Competing for Talent: Large Firms and Startup Growth
By James Bessen and Felix Poege
Is it better to work for a startup or a well-established large company? Is it better to dive into a startup’s dynamic, fast-paced world, 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? Of course, preferences differ across individuals, but on the other side, 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, and 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 from a significant presence of large firms. Conversely, while large firms may help create tech clusters, extensive hiring by large firms can prove too much of a good thing.
In our research, we argue that as startups are forced into competition for talent with large firms, they struggle to reach a growth phase. We investigate this phenomenon using online job advertisements of more than 140,000 startups founded since 2010 in the United States. Typically, startups initially consist of a founder team and a set of early employees who join via informal networks. But once a startup attempts to grow larger, it enters formal labor markets – including job advertisements, as reflected in our data. We identify local labor markets by commuting patterns and we assign startups and other firms to these labor markets. We then study how changes in large firms’ hiring within these local labor markets affect the salaries that startups must offer and their overall growth.
We find that when large firms increase their share of local hiring by a standard deviation, it 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. Note that this effect differs from the standard effect of greater hiring demand raising wages—it is specifically the share of hiring that is done by large firms that increases startup wages and reduces their growth.
We further explored which types of firms pose the greatest threat to a startup in labor market competition. 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 description. Indeed, the crowding effects for startups are weaker – but still present – if the large firms in the local labor market are more similar. This suggests that large firms do not create “kill zones” in the labor market 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 and for building 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 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.