Here’s how the startup hiring scene has changed in the unicorn era

A considerably higher percentage of startups are flush with funds today compared to a decade earlier. As a consequence, in the last few years, the market prices for certain type of talent has shot up, mainly fuelled by the whirlwind of VC money made available.



(Image Source: Dilbert.com)

The machinations of startup finances require them to pay over the odds for top talent. While they are high pressure jobs that require cross-functional skill sets, not unlike other industries, they are also high-risk, as the environment is relatively new, unexplored and extremely competitive.

Undeniably, salaries contribute massively to the burn-rate of startups, especially at unicorns. Often, wages were the single biggest expense items at a startup. At one point it appeared as though the unicorns were trying to outspend each other in enticing the best talent from top B-schools and the valley, but more as an ostentatious show of strength rather than out of requirement or necessity. It reminds you of those pubs that have a scoreboard announcing which table spent the most on alcohol. Needless to say, there has been plenty of debate on when the bubble would burst.

The problem with too much money and overpaying key personnel is that you start operating in a separate market altogether.

That means expensive hires could turn out to be expensive mistakes too, when exorbitant severance packages are factored in. Also, there aren’t many corporates willing to pay unicorn-level startup wages, even for above-average talent which results in them getting locked-in at the startup.

All of this (combined with other macro factors) hastened the fund crunch, leading to lay-offs and a 50% drop in recruitment in the last 18 months.

Using High Wages as a Strategy
Ashish Sinha, in his critical post against protectionism mentions how “excessive funding” shaped the thinking of a “startup founder’s hiring mantra”, which was to give

…so much salary to employees that the salary becomes an exit-barrier.

He goes onto mention that, several startups “had to shut shop because they couldn’t afford to bring in great talent, thanks to the talent-hoarding war by the likes of Flipkart and Ola.”

It can be supposed that,

Such practices created an environment where it appeared as if there existed two markets, one for unicorns and another for the rest.



(Image Source)

In a way, when growth is the focus and the pace set is extremely ambitious and aggressive, there are few options left other than ‘throwing money at the problem’. So, the best talent was lured in at a considerable premium which further skews the wage index heavily.

But paying extremely high salaries comes with its cons besides increasing cash-burn. A recent Bloomberg report mentions how some Google self-driving car experts were overpaid so much that they quit. Back here, there’s been a spate of exits at the highest levels at various unicorns. While the reasons vary, they have been largely attributed to lack of innovation and work culture in the latter case.

When M&As become the primary strategy for top talent acquisition-When unicorns can’t get the talent they desire, they ‘acqui-hire’
Usually an effective strategy to on board entrepreneurial talent who have a high risk appetite, it turns out to be quite expensive too (especially if the buy-out is an all-cash deal). Many a time, post acquisition, the founders lose motivation and may not align completely with the acquirer’s vision. Sometimes, it could turn out to be bad cultural fit for both organisations.

An interesting case was when Flipkart hired back their ex-employees by acquiring the startup they had just founded for a rumoured $20 million. The acquisition was done so quickly, that the founders were yet to launch their product after having quit. It does make one wonder why they weren’t given the freedom to develop that product while they were still employed.

But the playing field is more level now than ever before
The sheer quantum of dollars flowing in and number of deals happening has resulted in the Indian startup system becoming a more level playing field in reality.

Everyone has reasonable spending power and there is only so much top talent the unicorns can hire.

And the absolute elite talent from the valley, could not be lured in to make that extra difference. That meant, other funded startups could attract local talent, albeit above market prices.

Issues due to wage disparity
Another problem is that while the top management is paid top dollar, it does not filter down the pyramid at the entry-level or mid-level roles. It is becoming increasingly common for employees to have that odd spat with the management and sometimes even openly revolt against the founders. But, that is expected when there’s uncertainty over future funding and/or revenue sources.

The recent Infosys episode on high severance packages is a clear example of the old guard trying to uphold core values and maintain transparency as the current management team has adopted a growth-at-all-costs approach which has upset the founders who built their success on frugality and efficiency.

N R Narayana Murthy felt his “compassionate capitalism” philosophy was under threat, which recommends that the ratio between highest compensation in the firm and the median salary should ideally between 50% to 60%. The salary hikes and severance packages, NRN claimed, affected employee morale and increased dissatisfaction.

Regulate Wages?
Does bringing in regulations on salaries make sense? I don’t think so. We operate in a free market and market dynamics should always dictate wages. That is key for a performance based economy to flourish.

However, to create companies that last at least a couple of decades, firms could insert clauses in the company’s charter that impose reasonable restrictions on salaries.

So what then is the solution?
Focusing on the fundamentals of building a company and never losing sight of it as the firm grows, is key. That means, getting the work culture right, building lean teams, reducing redundancy and increasing efficiency are critical for success.

But more importantly, it always starts with choosing the right candidates.

Share your thoughts with me on Twitter.

Read: 8 Steps to Hiring Right at Startups

(Main Image: Thinkstock)