Future of Work Survey: Are Tech Employees More Valuable, or Are They Less Relevant?
January 20, 2017
Editor’s Note: The data herein was collected in September 2016.
It’s the founding date of a tech company, not its size, that determines how streamlined its workforce is. We might expect bigger companies to bloat, but a company’s age is a better predictor of how efficiently they use their employees. This begs the question: do employees at younger companies create more value, or are post-recession businesses finding ways to grow without relying on their workforce?
Value Per Employee Skyrockets in Newer Companies
With the dawning of the B2B gig economy and the growing applications of AI for knowledge work, we were curious to see if employment trends were already reflecting lower reliance on FTEs. We found evidence of this by looking at the value of a company per employee1 for the top 100+ private technology companies, and the top 100+ public technology companies. Looking below at a log-scale plot, we don’t see a spike in valuation or market cap over time—so it’s not just inflated valuations. By connecting a company’s market value to their headcount, however, we do see that young companies are making value/employee on a whole different scale.
Tech Company Value and Headcount Visualized on Log Scales
Technology companies come in all shapes and sizes, with their values and head counts ranging over many orders of magnitude. We would expect younger companies to be smaller, and older companies to have built their value and expanded over time, which is what is reflected in this plot.
Market Capitalization or Private Valuation per Employee (Log Plot of $ Millions/Person)
A company’s value per employee is highly variable, but not as variable as either number on its own (see the scales on the first figure). An upward trend is measurable from this data, and is more visible in the third figure.
We found not only an increase in the value of a company per employee based on a more recent founding date but that value per employee is blowing up exponentially. Over five-year averages plotted below, the trend emerges more clearly. At 200 technology companies, spanning 70 years of innovation, newer companies of all sizes are relying less on employees to drive their value.
Company Market Capitalization or Private Valuation per Employee Averaged Every Five Years Based on Founding Date
This plot shows the average value per employee at companies founded within five year windows, which demonstrates that older companies do not have optimized head counts.
What does this mean for employees and employers?
Older companies are using their employees differently—whether encumbered by legacy processes or outdated tools, they can’t build their value without expanding their staff. Meanwhile, younger companies are becoming more efficient. By pioneering new business models, taking advantage of automation tools, or using innovative management structures, new companies build valuable services and products without excessive staff. Hiring will certainly remain a priority for growth-stage companies, but when a young company goes public we see the same trend: their workforce stays lean, while their value keeps building.2
We shouldn’t be surprised that this trend has blown up in the last twenty years. The most successful business models in today’s Silicon Valley don’t depend on employees to create value. Facebook and Twitter rely on user-generated content to drive engagement. Airbnb and eBay made marketplaces for user’s sales and profit from the network effect. Amazon doesn’t manufacture most of the things it sells. Uber and Taskrabbit sell other people’s services. These individual examples are very different models that all lead to the same outcome: revenue isn’t coming directly from employee work.
The boom of the gig economy is on the horizon, which will shift the labor market even further away from directly creating revenue. It’s currently easy to find a solo worker to fill almost any need; marketplaces for ridesharing, creative writing, software development, cleaning, and grocery shopping are together serving many millions of requests per day. The challenge lies in verifying skills and guaranteeing pricing. The next iteration of the gig economy will help companies use external workers by providing verified and successful teams on demand. When this service is broadly available across industries, roles for internal employees will change yet again to focus on integrating and maintaining externally executed projects.
The trend of growing value with shrinking employee headcount is a harbinger for the future of work. While people and culture are still crucial to businesses, their impact will shift as technology automates and enhances work. Long before new technologies make workers obsolete, they will exponentially increase the value of each individual’s contribution.
1. Since revenue data is nearly impossible to find for private companies, we looked exclusively at private company valuations (that were public record) and market capitalization for public companies.↩
2. Fixed effects models showed a statistically significant effect (alpha=.10) from company age, but not based on whether the company was publicly or privately held.↩