Expanding the New Venture’s Human Resources: Beyond the Founding Team
The founding team of any new venture is a key component of its human resources. A first-rate group of founders brings a wealth of knowledge, experience, skills, and commitment to their company.1 Further, as common sense would suggest, the larger the founding team and the more varied the experience of its members (the principle of complementarity), the greater the likelihood that the new venture will succeed—specifically, the greater the new venture’s chances of survival2 and the faster its rate of growth.3 But no matter how excellent a new venture’s founding team is, it cannot possibly supply all required resources or all forms of information. At the very least, new ventures often require the services of experts from outside the company—such as lawyers, accountants, or engineers. And if the new venture is successful in obtaining financing and in building a customer base, the need for additional human resources in the form of employees beyond the founding team might soon become apparent. This raises several important and related questions: (a) How can new ventures succeed in obtaining the employees they need? (b) How many should they hire? and (c) Should these be temporary or permanent employees? Research on these questions provides relatively clear and informative answers.
Obtaining Excellent Employees: The Role of Social Networks
New ventures face serious obstacles with respect to attracting outstanding employees. As new companies, they are relatively unknown to potential employees and cannot offer the legitimacy or security of established firms. Thus, they enter the market for human resources with important disadvantages. How do start-up companies overcome these difficulties? They do so largely through the use of social networks. In other words, they tend to hire people they know either directly, from personal contact, or indirectly, through recommendations from people they do know and trust.4 This is helpful to new ventures in several ways.
First, by hiring people they know (often, family members, friends, or former coworkers), entrepreneurs are able to acquire human resources quickly, without the necessity for long and costly searches. Second, since they know the people whom they hire either directly or indirectly, it is easier for entrepreneurs to convince these individuals of the value of the opportunity that they are pursuing. Third, new ventures often lack clearly established rules or a well-defined culture; having direct or indirect ties with new employees makes the task of integrating them into this somewhat loose and changing structure easier.
In sum, new ventures generally hire people known to the founding entrepreneurs either directly or indirectly and, in this way, are able to expand their bases of human resources in a relatively rapid and cost-effective manner.
Is Bigger Necessarily Better? Number of Employees as a Factor in New Venture Growth
New ventures face many difficult questions as they grow and develop, but one of the most perplexing among these concerns is the number of employees they should hire. Adding employees—expanding the new venture’s human resources—offers obvious advantages. New employees are a source of information, skills, and energy; also, the more employees a new venture has, the greater the number and larger the size of the projects it can undertake. As we noted earlier, there is little doubt that in many contexts people working together in a coordinated manner can accomplish far more than individuals working alone. But adding employees to a new venture has an obvious downside, too. Employees add to the new venture’s fixed expenses and raise many complex issues relating to their own health and safety, which must be carefully considered. In a sense, expanding the company’s workforce is a double-edged sword, and the results of expanding the number of employees can truly be mixed.
Overall, however, existing evidence suggests that on balance, the benefits of increasing the number of employees outweigh the costs. New ventures that start with more employees have a greater chance of surviving than those that begin with a smaller number.5 Similarly, companies with more employees have higher rates of growth than those with fewer employees.6 Profitability, too, is positively related to the size of new ventures. For example, the greater the number of employees, the larger the earnings of new ventures and the greater the income generated by them for their founders.7
We should hasten to note that these findings are all correlational in nature; they indicate that the number of employees is related, in a positive manner, to several measures of new ventures’ success. They do not, however, indicate that hiring new employees causes such success. In fact, both number of employees and various measures of financial success might stem from other, underlying factors, such as the quality of the opportunity being developed, commitment and talent of the founding team, and even general economic conditions. (It is often easier to hire good employees at reasonable cost when the economy is weak than when it is strong.) So the relationship between new-venture size (number of employees) and new-venture success should be approached with a degree of caution. Still, having said this, it is clear that human resources are a key ingredient in the success of start-up companies; to the extent that a new venture can afford to expand its workforce, doing so might be an effective strategy.
Should New Ventures Hire Temporary or Permanent Employees? Commitment Versus Cost
Achieving an appropriate balance between costs and number of new employees is not the only issue facing new ventures where expanding their workforces is concerned; in addition, they must determine whether new employees should be hired on a temporary or permanent basis. Again, there are advantages and disadvantages to both strategies. Temporary employees reduce fixed costs and provide for a great deal of flexibility; they can be hired and released as the fortunes of the venture dictate. Furthermore, hiring temporary employees permits the new venture to secure specialized knowledge or skills that might be required for a specific project; when the project is completed, the temporary employees depart, thus reducing costs.
On the other side of the coin, there are several disadvantages associated with temporary employees. First, they might lack the commitment and motivation of permanent employees. After all, they know that they have been hired on a contract basis for a specified period of time (though this can often be extended), so they have little feeling of commitment to the new venture; in a sense, they are visitors, not permanent residents. In addition, there is the real risk that temporary employees will acquire valuable information about the company or its opportunity and then carry this to potential competitors. Certainly, that is a serious danger for any new venture. Permanent employees, in contrast, tend to be more strongly committed and motivated with respect to the new venture, and are less likely to leave—especially if they gain an equity stake in the company.
The choice between temporary and permanent employees is a difficult one. Which is preferable seems to depend, to a large extent, on specific conditions faced by a new venture, such as the industry in which it operates or the opportunity it is attempting to exploit. In situations where flexibility and speed of acquiring new sets of knowledge and expertise are crucial (e.g., among software start-up companies), temporary employees might be very beneficial.8 In situations where employee commitment and retention are more important (e.g., employees rapidly acquire skills and knowledge that increase their value to the new venture), then focusing on a permanent workforce might be preferable.9