A Hidden Reason Why 90 Percent of Startups Die

When talking about why 90 percent of early-stage startups easily die, people always talk about these reasons like no funding, poor product, bad marketing performance, weak leadership, etc. “Why do some many startups fail” from Quora features different voices and experts who pitch in on the conversation. However, there is a hidden and fundamental reason that few people really realize and emphasize — the hiring process sucks.

If the co-founders cannot hire the right person, all the problems like no funding, poor product, bad marketing performance, and weak leadership I mentioned above come naturally. No one wants to argue how important the talent is. However, few truly understand how severe their hiring problem is.

I was told by many of my friends who co-founded startups that usually they cannot get high-quality candidates easily and quickly. The hiring process took too long and ended with too many compromises. If we take a look at the image, we can image how much pain co-founders face when it comes to obtaining new hires.

80 percent of companies cannot receive more than 10 applicants on AngelList (randomly sampled 12,000 companies on Angel.co) Source: Hiretual

applicantspic1The average number of applicants is nine and median is four on AngelList. Most employers cannot have more than 10 applicants for their job ads and about half of them get less than four. It’s almost impossible to hire great talent.

The smaller your startup is, the harder your hiring and recruiting will be.

80 percent of smaller startups cannot receive more than seven applicants on AngelList

applicants1-10

Startups with 1 to 10 employees receive on average only 6.7 applicants with a median value of three. This means that a half of early-stage startups get less than three applicants and most of them cannot receive more than seven applicants.

Startups that fall into this category are in their co-founders dating stage, angel, seed, and pre-A fundraising rounds; founding teams are working on their product from MVP to a public product and ideally significant traction. The talent which is critical in this stage is engineering and product development. That’s why there is such a huge demand for this limited pool of talent.

The demand is so big that even academic STEM programs can’t keep up with it simply because the vast majority of startups are in this stage. Often early-stage startups have no choice but to hire a recruiting agency or do the footwork of recruiting yourself.

80 percent of startups with 11-50 employees cannot receive more than 13 applicants on AngelList

applicants11-50

Startups with 11-50 employees receive on average 12.13 applicants on average and median of five. Notice that the number of applicants for 11-50 people startups jumps to almost two times the number of applicants for startups under 10 people. Startups that are in this segment usually have secured their series A or B fund and as results they are often perceived as less risky while still offering lucrative equity or stock options. Besides less risk and more compensation, an important factor behind the increase in applicants is the need for other talent other than product development.

Average risk-takers see joining startups between 11 and 50 people as the best time because at this stage companies have a good product market fit, are showing good growth, and ideally have healthy revenue streams.

80 percent of startups with 51-200 employees cannot receive more than 17 applicants on AngelList

applicants51-200

As companies grow, you see how they become more attractive to a bigger talent pool. Companies with more than 50 people receive on average 17 applicants through AngelList with a median of six which is on average 41 percent more than companies under 50 employee.

Only a handful of companies get more than 18 applicants through AngelList, and the maximum number of applicant a single job post has received in our sample of 12,000 companies is 134. Nevertheless, AngelList is an awesome platform for startups and recruiters everywhere and as its user base of 2.7 million and startup base of 1.2 million grows day in and day out with the recently added “Connections” product feature.

80 percent of startups with 201-500 employees cannot receive more than 18 applicants on AngelList

applicants201-500

A highly competitive market for engineers and product development talent is a big driver behind why engineers and product development talent are often passive seekers. Competitive market drives the demand up, which in turn drives their compensation up, way beyond the minimum cost of living in the area. Therefore, there is really no need to switch jobs. That and risk is why only rarely job ads get past 18 applicants on AngelList.

If you are not clear about how impossible it is to hire a new employee from 10 applicants, see this analysis from a Jobvite report on the recruiting funnel:

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Hiring Funnel

Let’s do some simple calculations: AngelList averages 9.08 applicants (from the first image) multiplied by 12 percent → 1.09 interviewees multiplied by 17 percent → 0.19 offers multiplied by 89 percent → that’s 0.16 hires. Wow … Obviously, my friend was so lucky. He hired a product manager from his AngelList job post out of seven applicants.

Here we might have pitfalls. Jobvite report’s data is from ATS vendors and several job boards. Our data is from AngelList only. Therefore, there could be two scenarios.

  1. AngelList has 6.25 times higher quality applicants than any other platforms like LinkedIn or Indeed. I don’t think this is the case or possible.
  2. AngelList has the same or somewhat higher quality of candidates. However, employers on AngelList have an easier time making an offer decision … be it self-involvement in the recruiting process or no cost of AngelList job ads. This might be possible. Startups hire faster than big companies. However, if they make a hire decision based on a poor candidate pool, the failure probability (90 percent) starts to be reasonable! That’s a terrible fact that has been hidden for such a long time!

AngeList Job Ads Salary Analytics

angellist-salary-eng-min

Hiring and recruiting is challenging, especially for early stage ventures as there is no employer brand to attract top talent, and there is lower compensation than at other companies. However, startup recruiting is the land of opportunity for desperate job seekers who want to gain experience and prove themselves. Even novices to sourcing and recruiting can quickly learn the ropes of recruiting by doing startup recruiting. It’s a huge challenge to find interested candidates, but offers can come easier from the hiring managers. I suggest:

  • Take a percentage of commission as equity in the company, lowering the upfront cash cost for your client. Your clients will hire much faster since most startup optimize for value per dollar spent.
  • Increase the involvement of the hiring manager in the recruiting process. Responsiveness to your emails, and contacts and the level of engagement is a critical determinant whether the client will hire faster than not at all.

Parting Thoughts

Hands down, the reason why most startups fail is the wrong people, which may include the founders themselves. That’s why having a master recruiting and hiring strategy is one of the wisest decisions that any startup founders can choose.

If you enjoyed or found this article useful please like and share. Let me know your thoughts in the comments below.

Ninh Tran

Ninh Tran is the COO & co-founder of Hiretual, a sourcing platform that combines recruiting with science to power a wider, deeper, and more accurate search, actionable insights, and swift management for thousands of recruiters. An ERE Media and Inc. contributor, he has spoken at the University of California-Berkeley and Stanford. He founded Trucksome Inc. to help emerging local food economies thrive creating thousands of jobs for the unemployed right here in the U.S. Then he went on to Google before co-founding an executive search firm HireTeamMate, Inc., where as COO he lead the recruiting operations that placed hundreds under one year before founding Hiretual.