CHAMPAIGN, Ill. — Fledgling technology startups need to hire skilled scientists and engineers to bring their cutting-edge products from the proverbial Silicon Valley garage to the market. But to attract the best and the brightest, startups also must routinely compete with established firms for top talent.
Commonly held views on job-choice decision-making would point to highly sought-after tech workers choosing jobs with established companies that offer the highest pay and benefits, ostensibly leaving resource-constrained startups to sift through a weaker talent pool. But new research co-written by a University of Illinois Urbana-Champaign expert in technology entrepreneurship and scientific labor markets proposes an alternative theory: Some high-ability, in-demand tech workers would prefer to join startup firms despite the lower pay and riskier prospects for the company’s long-term survival because they’re attracted to the startup culture and environment.
Non-monetary benefits such as independence, autonomy and the ability to work on innovative technologies are among the key selling points for talented scientists and engineers who spurn working for a bigger technology firm in favor of a startup, said Michael Roach, a professor of business administration at the Gies College of Business at Illinois.
“Certain workers are willing to take a job for lower pay in exchange for other benefits such as working for a smaller firm and feeling like they’re contributing to the creation of something new and novel,” he said. “For some high-ability tech workers, there’s more significance to being employee number 20 than employee number 2,000.”
The paper, which was published by the journal Management Science, was co-written by Henry Sauermann of the European School of Management and Technology Berlin.
Using a longitudinal survey that followed more than 2,300 science and engineering doctoral students from graduate school through their first job, the researchers found that both an individual’s ability and career preferences strongly predicted post-graduate employment with a startup as opposed to a bigger, more-established tech firm.
“There’s a lot of evidence using U.S. Census and other administrative data that shows that employees at small firms are paid less, which has been interpreted as startups not being able to attract high-ability people,” Roach said. “But we found that startups are able to recruit high-ability workers despite paying their new hires approximately 20% less than established firms.”
The findings are consistent with preference-based job sorting in that working at a startup may be a better fit for some workers, Roach said.
“We found that career preferences expressed during graduate school strongly predicted post-graduation startup employment,” he said. “In other words, if you have this dream of getting in on the ground floor of the next Google when you’re in grad school, then you’re more likely to be employed at a startup after graduation. All of this suggests that many individuals join startups because of expected non-monetary benefits that compensate them for lower pay.”
Working at a startup could just be a better fit for certain high-ability STEM workers, Roach said.
“It’s likely not because of stock options,” he said. “There’s a common belief that individuals work at startups to get rich when the venture is successful, but we find that employees are aware that startup employment is risky and they choose it for reasons other than future financial payoffs.”
By contrast, those who choose to work at a big company might crave the stability, job security and clear career path that an established firm can offer, Roach said.
“Some high-ability workers will have a preference for being an employee in a really big company where they know what they’re going to do and what their job is going to be,” he said. “But it’s also true that some high-ability workers prefer a riskier startup environment that offers more autonomy and more interesting work despite lower pay. This research really gets at these assumptions that high-ability workers seek to maximize their earnings by choosing the highest-paying job. By observing both ability and preferences we are able to tease these out.”
Further analyses using data on job applications and offers suggest that the pool of workers drawn to startup employment is large enough that startups can be selective and extend job offers to the most talented scientists and engineers, according to the paper.
“The way the prior evidence has been interpreted would lead you to believe that startups really struggle to hire high-ability people because they can’t pay enough to recruit them,” Roach said. “But we show that high-ability workers choose startup jobs despite earning less, which suggests that they receive some non-financial benefit from the job. Some may just want to work at a startup, while others may be entrepreneurially minded and would like to experience it firsthand, or they simply don’t want to be a small cog in a larger machine.”
The research was supported by the National Science Foundation and the Ewing Marion Kauffman Foundation.
Editor’s notes: To contact Michael Roach, email mwroach@illinois.edu.
The paper “Can technology startups hire talented early employees? Ability, preferences, and employee first job choice” is available online.
DOI: 10.1287/mnsc.2023.4868
