Why over-hiring is one of the biggest risks to the success of start-ups

In common parlance, start-ups are known for their dynamic atmosphere, in which innovation and exponential growth are paramount.
But what does growth actually mean?
Does it really make sense to focus on generating the highest possible number of employees right from the start?
What risks should be considered?

A podcast episode of the “Y-Combinator” on the topic of “Don’t make these hiring mistakes” (if you want to listen in, you can find the episode here: https://www.youtube.com/watch?v=CUZ6PKJZvXE) gets to the heart of the matter: Sog. Over-hiring can be one of the biggest risks to the success of a start-up.
But why does it happen?
The podcast hosts suspect that many founders (especially so-called first-time founders) equate having as large a workforce as possible with prestige and attractiveness for investors, potential partners and customers.

But while rapid growth is often seen as a goal, it can become a major risk if start-ups get carried away and hire too many employees.

Below we list some of the possible consequences of excessive staff growth in the initial phase that experts warn against:

1. High costs: Startups with limited resources could quickly run into financial bottlenecks if they employ more staff than they can afford.
2. Dilution of the company share: Start-ups with limited financial resources often only remunerate employees pro rata with a regular salary, but also in company shares.
   Consequently, any additional employee who is granted shares in the company can, in principle, dilute the shares of the founders and existing investors.
   In the long term, this can jeopardize control of the company or at least reduce the attractiveness of the company for investors or in the event of takeovers.
3. Difficult communication and coordination: If employee growth is too rapid and not enough emphasis is placed on a well-thought-out onboarding process, communication within the team can quickly become difficult.
   This can lead to inefficient workflows and misunderstandings and, as a result, can actually hinder rather than accelerate productivity.
4. Endangering the corporate culture: Startups often place great value on a special corporate culture, e.g. a special feedback culture, authentic communication from the founders, flat hierarchies, joint activities or special flexibility in working hours.
   Over-hiring can dilute or change such a special culture, as new employees may not immediately know and share the same values and goals and integration is made more difficult if a large number of new employees join the company very quickly.
5. Waste of resources: Superfluous employees not only tie up financial resources, but also the time and energy of founders and managers who have to work out communication structures in the growing organization, deal with misunderstandings and maintain the corporate culture despite the fact that they could be better invested in other aspects of the company.
6. Lack of flexibility: Start-ups must be able to adapt quickly to market changes.
   Too large a workforce can impair the flexibility and agility of the company.

Below we have summarized some strategies that can be used to avoid over-hiring and the associated risks:

1. Careful planning: Startups should think through their growth plans carefully and set realistic targets.
   Regularly review staffing requirements and ensure that each new hire offers clear added value.
2. Regularly question strategies and assumptions: Does it really make the company more attractive to third parties if it has a particularly high number of employees?
   What factors are really important for long-term growth?
3. Prioritize core competencies before achieving product-market fit: In the podcast mentioned above, the “rule of thumb” is to realistically check whether product-market fit has been achieved.
   If product-market fit has not yet been achieved (or if it is unclear whether it has been achieved), only hire employees who are essential to the company’s core functions.
4. Flexible outsourcing: The use of outsourcing services can be useful to overcome temporary bottlenecks without entering into long-term commitments or to react flexibly to market changes or changes in the business model whose duration is not yet clear.

Overall, over-hiring can become a serious brake on a startup’s success.
A cautious and strategic approach to the hiring process is crucial in order to promote growth without jeopardizing the long-term health of the company, especially before reaching product-market fit or when it is unclear whether this has already been achieved.
Regular reflection on the company’s own strategy and specific personnel requirements are important tools to prevent the risks of over-hiring from materializing and therefore represent a long-term strategy for success.

If you would like to find out how IT outsourcing can help you avoid falling into the over-hiring trap, contact us for a no-obligation consultation.