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Stop Your Firm’s Brain Drain – Convincing Innovators to Choose an Established Firm Over a Startup

by May 27, 2014, 12:01 am ET

                                                                                    John Sullivan and Trena Luong

There is an innovator brain drain going on. The drain is away from larger established firms, which desperately need more innovators, and toward startup firms, which are successfully recruiting a disproportionately high percentage of these prized innovators.

fs-tritium-image1It doesn’t matter whether your corporation is trying to hire experienced talent or recent grads; it seems like every innovator and entrepreneur these days is seriously considering working at a startup (or creating their own startup). What makes the “brain drain to startups” a problem so unique is that corporations are fully aware that they are currently outmatched in this recruiting battle and most are also painfully aware of the economic damage that they suffer whenever they lose an innovator.

Given this awareness, it would seem logical that, at least at large tech firms in the Silicon Valley, each would have a dedicated “counter-startup recruiting program” designed specifically to reverse this brain drain. But for some unexplained reason, it’s almost impossible to find a large corporation (tech or otherwise) that has a comprehensive formal recruiting program for landing innovators who have had a natural inclination to bypass them and go to startups. Yes, some large firms like Google, WL Gore, Yahoo, Facebook, and recently Zappos have a few features that are attractive to innovators but no one has a visible comprehensive “counter-startup recruiting program.”

What Is a “Counter-startup Recruiting Effort?”

The basic plan behind a counter-startup program is to first identify the factors that draw innovators to startups and then to show these innovators that a corporate entity can actually match startups feature to feature. For that reason, you could also call your recruiting program a “startup feature-to-feature matching program.” A unique and separate tailored recruiting program is necessary for two basic reasons:

  1. First, because the innovators who are drawn to startups have a completely unique set of “job and company selection factors.” And in order to successfully recruit them, you’ll have to make it easily visible to external prospects that most of their job acceptance criteria can be met at your firm.
  2. The recruiting process itself must also be tailored. This is because most startup-leaning innovators would be completely turned off by the impersonal and completely lacking in innovation standard corporate recruiting process that they would have to go through in order to get a job at a large firm. In addition, most standard corporate recruiting processes would simply miss or even reject innovators because they are so different.

If you are a corporate recruiting leader and you are intrigued with the prospect of reversing this “innovation brain drain” away from startups and toward your firm, please read on.

Show Me the Money!

Perhaps one of the reasons that there is an absence of dedicated counter-startup recruiting programs is that corporate recruiting leaders have failed to provide an effective business case to their own executives that clearly demonstrate that unnecessarily losing these innovators is costing their firm tens of millions and possibly up to $100 million each year. If you doubt the economic value of the innovative employees who are drawn to startups, you have two choices, estimating the dollar value of individual employees at startups or calculating the performance differential between an average new hire and an innovator at your own firm. Let’s look at the dollar value of individual employees at startups first.

Estimating the Economic Value of Individual Employees at Startups

Almost everyone has heard about corporate acquisitions where startup firms with a small number of employees are acquired for over $1 billion. These acquisitions it turns out are an excellent way to illustrate the tremendous economic value of a single startup employee. The calculation is actually quite simple. Begin with the billion-dollar buyout value when the firm is acquired (or their valuation estimate when a VC invests in them). Next divide that value by the number of employees at the startup. Illustrative examples that come to mind include WhatsApp, which was worth $19 billion with only 55 employees ($354 million each) and $1 billion Instagram with only 13 employees ($76 million each). That of course doesn’t mean that every startup employee is worth tens of millions of dollars (an acquired startup employee is estimated by PrivCo to be worth a minimum or $750,000) but clearly the best ones are (i.e. the ones that you should target your recruiting effort on).

How can a firm determine the dollar value that is added to its revenue when it recruits a single prospect who was going to go to a startup? Initially $100 million might seem like an outrageous amount of money for recruiting a dozen or so innovators each year away from startups, but let us illustrate how you can arrive at that number using your own firm’s data.

Let’s assume that you are a high-tech giant like Google, Facebook, or Apple. Current high-quality employees at all of these firms each generate on average more than $1 million in corporate revenue each year. An innovator would produce much more than the average employee, but precisely how much more than the baseline $1 million?

If you take the performance differential number, or what I call the “the innovator multiplier,” identified in this case by Steve Jobs when he was at Apple, at 25 times more than the average worker, then a single recruited innovator at one of these firms would be worth $25 million (25 X $1 million). Thus you would only have to recruit four of these innovators each year in order to generate $100 million in extra revenue. Even if he used the more conservative performance differential of 10 times the average employee that several other sources have identified, it would still only take 10 innovative recruits each year to reach the $100 million threshold. If your revenue per employee was lower, in this case the $295,000 at the much younger Twitter, at a multiplier of 10, the value of each innovator would still approach $3 million each for every year that they stayed at your firm.

Work with your CFO’s office in order to estimate their actual value at your individual firm, but capturing innovators who were headed to startups has a stunning ROI. This is because of their obvious impact on product development but also because these innovators can attract other innovators, and they will also energize your existing employees. Compared to the cost of a “counter-startup program,” the results can only be classified as stunning!

Incidentally, it’s not just a dollar gain that makes not having a counter-startup recruiting program an unforgivable missed opportunity, but also because we have found that it’s not that difficult to develop a successful recruiting approach that makes a large firm seem almost as desirable as a startup.

Phase I Preliminary Results From Our “Counter-startup Recruiting” Research

After six months of benchmarking and research, we have put together an outline of what a major corporation would have to do in order to develop a recruiting program that would reverse the brain drain towards startups. The major components of that plan include developing a business case, identifying startup attraction factors, identifying large firm attraction advantages and rejection factors, and developing corporate recruiting and branding approaches that are tailored to attract and sell those who are inclined to go to startups.

The last but most important component of the plan is implementing corporate approaches that have been successful in making the corporate “working life” of these recruited innovators appear and feel to be “startup like.”

Preliminary Results Reveal Some Startup Attraction Factors

One of the most important components of any startup recruiting effort is to identify the factors that attract innovators to startups. This involves some simple marketing research, where using surveys, focus groups, or interviews you identify and categorize a list of the perceived factors that attract innovators to startups. Our initial research has already identified some of those “startup attraction factors,” which corporations will have to learn to match. Those attraction factors include:

  1. I finally fit – you will finally feel like you fit because you will be surrounded by other innovators and risk takers.
  2. Build not fix – you will have a chance to create something brand new rather than fix already existing features.
  3. Continuous excitement – you will have a constant adrenaline rush because everything will be new and you will play a major role in every problem, decision, and opportunity. Your entire team will literally depend on you.
  4. Opportunities to take risks – you will be in a risk-taking environment where you will not be afraid to fail (what would you do if you weren’t afraid?).
  5. Access and knowing why – not only will you have continuous access to decision makers and executives, but if they reject your ideas, you will know why.
  6. Rapid approvals — you will have almost immediate approval or rejection of your ideas, and in many cases you will be able to make your own decisions without approvals.
  7. Work environment – you will be in a highly collaborative work environment that is designed around the needs of innovators.
  8. Broad responsibilities – with lean staffing, you will have broad job responsibilities, cross functional opportunities, and there will be no restrictive job descriptions.
  9. A panache image – working at a startup may cause your corporate friends to be envious because you will be viewed as a risk taker, an entrepreneur, and a pioneer.

Preliminary Results Reveal Some Large Firm Attraction Advantages

Although many firms don’t successfully market them to recruits, we found that large firms do have their own compelling attraction factors. They can include:

  1. Experienced leadership — an opportunity to work under experienced proven leadership.
  2. A chance to do the best work of your life – their size and abundant financial and other support resources make it more likely that you will have the opportunity to finally do the best work of your life.
  3. Work/life – you will have more reasonable hours and work/life balance.
  4. Stability — large firms are arguably more stable and they can provide more job security.
  5. A strong employer brand – you will likely have strong a universally known employer and product brands that can’t often be matched by a startup.
  6. Variety – they will be a variety of products, projects, and business units to work on.
  7. Impact – many more customers will provide a chance for you to have a worldwide impact.
  8. Advanced technology – corporations have significantly more support resources and they can afford the latest advanced technology tools.

Preliminary Results Reveal Some Possible Actions That Large Firms Can Take to Become More “Startup Like”

Perhaps the most important goal of our research is to identify the actions that larger firms can take so that their newly hired innovative employees will continually feel like they are working at a startup. These “startup-like” features to add or emphasize include:

  1. Prioritize innovators – work with the COO’s office and HR to prioritize innovators so that everyone understands and approves that they must be treated differently.
  2. Independent units – create small business units that are allowed to operate autonomously from the corporate structure.
  3. Isolated workplaces – create isolated physical work places within the facility with relaxed “startup like rules” and floor plans where innovators can go to think, collaborate, and create.
  4. Increase freedom — identify the areas where innovators expect more freedom of choice (i.e. projects, hours, coworkers, and location) and then provide programs like Google’s 20 percent time to give them more freedom and choices.
  5. Innovator budgets – provide individual innovators with their own development and innovation budgets so that they don’t have to seek approval for everything and they can act more like an entrepreneur.
  6. Provide startup funding – set up a funding unit that helps top innovators among your employees to start their own “garage startup” without having to leave the firm.
  7. Opportunities to pitch ideas – create scheduled opportunities where innovators can pitch their new projects and innovations directly to executives. Consider providing instant decisions on initial funding at these events.
  8. Select your leader – in order to minimize conflicts between top innovators and their manager, allow them to select their own team lead from a group of approved names.

Phase II – Seeking Corporate Support

This summer (2014) we will be working on the second phase of our counter-startup research. It will involve collaborating with one or more larger Bay Area tech firms in order to: 1) conduct surveys that will reveal a complete list of the attraction factors, 2) to design and test the possible components of a counter-startup recruiting program, including the best approaches for spreading your recruiting message to those who might not normally even consider a major firm, and 3) to compile and test the viability of the doable actions that larger firms can reasonably take to make their work environment “more startup like.” If you are a recruiting leader and you are willing to help us with our surveys or if you would consider financially sponsoring the entire Phase II effort (and have it focused exclusively on your firm) please contact Addie at addie@drjohnsullivan.com or call 650-468-6588. 

Final Thoughts

After a great deal of initial research, we have concluded that large corporations are missing out on a powerful opportunity to successfully recruit innovators who are also considering startups. It’s a missed opportunity because even though recruiting leaders are aware of the brain drain, it appears from the outside that they have failed to mount any more than a token effort to make their corporations as attractive to innovators as startups. Our preliminary research shows that large corporations can in fact match many of the reasons that cause innovators to go to startups.

We assert that corporations can win “the war for innovators” provided that they have a data-driven recruiting approach and the courage to go “mano y mano” with startups that have consistently proven to be bolder and more aggressive in their recruiting.

If you have any ideas to share on how corporations can become more attractive to those innovative prospects considering startups, please use the comments section following the online version of this article on ERE.net or send them directly to me at my university email address, which is JohnS@sfsu.edu.

This article is provided for informational purposes only and is not intended to offer specific legal advice. You should consult your legal counsel regarding any threatened or pending litigation.

  • http://www.ConteXtream.com Aviva Gatt

    John,
    what about large corporation’s ability to retain the innovative teams when they acquire a startup? if efforts are made to retain these innovators that they have already paid for – makes more sense to me. Acquiring companies should measure their ability to retain these teams longer than 1 year & the suggestions that you made above are relevant here- + they will attract the type of innovative candidates that we all are looking for.
    my 2 cents,
    aviva

  • Quintina Jenkins

    Hi John,
    Great article. I look forward to reading about Phase II of the research. One idea I have is offering a referral program in conjunction with the counter-start-up recruiting program. The referral program will allow innovators to bring in others like them, with the same interests. These new, referred employees can work on the innovators’ team.

  • http://www.EngineeringReferral.com Douglas Friedman

    This is an interesting article that makes some intriguing points.

    However, I’m not certain the assumption that underlies it is correct. The idea that large, established companies are losing the best or most innovative employees to startups is something I’ve heard before but I’ve never seen any hard data to back this up. In fact, the only data I have seen (internal corporate analysis of exit surveys by performance rankings, etc.) has not supported this perspective. I am not saying your supposition is incorrect because I haven’t seen any kind of metadata that pulls together exit surveys from a large group of companies so maybe it just hasn’t been an issue at the companies where I’ve worked. But I will say that through the years I’ve seen a lot of dissatisfied corporate HR recruiters at very large companies point to “how they do it at startups” as an excuse for all sorts of things or as a lazy way of justifying changes to process that they would personally like to see for one reason or another.

    I’ll also point out that, as a vendor, I’ve worked with a large number of startups and, although some have terrific hiring processes, I haven’t noticed that they are as a rule any better or worse at recruiting than Fortune 500 companies. The underlying causes may to be different but the poor results can be the same (hiring indecision and/or bad hiring decisions). I also think it is pretty accepted out there that startups have become “riskier” for employees over the past few years as startup accelerators and other early lifecycle seed options have gained ground over more traditional financial paths (like significant Series A raises earlier in a company’s lifecycle). This might very well be a good thing for innovation in general. It is easier than ever to get some kind of financing for a startup business idea. But, if you speak to engineers who are familiar with the startup business ecosystem about opportunities at a startup, most will immediately ask about the financing, and I’ve certainly come across a lot of engineers at startups that are actively seeking more stability at a larger company. I do not believe this has anything to do with their “innovativeness” but rather reflects a desire to know that they are definitely going to be paid for their work and an increased probability that their work is actually going to be used for something.

    One last thought is that sometimes people confuse the term “startups” with “companies that are growing really fast.” I think everyone understand the value in working for a company that is kicking butt and growing like wildfire and thus creating all kind of potential new opportunities for its employees. But there are large companies with very impressive growth rates and startups (lots of them) that are going nowhere. In my experience, the former have all kinds of great people knocking their doors down while the latter have all kinds of problems recruiting plain competent folks. Just my 2 cents. Thanks again for a good article.

    Doug Friedman
    EngineeringReferral.com
    http://www.linkedin.com/in/douglasdavidfriedman

  • Keith Halperin

    Thanks, Dr. Sullivan ISTM that if a company (startup or established) is really and truly serious about getting the very best people and KEEPING them for as long as needed, then they would offer “multi-year, guaranteed-raise/bonus, no-layoff-without-cause” employment contracts.
    Somehow, you don’t hear too much about those. I guess companies would rather complain and look for cheaper, less power-shifting alternatives and hope for the best…

    -kh

  • http://DavidALee.com David Lee

    Dr. Sullivan – one additional component of Large Firm Attraction that I haven’t seen organizations use to attract candidates is Data Availability! It may be great to build something new but most start-ups need months or years to get the amount of data required to evaluate what they created. Working at a large firm the possibility exists to build something and leverage existing customers, etc. to gather large amounts of data in a short period of time. This allows employees at large firms to refine what they create much more quickly based on data. Of course you have to collect the right data in order to use it as a selling point. Highlighting you are a data driven organization doesn’t work well if the data you have isn’t relevant to the position.

    Dave Lee
    http://DavidALee.com

  • Richard Araujo

    It’s an interesting article, but at a glance I don’t see any evidence ‘innovators’ are going anywhere in particular, much less to start ups. Nor in my experience do many companies actually want innovators. Of course, they say they do, much like everyone wants a Ferrari all else equal, but how many people are actually able and willing to pay for a Ferrari? The latter group is much smaller, but that’s what you’d really have to evaluate before opening a dealership. Likewise for implementing a counter start up recruiting strategy. And then you need a business climate where those innovators are welcome, and I see some problems with some of the suggestions to do so.

    Prioritizing them will alienate the rest of your workforce, and good luck getting anything done when the people they need to actually execute the ideas are pissed because their pay and benefits aren’t up to snuff. Truly prioritizing them might also raise discrimination concerns, which are much more easily proven when it’s written into policy. The freedom such people tend to want is hard to come by, and comes with risks many aren’t willing to shoulder, which also means the funding and budgets likely won’t be there. And selecting your own manager is not something that would fly at any company I’m aware of.

    So, if this advice/strategy is aimed at large corporations, which if we define as companies employing over 1000 people, that covers less than 50% of the workforce. If we assume that group of employers follows a normal distribution in terms of being able and willing to enact such policies, we’re probably dealing with employers covering way less than a quarter of the workforce, less when you consider innovators are themselves a distinct minority, and proportionately way fewer total employers because the majority of employers are small to medium businesses. So, this is niche advice really, and not applicable to the large majority of what most recruiters do.

    A more useful starting point would be to try and hone in on a common definition of what companies consider ‘innovation’ to really be. For some it may be a better way to handle AP and AR, for others it may mean world changing technology. It’s a broad term, at base it likely just means someone who is willing to question the standard practices or what’s commonly considered possible, which means, as you’ve pointed out in other articles I believe Dr Sullivan, that innovators are also more likely to have checkered employment histories, because not many higher-ups are open to that kind of critique.

    So the real starting point seems to be: define innovation. Followed closely by evaluating the willingness of corporate leadership to admit they may be wrong. So, you get a composite of how much change people define innovation as and how willing they are to accept such change. I’m not optimistic that most companies, including most big corporations who this is aimed at, would score well on such an assessment. It seems to me innovation is a eucatastrophe, when what would normally turn into a bad situation for the innovator ‘works’ for whatever reason or confluence of events, likely because their most immediate manager forgot to get offended at a new idea. And then in hindsight everyone praises the innovator when s/he could have just as easily been stomped on.

  • Keith Halperin

    @ Richard: Well-said. I think corporate thinking in regard to innovation, (particualrly when it comes from ordinary employees) is best summarized by a quote from a previous season of Mad Men:
    “Unless this works, I’m against it.”

    -kh