Some economists believe recessions are good for start-ups. According to them, when large companies fail, there is automatically more room on the playing field for new, more agile players. Others, on the contrary, believe that recessions hurt entrepreneurship. They underline the mistrust of investors in difficult times and a decline in financial flows to new businesses, which slows down growth.
The challenge of recruiting talent in times of crisis
But what is happening on the job market side? More than any other type of business, start-ups, in order to develop, depend on the quality of their employees. Teams are generally small, with each individual playing a strategic role in the development effort. This is why we often see that human capital, more than financial capital, is the key to the success of a start-up.
So, do economic downturns make it easier or harder for start-ups to access the talent they need?
With my colleagues Richard R. Townsend from the University of California, San Diego, and Shai Bernstein from Harvard Business School, we examined the impact of the Covid-19 recession on entrepreneurship in the United States through the prism of hiring. We have identified significant changes in the preferences and activity of job seekers that suggest that there may well be a problem when a crisis arises.
These winning start-ups in the post-Covid-19 world
We were interested in the impact of the pandemic on start-ups in the United States. We hypothesized that rising unemployment could make start-ups more attractive to job seekers; that the latter could be more open to small “at risk” businesses, precisely because they have less to lose in times of recession. The reverse could be just as true: qualified job seekers are more inclined to ‘fly to safety’ in times of hardship or uncertainty, thus preferring opportunities within larger organizations and more established to mitigate personal risk.
A 14% drop in applications received
As part of our research, we obtained a large set of proprietary data from AngelList Talent, the largest online jobs platform that connects start-ups and businesses with job seekers.
We reviewed the search and application activities of job seekers between February and June 2020. AngelList Talent also provides extensive details on the profile of each candidate: academic and professional qualifications, skills and years of experience, which are summarized in a quality assessment via the platform.
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We wanted to capture any changes in the behavior of job seekers to see if they continued to seek and apply for jobs at smaller, riskier companies when the pandemic started, or if they were looking elsewhere. We were particularly interested in knowing whether high-level candidates changed their search criteria, given the importance of this type of profile for start-ups.
We first analyzed 3 million searches performed by job seekers on the platform, focusing on their search filters, including company size (number of employees), location, salaries, its types of contracts and sectors of activity.
We saw a clear and dramatic change in behavior towards the end of March. Applicants began looking for jobs at companies that were about 25% larger than those where they had previously sought work.
And that’s not all. When we delved into these search parameters, we found that along with finding larger companies, applicants broadened the other search criteria to include lower paying positions, part-time jobs, and jobs in companies. more varied places and sectors.
In other words, job seekers are willing to make compromises in order to avoid working in a start-up. Thus, we found that between mid-March and June 2020, applications decreased by 14% in small businesses in the start-up phase, while this drop is only 4% in large companies. in the start-up phase.
Then comes the question of the quality of the applications received. It is the highly qualified candidates who “drop out” of the start-ups, not the low-qualified candidates. As a result, we found that small start-ups experienced an 8% drop in the quality of applications, while mature companies hardly saw the quality of applicants change. And this is worrying.
We know that entrepreneurship is a powerful engine for innovation and job creation. Downturns are precisely when the economy needs new ideas and business agility the most to adapt to change.
Our study clearly shows that in this period of recession, “young companies” have difficulty recruiting. Most importantly, they struggle to recruit high-potential candidates on which their viability and growth depend.
The challenges: a double whammy
We have known for some time that in times of recession funding is harder to come by, but we are now also seeing difficulties in the area of recruitment. It is a “double whammy” that can lead start-up founders to bankruptcy in the event of an economic recession, precisely when we want to see more entrepreneurial activity.
There are steps these founders can take to alleviate some of the hiring challenges. One of them is to take advantage of the digital flexibility that has been accelerated by the Covid-19 crisis. They may want to accept more remote work, flexible hours, or other benefits. Incorporating stock or stock options into compensation programs is another option for cash-strapped start-ups, to make them more attractive to job seekers compared to large companies.
At the macroeconomic level, it is imperative that policymakers rethink the design of subsidies. Above all, governments need to view entrepreneurship through the lens of the labor market.
So far, policy makers have focused on funding and R&D [Recherche et Développement] when they sought to support entrepreneurship. But we have underestimated the role played by the labor market. Our recommendation would be that policy makers look for more creative ways to mitigate the labor market risk surrounding entrepreneurial failure. One approach could be to improve social safety nets
so that job seekers do not see start-ups as too much of a risk when times are tough.
Ting Xu is co-author of “Flights to Safety: How Economic Downturns Affect Talent Flows to Startups” with Shai Bernstein of Harvard Business School and Richard Townsend of University of California, San Diego, Rady School of Management.