The True Costs of Startup Recruiting
Quantifying wins and losses in the war for talent
Hiring is widely acknowledged as one the most important functions with a startup company, and one of the most difficult. Success is rarely accidental. Exceptional Founders, experienced investors and product/market fit are valuable ingredients, but no matter who you are — it’s tough to grow a business with no team.
In a market where technical talent is openly referred to as currency, it’s become clear that an ability to hire is necessary to build, improve and scale a business. Silicon Valley history is full of well funded, well positioned startups who squandered market opportunities due to an inability to acquire technical talent. In today’s world, companies either plan aggressively or pay dearly to mitigate these outcomes.
I’ve outlined some of my thoughts on how to conceptualize a hiring capability and the net costs of winning and losing in today’s market.
What does it cost to win at hiring?
For knowledge workers (employees making $100,000-$150,000 annually) today’s average recruiting fee is 20 percent (top firms get up to 30 percent) meaning an average fee sits between $20,000 and $30,000. At 5 hires per year, net cost would be upwards of $150,000. That takes care of 5 hires, but what about the other hires in the plan? They usually don’t come for free.
Let’s assume Startup X wants to hire 20 engineers in one year. At $20,000 per hire (the low end) this would cost $400,000 on the year. A cost per hire of $20,000 is not tenable for most startup companies, and that figure doesn’t nearly capture the entire sphere of costs (most notably the time engineers spend interviewing instead of writing code). Unless Startup X is willing to concede this high cost per hire (which, many are) they must make a plan to build a hiring capability.
But what does a hiring capability cost? I prefer to think about what it’s worth.
Is it worth $400,000 per year to be able to hire? $600,000? Every company should know this number. Every company’s threshold is different, but the teams who think about hiring this way are better at forming a plan and executing against it.
Identifying a budget commitment for hiring is a healthy exercise for any growing company. And while investing a hypothetical $600,000 per year towards a recruiting solution would not equal a capability, at least you’d know what it costs. From there you can optimize to how much it should be worth to you.
Where would that money go? Obvious costs include: a recruiter’s salary or consulting fees, LinkedIn licenses, agency fees, applicant tracking systems, etc. Some of the less obvious examples are: candidate travel, sponsorships (college fairs, hackathons) and perhaps employee referral bonuses.
Companies should justify these expenses against their value in delivering positive hiring outcomes.
Not every dollar spent will equal a hire. Some hires will come free. Others are disproportionately costly. A sound hiring plan takes all of these hire-types into account and plays to the strengths of the company.
What does it cost to lose at hiring?
If only hiring were as easy as spending money. Yes, winning can be expensive. But plenty of companies have the budget and stomach for spending big and still struggle to hire.
I would argue that the cost of missing out on the people you want to hire is exponentially worse. This is because of time, which is a finite resource.
Remember Startup X? Let’s say they want to make 2 key hires—a front end developer and a backend developer:
- They phone screen a total of 12 candidates, 6 for each role.
- Of those 12, half make it on site for full interviews.
- These 6 candidates meet a total of 5 interviewers during their visit.
- From there the company makes an offer to the top candidate for each role.
- One is accepted. Yay!
Assuming in this exercise that phone screens are 30 minutes and onsite conversations are 60 minutes, then altogether Company X is committing to 36 hours of interview time for one hire.
In the real world, there is no guarantee of a hire. The above scenario is generous—even Google only closes 65 percent of its offers. Series A startups vary wildly, and average much less.
Multiply the above scenario by the number of hires on the plan and one can begin to see the time investment and uncertainty involved with hiring successfully at scale.
Time costs to a small team can be disastrous, which makes success an imperative once an offerable candidate is found.
By the time a candidate has gotten to the offer stage, significant effort has been expended and urgency is heightened, because without the close it could all be for NOTHING.
This is where most startups fail at hiring. Companies focus so much on qualifying and assessing the candidate for technical merit and culture fit that they overlook the risks of having an offer rejected.
This is not meant to suggest that vetting a candidate is secondary to closing them—a bad hire can be worse than no hire. Nor do I mean to suggest that anyone closes every offer.
The point is that anyone worth making an offer to is worth every effort in the arsenal.
A hiring executive should be remiss to know they did 90 percent of what they could have done to hire their candidate of choice. Did the candidate speak with the CEO? With a board member? Was the offer as competitive as it could have been? Better to ask these questions before it’s too late.
Even experienced hiring teams will lose some candidates. Some hurt more than others, but it’s the patterns that tell the story. A close rate of less than 33 percent is cause for re-examination. There are multiple variables to optimize, and in today’s world there is no excuse for failing to measure one’s efforts, especially if they aren’t working.
The emotional pain of losing top candidates is also a factor. It’s discouraging for a team to continually miss out on hiring top talent. The internal (and external) signals it sends are corrosive, and no one likes rejection. Great candidates earn the respect and pique the interest of interview teams. They sell themselves to the company. To be sold and have the prize pulled away is deflating to say the least—traumatic at worst.
But life goes on. After a loss, the best a company can do is get back at it, meet new candidates and avoid making the same mistakes again.
Which is better — losing or winning?
Winning is better. You’re welcome :)
How do you win more often? Take control of your hiring.
How to take control?
Hire a recruiter. Seriously. If you can find a good one, the value will far outweigh the price. But don’t let yourself get trigger-happy. Make sure the person you hire will represent your company positively to everyone they touch — because they will touch more candidates than anyone else in your company. More thoughts on how to hire a good recruiter here. ;-)
Time and money are extremely valuable to a startup, but the value of a GOOD recruiter goes beyond reducing costs. Hiring a recruiter means a company has an owner dedicated to making sure the deal doesn’t fall through due to timing, a lack of communication or a bad offer. Recruiters vary in their abilities to affect outcomes, and the job of hiring is not theirs alone, but simply following a few best practices can help closeable offers from unravelling. I focus on 3:
1. Start closing early
2. Move quickly
3. Make strong offers
Start closing early.
By the time a candidate comes to interview on site, both company and candidate have had plenty of opportunity to research one another. Successful candidates come in having done some research on the company, and conversely underprepared candidates envoke resentment amongst the interview team.
Likewise, a company should start understanding their top candidates as early as possible. This is tough to do at scale, but when possible it’s important to identify a high-value target as soon as possible. Then, devote time and effort to ensure the candidate understands the opportunity, and the company understands what’s important to the candidate. How are they making their decision? Commute? Compensation? Career growth?
The better an employer understands a candidate’s mindset, the more often they have offers accepted.
It’s the recruiting team’s job to get hooks in early; to describe the opportunity and specific value to the candidate. The recruiter is the one person in the company with the bandwidth and responsibility to get to know the candidate, and how they are making their decison.
This process should be started as soon as a candidate is determined to be valuable—which, for top people is at first contact.
Recruiting isn’t rocket science, but it is time sensitive. In the agency world we had a saying: “time kills deals”. Recruiting is time sensitive for 2 main reasons:
- First, good people aren’t on the market for very long, and there are often competing offers. Great people are highly sought after, and when they become available, a week’s time can be the difference between landing game-changing talent, or being first runner up.
- Second, a job change is an emotional decision. Of course things like money, and work/life balance play a role, but when it comes down choosing a new professional home, the calculus is emotional. People want to go where they will be happy and evolve their careers. They want to be inspired. Yes, they want to be well paid while doing it, but strong compensation is table stakes.
This means completing all essential steps so that an offer can be issued in the necessary time frame. Make sure ALL evaluations are complete, ALL debate on the hiring decision has been addressed, and ALL approvals have been obtained — in time to make an an offer the candidate can accept. If this is 5 days, then try your hardest to get it done in 5 days or you may lose your candidate by simple moving slow.
This type of agility is not typically possible in larger organizations — so this is where startups can really compete.
Moving fast and keeping a steady pace are some of the no-brainer operational guidelines to running a sound recruiting process. You can control this and you will have to at some point if you want to be good at hiring. Own the relationship with candidate and respect their timing.
Don’t go dark on great candidates because others are keeping tabs and they will take advantage.
Make strong offers.
Making a strong offer is partly about a company’s budget, partly about a candidate’s expectation and partly about the market realities. A strong, realistic offer is informed by all of these factors and is flexible proportionate to the importance of the hire.
((target comp + expectation + market reality) / 3) = (offer (+/- degree of urgency — 20% max))
The market reality is that todays Series A and B startups are paying almost as much in base salary as mature companies. Equity is obviously the differentiator, but the volatility of the private markets is not for everyone.
Candidates have more choice than ever, and with decades of startups corpses littering the valley, many people have become more savvy about their risk tolerance and compensation frameworks. This means even early stage startups need to pay market rate salaries to compete.
What is market rate?
There is no easy answer to this question. Levels vary based on industry, investors, maturity and philosophy. It’s a moving target for startup companies. There are great tools out there like Wealthfront’s salary calculator, and more candid content here, here or here. But these are simply guidelines—there are always exceptions and every company’s model is different. It’s important to understand, and continually assess how your own company’s compensation paradigms relate to the market.
If a company can define best practices across the hiring spectrum, and adhere to them, they can dramatically improve their chances of hiring succesfully. But risk can never be fully removed. Bottom line, an offer can be appropriate, compelling and delivered on time… and still come up short.
It’s up to the recruiter to ensure that any offer extended is acceptable, and it’s up to EVERYONE (including the executive team) to make sure it’s accepted.
In closing, don’t forget to close.
Hiring doesn’t happen on its own. A desirable brand, a strong team and a solid interview process are all essential ingredients, but won’t deliver an outcome by themselves. Closing the people you want is what counts.
The objective should be to reduce offer declines as much as possible, because offerable candidates are so incredibly valuable in this competitive market.