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When startups are deciding where to locate, many consider setting up shop in “tech clusters” that have developed labor markets for the specialized staff that startups need to grow. Yet these areas are dense with talent for a reason: It’s often due to the presence of large firms with whom these fledgling companies must compete. In a new study, researchers found that when large firms increase their hiring, startups in the same location are forced to offer src0% higher salaries, while reducing their expected growth by 36%. While talent-rich communities may be alluring, they can stifle startups ability to scale — a finding which should be incorporated into startups’ landscape analyses. Startups often choose to base their fledgling companies in “tech clusters,” seeking to benefit from these areas’ developed labor markets for technical, sales, and managerial staff — typically arising from a significant presence of large firms. Yet while this proximity to talent can provide access to the specialists a startup may need to scale, it also forces these new companies to offer high wages to compete with the offerings of their large firm competitors. Spending large amounts on salaries can leave less capital for other important initiatives, like experimentation or marketing, which can in turn make it harder for startups to reach a growth phase.
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