Startups typically have a tougher time raising money during recessions. But that’s not the only reason they struggle during downturns, according to new research — they also have a tougher time hiring. That’s because job seekers prefer safer options and so are more likely to apply for jobs at incumbent firms. This, alongside the difficulty fundraising, makes growth even tougher for startups during recessions.
Conventional wisdom suggests that startups are vulnerable to recessions because they struggle to secure financing during such times. However, the Covid-19 downturn upended this narrative. Venture capital funding, contrary to expectations. That raises the possibility that funding isn’t the only factor that makes recessions so hard for startups.
offers an alternative hypothesis rooted in the labor market: Startups find it challenging to attract talent during downturns due to job seekers’ inclination toward larger, more established firms.Testing this hypothesis is tricky. If startups hire less during a downturn, is that because workers are reluctant to join them, or because startups are reluctant to add workers to their payrolls?
This shift had a tangible impact on firms. Less-established startups received fewer job applications, particularly from high-quality candidates, leading to a decline in the talent pool available to them. This decline happened even within the same job vacancy over time. That means it’s not just that startups demand less labor during recessions — even for existing job postings, hiring got harder.
One might question whether these findings are applicable beyond the unique circumstances of the Covid downturn, which may have been more extreme than other downturns. However, we show that the magnitude of the decline in economic expectations during that time period aligns closely with declines observed in past recessions.
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