrained-startups spend on hiring, which involves money spent on freelance hiring managers, sourcing, screening, and interviewing candidates, hiring recruitment agencies, could be better used in performing their main business with less personnel.

While the fact remains that it would involve more work from the existing initial employees and founders, it still saves a big chunk of their financial resources since it is not only the hiring process that would cost money but also the onboarding and retention of the employee(s)- which are worries a company should have at a more developed stage in its life cycle.

office meeting room

But there is a limit to this as these startups tend to stall and make little progress. . According to Failory, 10% of startups fail within the first year. If startups continue to keep a jack-of-all-trades attitude and fail to delegate responsibility when needed, they would struggle to recognize and scale up to competition. According to CB Insights, notable cases of failure are a weak founding team (23%) and being beaten by competition (19%). This shows that not being able to hire the right people at the right time is also a reason that can hinder the progress of many startups.

Both the examples aforementioned are two extreme ends of the spectrum, up-and-coming startups need to find their own unique perfect balance of internal teamwork and delegation to external new hires according to their level of growth, resources and future end goals, there is no magic formula to choose the amount of hiring.

In the end, hiring must be done efficiently and with a reasonable budget, startups must learn to attract talent with their passion and their openness to incentivise early joiners (e.g with Employee Stock Option Plan).

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