Studies have explored the importance of ties in the labor market and how connections between people affect the chances of getting hired. But what effect does hiring a connection have on the firm itself?
A new study published in Strategic Management Journal found that ventures perform better when they hire founders’ proximal employment ties in the early stages; however, the researchers also found the effect is tempered when founders hire their former schoolmates — in particular in the early stages.
Researchers Vera Rocha of Copenhagen Business School and Rhett Andrew Brymer of University of Cincinnati explored how hiring connections affected business, along with the different categories of such ties, such as employment versus education. They also considered the proximity of the connected individual to the startup founder.
“The type of connections we develop in school and at work are very different — the latter tend to be more professional than the former, which instead sometimes include long-time friendships and connections that may be very similar in skills and other attributes,” Rocha says.
The researchers tapped a large longitudinal sample of Danish ventures, founders, and hires across multiple industries. With this data, they could trace when, where, and what individuals studied over time, where they worked and whether they changed careers. They could also follow firms over time — many from inception until they exit or scale — while also tracking who joins and leaves those firms and how the firms perform. The authors then performed a large-scale analysis of startup hiring patterns and their associations with venture performance.
“We found that not all affiliation ties have the same value, and that this value may also differ depending when — in the venture lifecycle — those affiliation ties join the firm,” Rocha says.
She and Brymer found that young firms perform better when they use affiliation-based tactics, as they appear to help firms access and retain higher-quality employees. There are, however, some caveats to using these tactics. Ventures perform better when hiring founders’ proximal employment ties in the early stages (i.e., within the first three years), but less so when hiring schoolmates. For example, ventures that hired founders’ classmates from elementary school performed worse than firms without such hires, as these connections may be less professional and include some friends. It hints at the dangers of hiring personal connections who may not bring necessary resources to the team, or with whom you may end up having conflicts.
Among firms that hired individuals who studied at the same university as the founders, the researchers actually observed higher performance within firms that had these relatively distal ties (e.g., those who studied something different than the founders), as these hires may bring more complementary knowledge to the team. They also found that these individuals may be more beneficial to the firm when hired at later stages, as they seem to fill specialized roles and higher ranks in the firm that are identified at later stages.
Rocha acknowledges the temptation among founders to hire those they know well, or those with a shared professional or educational background.
“But there may also be some downsides in doing so, especially if some of those hiring decisions are based on social connections without bringing complementary resources to the team,” she cautions. “In a separate study, we have looked at how young ventures can sometimes grow into companies that lack demographic diversity possibly due to these affiliation-based hiring tactics. So, in practice, these hiring strategies must be used with caution and practitioners need to be aware of the trade-offs involved.”
