Financing crisis

Start-ups in Europe are scaling back on personnel growth

Start-ups in Europe are significantly slowing down their workforce expansion this year. The hiring rate, especially for late-stage companies, has sharply declined compared to the previous year, as an analysis shows. For the majority, a short-term increase in staff is currently not a priority.

Start-ups in Europe are scaling back on personnel growth

The self-proclaimed job engine of the economy is sputtering in times of inflation, rising interest rates, and economic downturn. The so-called hiring rate, which is derived from the number of new hires relative to the average number of employees, has dropped from 60% last year to 37% at European start-ups, as determined by the British compensation platform Ravio in an analysis.

The reluctance to build up staff is observed in all stages of development, write the authors of the study. The hiring rate has particularly declined dramatically for late-stage companies, from 62% last year to now 31%. This is likely associated with declining valuations in the public markets and the quasi-closed IPO window. Given the circumstances, companies have fewer financing options, so they must now focus on personnel. For the analysis, Ravio, founded in January 2022, evaluated data from 900 companies based in Europe and simultaneously surveyed 1,000 HR managers.

Expanding the workforce is not a priority for the majority of companies in the coming six months. According to the survey, 55% stated that employees who left the company would be replaced, but the overall number of employees would not increase. Currently, only one-fifth of start-ups plan to do so, according to the survey.

After the boom year of 2021, in which start-up investors poured more money than ever into innovative young companies, the start-up scene has had to cope with significantly fewer resources for quite some time now. Last year, venture capital investments in Europe, according to data provider Dealroom, decreased by 17% to about $100 billion. In the first nine months of the current year, the decline compared to the previous year was even more pronounced, dropping by 44% to $47 billion.

"The current economic environment puts HR managers under enormous pressure," comments Raymond Siems from Ravio on the analysis results. "Those responsible are faced with the challenge of achieving more with less." As budgets are limited, companies are increasingly turning to incentives such as company shares and benefits to retain and motivate employees. The planned tax reforms for such participations in Germany are likely to be even more beneficial to companies in this context.

Pay transparency not yet a topic

Compensation reforms initiated at the EU level are also expected to have implications for local start-ups in the future. According to a directive to improve pay transparency, all member states are obliged to introduce corresponding instruments into national law by June 2026. The goal is to reduce gender-specific wage gaps, also known as the gender pay gap.

In the start-up scene, pay differences are even larger than in the overall economy, according to previous research. Ravio estimates the median gender pay gap at the start-ups examined on the platform to be 26%. In the entire European economy, the gap was last at 13%.

However, for most start-ups, pay transparency is not a major concern at the moment. According to the Ravio analysis, 69% of the surveyed companies do not feel pressured by the directive, with the majority attributing this to the long period until the required implementation.