Recessions

Research:
Employees In Recessions,
Avoid Jobs with
Startups
by Shai Bernstein, Richard Townsend, and Ting Xu
September 29, 2023

Illustration by Skizzomat

Summary. 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. close
Startups are an important catalyst for innovation and economic
growth. Yet these important firms are also more sensitive to
economic fluctuations than their more established counterparts.
While the vulnerability of startups to economic downturns has
been well documented , the reason for this
vulnerability is not entirely understood.

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 surged in 2020 and 2021, contrary to
expectations. That raises the possibility that funding isn’t the only
factor that makes recessions so hard for startups.

We sought to shed new light on how employees choose between

startups and established firms, which are increasingly competing
for the same talent. Understanding employee preferences and
how they change with economic conditions is critical to
understanding incumbent-vs.-new-entrant dynamics. Our
research 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?

To specifically detect changes in workers’ interest in startups, we

partnered with AngelList Talent, the leading job-recruitment
platform for entrepreneurial firms. Through this partnership, we
were able to look at changes in job search and application
behaviors during the most recent recession: the Covid downturn.
Our findings reveal a “flight to safety” among job seekers. During
the downturn, they increasingly directed their searches and
applications to larger, more established organizations. Notably,
higher-quality candidates, measured by experience or education,
were particularly inclined to shift away from startups.

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. While startups faced challenges in filling their job
vacancies, more established firms benefited from this shift in job
seeker interest, experiencing greater success in attracting talent.

What drives the flight to safety by workers? There are two possible
explanations. First, workers may become more risk-averse across
the board during recessions, amplifying their desire for job
security. Second, workers could change their view of how risky
different employers are. Our findings point more toward the
former, because both growing, successful startups and less-
successful ones saw a decline in applicants. That’s more
consistent with an across-the-board decline in risk tolerance,
rather than a reassessment of how risky specific employers are.
(Because if that were the case, the struggling startups would
presumably take a bigger hit than the more successful ones.)
Thus, our results are more consistent with the idea that increased
risk-aversion drives job seekers away from all startups —
regardless of their quality.

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. Moreover, we conducted rigorous tests to rule out
Covid-specific factors that might explain our results, such as a
shift in job-seeker preferences toward employers who could offer
remote work or strict health protocols.

It has long been recognized that startups grapple with financial

constraints during periods of economic turbulence. The Covid
recession was unusual in that most recessions lead to less venture
capital funding, not more. Our research adds a new dimension to
this understanding by highlighting that human capital — another
vital resource for startups — also comes under significant strain
during downturns, leading to a “double whammy.”

Historically, policy interventions have been primarily geared

toward alleviating financial pressures on startups but have
ignored the talent crunch they face. This talent crunch poses a
considerable risk, potentially undermining a startup’s ability to
survive and compete against larger, established firms. As we
navigate through economic uncertainties, a more nuanced
understanding of these forces is essential for both policymakers
and entrepreneurs.

SB
Shai Bernstein is the Marvin Bower Associate
Professor in the Entrepreneurial Management
Unit at Harvard Business School and a Faculty
Research Fellow at the National Bureau of
Economic Research (NBER) in both the
Corporate Finance group and the Productivity,
Innovation, and Entrepreneurship group.

RT
Richard Townsend is an Associate Professor of
Finance at UC San Diego’s Rady School of
Management.
 TX
Ting Xu is an Assistant Professor of Finance at
the Rotman School of Management, University
of Toronto.

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