Most of our startup clients are growing fast, raising capital, developing and shipping product and hiring. Lots and lots of hiring! The war for talent is real, and many of our clients use external recruiters to help find attractive candidates. Working with outside recruiters is totally normal for companies that have raised a couple of million in seed or venture capital… but how does this change as startups get bigger and reach later stages of financing?
The cost of recruiting a startup employee
Outside recruiters typically charge between 20% and 30% of the new hire’s salary. That’s not cheap, and can dramatically impact a small startup’s cash flow!
Many of our clients’ CEOs rightfully spend a large percentage of their time recruiting. This is an important task for a company that has just raised capital. Getting the right “butts in seats” and sculpting the company’s culture is a critical role that all startup CEOs much focus a huge amount of time on. But what is the cost of the CEOs time, and how can that time most effectively be spent? If a startup has only raised a few hundred thousand dollars in seed financing, then there is likely not enough capital to spend on expensive outsourced recruiters - meaning it’s on the CEO’s plate to do all the recruiting. But once a company has raised enough venture capital, having an outside recruiter (or several on contingency) can give the management team a lot of leverage - outreach, initial screening, scheduling calls. This can all help the team focus on evaluating the potential hires in a more time-friendly way.
What is the cost of not hiring? Does the startup need that next developer to ship a product on time? Does the critical research get done if there are too few researchers? Can the team hit its revenue growth numbers without the right number of salespeople? What happens to customer satisfaction and churn rate if there aren’t enough customer service team members?
The cost of not hiring can be much greater for many startups! Cash flow burning startups are in a race against time. If the company does not hit their goals they may not advance enough to be able to successfully raise the next round of capital. So, not having a team member can actually help cause a company to run out of cash!
Many of the startups we work with that have raise a few million in capital anticipate that they’ll hire a head of HR after they do their Series A or B. When we work with them on their startup’s financial model, they assume that the costs associated with an external recruiter will go way after the head of HR is hired. In our experience, this is not a good financial projection strategy.
A great head of HR may need to hire 5 to 20 new employees a month - a huge lift for anyone. They will likely be best utilized, and most successful if they can continue to leverage outside recruiters. Additionally, even the best HR leaders are not going to be hiring experts in all categories of employees. Screening and finding developers is very different than recruiting salespeople. Letting an HR leader use best in class recruiters, and expecting them to do tight job managing these recruiters, is the strategy that is most likely to let the startup achieve its hiring goals - and by the transitive property, achieving its value creation milestone.