As previous research shows, only a handful of startups survive and grow to have a significant effect on job creation. A recent study published by the research institute of the German Federal Employment Agency analyzed the factors that influence a startup’s likelihood of becoming an employer. The study surveyed over 5,000 entrepreneurial firms in Germany and tracked their performance over time to see when they were more likely to hire in general and hire highly-skilled workers (i.e. specialists) in particular.
The study measured the effect of firm-specific factors like founder backgrounds, as well as factors external to the firm, such as the local labor supply, which was measured through unemployment levels. The findings below show how these factors affect a startup’s hiring success.
- As unemployment increased, startups were more likely to hire new people in their early years.
This has important implications for the role of startups in addressing unemployment. As previous research shows, startups are more likely to hire people who were previously unemployed, thus playing an important role in bringing unemployed people into the job market.
- Companies that raised external funding had a higher probability of becoming employers, while founders who used their own material resources or bootstrapped were less likely to hire in their early years.
According to the authors, using material resources privately owned by the founder was associated with smaller, solo-entrepreneurial firms, while founders that planned on growing from the beginning focused on external investment early on.
- Companies founded out of necessity were 42 percent less likely to become employers.
More specifically, founders who were unemployed in the year before starting their companies were significantly less likely to become employers than founders who were working the year before.
The study also revealed some interesting patterns that affected a startup’s ability to hire highly-skilled employees in particular.
- Startups had a higher probability of hiring highly-skilled employees as early as their first year when unemployment was high or GDP was decreasing.
This indicates that startups need highly-skilled human capital in their first years and can be a useful source of employment for highly-skilled labor during difficult economic conditions.
- Founders with university degrees were 14 percent more likely to hire highly-skilled employees.
According to the authors, potential highly-skilled hires do not have as much information on a startup’s performance in its early years as they do on established firms when they consider working for them. Instead, the credentials of the founders can act as a signal for the quality of the firm for potential hires. Founders with higher qualifications are also likely to have higher standards when hiring and have access to networks of skilled employees to hire.
- Holding a patent increased a firm’s probability of hiring highly skilled workers by 12 percent.
Patents were used as a proxy for the level of innovation at the firm. According to the authors, innovation can be another signal for skilled employees to evaluate a startup’s performance.
The full study can be accessed here.
Contributed by Maha AbdelAzim