Why startup headcounts are getting smaller

In the aftermath of a go-go bull market that reached its frenzied peak in 2021, the venture capital industry has experienced a spate of contraction, causing companies and investors alike to place a new focus on efficiency. 

This idea of doing more with less extends to company hiring. Across most sectors and industries, early-stage startups that successfully raise venture funding today tend to have smaller teams than they did two years ago.

The changes are most pronounced in the consumer and fintech industries. In 2022, for example, the average headcount among consumer startups that closed a seed round was 6.4 employees. By 2024, that figure had fallen by almost half, dropping to just 3.5 employees.  

Paying employee salaries is expensive. As companies seek to manage costs and win the favor of potential investors, many executive teams see payroll as one clear place to cut. 

“A lot of teams today pride themselves on being lean,” says Heather Doshay, a partner at SignalFire who leads people and recruiting efforts for the venture firm’s portfolio. “I think it’s the idea [for startups] that we don’t know when we can fundraise again, so we want to extend the runway for as long as possible. And because headcount is the highest-cost line item on our budget, if we can reduce that variable, then we can extend our runway and control our own destiny.”

>> Read the full State of Startup Compensation report for H2 2024

Redefining the startup job market

In many cases, the tasks that companies want their employees to perform haven’t changed. Instead, some of these companies are reducing headcount by shifting the responsibilities that are expected of each role. 

This can include combining what used to be multiple roles into one. 

“I’m seeing companies say, for example, I want to hire my first product marketer. But they actually put demand gen and content and everything else into this role,” Doshay says. “You’re seeing a lot of that, the slimming down of headcount by bundling up roles.” 

This can of course impact the sorts of employees that companies are seeking. Instead of looking for candidates who are experts in one particular area or skill, some hiring teams will be more inclined to choose workers who can contribute in a variety of ways. 

“I think it’s going to be the year of the generalist for a lot of companies,” Doshay says.

A spike in sales hiring

As headcounts across the venture landscape have declined, startup hiring patterns have shifted.

The most significant change is that sales roles account for a larger percentage of startup hiring than they used to. In 2024, nearly 20% of all new hires logged on Carta were in sales, up from 14.8% back in 2020. 

In this new era of efficiency, companies are more focused than ever on the bottom line. And compared to other job functions, sales can have a much larger (and more direct) financial impact.

“The increase in sales hiring doesn’t surprise me at all, because of the dynamic of how sales compensation works,” Doshay says. “Generally, for a rep at a high-performing company, their quota for the amount of revenue they’re bringing in will be four or five times the amount of the cost basis of their salary. You can think that for every account executive that we pay $250,000, they’re going to bring in $1 million.” 

In other job functions, Doshay has seen companies get more creative. This can include turning to part-time alternatives to fulfill some roles instead of making full hires during the early days of startup life. 

“You can think through the need in some other roles,” Doshay says. “For example, do we need to have one designer for every product manager? Maybe not. Maybe we can have our PMs pick up some of the design work, and we can use a contract designer or an agency to do some pieces on the side.”

How AI is affecting headcount

In many cases, a corporate desire to produce work more efficiently has been augmented by the rapid rise of new AI tools and technologies. This is particularly true in software-focused sectors such as fintech and consumer, which have seen the largest drop-offs in average early-stage headcount. 

Doshay believes that this trend will only continue, with startups continuing to find AI use cases that will reduce their labor needs and allow them to operate with smaller teams. 

“A lot of AI products have the potential to replace not job categories, but the volume of jobs you would need to have in that category,” she says. “Instead of hiring 10 editors, I could hire one senior editor and have that person work with this AI platform.” 

The shifting market forces that led to the broader slowdown in the venture market across the past two years will eventually shift again. At some point in the future, the startup world may once again prioritize rapid early growth over maximum efficiency, and hiring needs could spike. 

But for now, at least, the continued adoption of AI seems inexorable. In some cases, the reductions in typical early-stage headcount that have occurred in the past two years might become the new normal.  

“I do think that you could see hiring continue to stay slow and stay lean,” Doshay says. “Partially because of the economy, but partially because of the emergence of AI technologies replacing task-level work for people.”

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