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In The Front Door, Out The Back: Attrition Challenges At High Growth Startups

In The Front Door, Out The Back: Attrition Challenges At High Growth Startups

While companies invest heavily in recruiting, a bit more focus on retention might pay significant dividends.

Life inside a startup—especially a high-growth startup—is inherently chaotic. For many, it can feel like a race against time along a track whose ground is always shifting. 

The challenges are especially acute for human resources leaders. Budgets are limited, but demands are huge. You’re under constant pressure to help professionalize the company, deploy new benefits, establish a compensation framework, and create incentive plans, employee engagement programs, and diversity initiatives. Yet all those imperatives take a back seat to your top three priorities: hire, hire, hire.

Now consider this. Those great employees you just brought in get restless, start looking for new opportunities, and leave. Maybe you had them for two years, maybe one, maybe less. All of a sudden, your two-year mandate to double the workforce, say, from 100 to 200 people, means you’ll have to find some 150 new hires, not 100. Congratulations, your job just got significantly harder.

Unfortunately, that’s exactly what appears to be happening at some of America’s most successful VC-backed companies. In 2022, a survey of CFOs in The Circle found that 60% of companies are experiencing voluntary attrition rates of 11% or higher (the national average as reported by LinkedIn). The survey included startups ranging from Series B to D+, the majority of which had over $50 million in annual revenue. In other words, these are well-established private companies with big hiring budgets and competitive compensation plans; yet, retention remains a challenge for them and many other companies. 

High Turnover Rates for Startups

A 2018 Founders Circle survey of 25 large hyper-growth startups—including a number of “unicorns,” or private companies valued at $1 billion or more—found that one-in-four of their employees leave in a given year. That attrition rate (25%) was roughly double the overall industry attrition (13%), as reported by LinkedIn. It translates into an average employee tenure of just two years. Therefore, comparing 2018 to 2022, it does appear that attrition rates have declined.

The survey found that attrition was most acute in categories like engineering and sales, where talent is hardest to find, especially in tech hubs like the Bay Area and New York.

Here’s another way to think about the issue. High-growth startups spend a huge amount of money and resources to recruit talent. And yet, one in four of new recruits head out the door within the year. Given the sky-high cost of losing employees—it can range from tens of thousands of dollars to as much as double the employee’s annual salary—it suggests that a little more focus on, and investment in, retention could do wonders for companies that are struggling to scale up. 

Lest you think the startups surveyed are outliers, or poorly run, consider the following: at the time of taking our survey, these companies were, on average, seven years old, have roughly tripled their workforce to more than 300 in the past two years, and have grown revenue by 70% in the past year. Thirteen of them had sales of at least $50 million. In other words, the companies, which were spread between the Bay Area, Southern California, New York, Boston, and other locations, were among the most successful startups anywhere.

What’s more, nearly all offered a slew of HR benefits that a majority of American workers lack, including paid parental leave, management training, work-from-home programs, tuition reimbursement, and in-house prepared meals. 

So what’s ailing companies whose very growth should create plenty of opportunities for their employees? What’s making their workers restless? And what can they do to overcome these challenges? If startups — even those which by all accounts seem to be doing nearly everything right — still lose talented employees at a higher rate than industry averages, what can be done to help them lower attrition rates and hold on to the best talent?

These are some of the questions that get regularly discussed during peer-to-peer conversations with CEOs, CFOs and CHROs in The Circle. Below are some of the insights on employee retention and attrition that we’ve gathered over the years:

If you’re a CFO or CHRO interested in participating in conversations like these with other private company executives, we encourage you to apply to join the Circle.

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