Research Shows How Startups Hired During Dot Com Bubble

January 20, 2016

2:00 pm

During the peak of the dot com bubble money was flowing, tech companies were growing, and it was all leading up to a meltdown. Some of the biggest tech flops sprang forth from that period, such as eXcite (Joe Krause) and broadcast.com (Mark Cuban), but many of those who lost are once again back on top.

With a steady – and, at times, exponential – growth happening again in the tech world, some are suggesting we are headed toward another bubble bust. Although hiring may not specifically been the key component to to the organizations who were unable to weather the storm, prior research indicates it may have played a role.

Initially rediscovered by Hunter Walk, Partner at Homebrew VC, Organizational Blueprints for Success in High-Tech Start-Ups was published in 2002 and highlights hiring and culture based data from 200 startups in the middle of the dot com bubble. At the time, two Berkeley professors, James N. Baron and Michael T. Hannan, compiled data and interviews from the startups from 1994-1998, which resulted in an eye opening look at the hiring practices of the startups who survived the dot com bubble burst.

“Though some observers might think that most startups look pretty much the same, or that the appropriate organizational design and culture for a high-tech venture is ‘obvious,’ the data suggest otherwise.”

According to the research, there are five core components that go into hiring, retention, and eventually contributed to the company’s success or failure.

hiring startups

The report further broke down each component in layman terms as well:

  • Star: “We recruit only top talent, pay them top wages, and give them the resources and autonomy they need to do their job.”
  • Commitment: “I wanted to build the kind of company where people would only leave when they retire.”
  • Bureaucracy: “We make sure things are documented, have job descriptions for people, project descriptions, and pretty rigorous project management techniques.”
  • Engineering: “We were very committed. It was a skunk-works mentality and the binding energy was very high.”
  • Autocracy: “You work, you get paid.”

Each of these are considered the primary hiring models; however, there are also blends between them and smaller, less common models as well. For example Holacracy would be considered a less common alternative.

Following the 200 companies, the researchers concluded that there are three primary results from the data.

“In the new economy, as in the old one, it turns out that organization building is not a secondary diversion from the “real” work of launching a high-tech start-up. Rather, as the findings from our ongoing research program suggest, it might well prove to be the main event.”

They concluded that not only does the product, services, and development of the company matter, but hiring and the development of core values and culture are as important if not more. The other two conclusions are more so advisory, or sub details that lead to their primary conclusion: Origins matter and change is disruptive.

According to the research, the origins of the company or which hiring model they implement, may preordain its destiny. Further, massive change to the hiring model often results in an eventual failed business. The exception of course being that a business must change along side market shifts in order to adapt, and not accepting the necessary risks also resulted in failure.

change is bad for startup hiring

However, the research also shows that most of the studied startups were resistant to change, and only a portion altered some aspects to a blended model.

“We do not observe firms routinely shifting between models that, on their face, appear highly distinctive (e.g., Commitment and Bureaucracy). Moreover, 84 of the 165 companies (50.9 percent) did not change their blueprint at all, while another 49 (29.7 percent) changed on only one dimension.”

Success, Failure, and Going Steady

As Walk so astutely pointed out in his LinkedIn post, the point of a startup is not to survive, but to succeed. To that note, some models were more likely to result in success, steady growth, and of course failure.

For startups using the commitment, and star models, they were more prone to success, whereas the autocratic model is almost a sure path of failure.

likelihood of failure by hiring type

If you consider a company with an IPO as a sign of success, which it typically is at the time, the commitment model offers the greatest chance to meet that exit type.

startup hiring ipos

Finally, although the commitment model has the greatest potential to result in an IPO, post IPO or otherwise, the Star model is the most likely to result in the strongest annual growth.

star hiring model
“In particular, firms founded with Commitment models were the fastest to go public, relative to otherwise comparable companies whose founders embraced a different model. Companies with Non-type founder blueprints were the least likely to go public, all else being equal. Consider two companies that were identical in every respect except that Firm A was founded along Commitment model lines and Firm B’s founder espoused a Non-type blueprint. Firm B’s probability of going public was only 16 percent of that of Firm A. Firms with Commitment-model founders were also the least likely to fail, whereas firms founded along Autocracy lines were the most likely to perish.”

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Elliot is an award winning journalist deeply ingrained in the startup world and is often digging into emerging technology and data. When not writing, he's likely either running or training for a triathlon. You can contact him by email at elliot(@)elliotvolkman.com or follow him on Twitter @thejournalizer.

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