The Laws of Talent Attraction

Where to start a career is a hot topic for recent graduates and professionals alike. Is it better to dive into the dynamic, fast-paced world of startups, where close-knit teams are the norm and every day brings a new, exciting challenge? Or should one opt for the stability, high salaries, and clear career paths that large, established companies offer? As a result, startups and large firms are constantly battling to attract top talent, each offering its own set of advantages.

From the perspective of startups, sustaining this competition for talent can be difficult, as it implies tough choices. Startups seeking to hire critical talent often choose to locate in "tech clusters" that feature developed labor markets for technical, sales, and managerial staff. Unfortunately, these typically arise where there is a significant presence of large firms. Conversely, extensive hiring by large firms can prove too much of a good thing. 

In our research, we argue that as startups are forced into a competition for talent with large firms, they struggle to reach the growth phase. We investigate this phenomenon using online job advertisements of more than 140,000 startups founded since 2010 in the United States. While startups initially consist of a founding team and a set of early employees joining the fledgling company via informal networks, once a startup tries to grow larger, it enters formal labor markets – including job advertisements, as reflected in our data. We assign startups and large firms to local labor markets, as defined by commuting patterns. We then study how changes in hiring by large firms within these labor markets affect the salaries offered by startups and their overall growth.

We find that when large firms increase local hiring by a typical amount in the data, this forces startups to offer significantly higher salaries - up to 10% more for crucial roles - while reducing their expected growth by over a third. Such a "crowding out" effect is particularly pronounced in critical areas like management, STEM, and sales. 

We further explored which types of firms pose the greatest competitive threat to startups in labor markets. Large firms with very similar business models may be the most dangerous, as they rely on the same specialists and attempt to poach them from each other. On the other hand, large firms may prove beneficial to similar startups, either by providing ideas, tools, training, financing, or even exit options. To investigate this, we assigned a proximity score between small and large firms based on the text of their business descriptions. Indeed, the crowding out effect for startups is weaker – but still present – if large firms in the local labor market are more similar. This suggests that large firms do not create labor market "kill zones" and that a more specialized local economy would alleviate some of the adverse effects of labor market crowding.

For entrepreneurs, business leaders, and policymakers alike, understanding the dynamics of competition for talent is crucial for successful growth in order to build a thriving startup ecosystem. Our results provide a first indication of how regions can better balance the presence of large firms with the needs of their entrepreneurial community. For example, regional policymakers frequently seek to attract large firms with tax breaks and other incentives, and we show that they face a tradeoff in doing so. Large firms can increase agglomeration economies in a region, but crowding might diminish or even reverse these benefits. Focusing on specialization and policies that improve employee mobility, such as non-enforcement of employee non-compete agreements, might diminish crowding. Our research presents a cautionary tale for startups and offers insights into how startups can navigate the talent war.