The Time-Money Trade-Off for Entrepreneurs: When to Hire the First Employee?
Onesun Steve Yoo
University College London - Department of Management Science and Innovation
University of California, Los Angeles (UCLA) - Decisions, Operations, and Technology Management (DOTM) Area
Charles J. Corbett
University of California, Los Angeles - Anderson School of Business
June 14, 2013
Entrepreneurs need to invest money and time to grow their firms. Both money and time are often scarce, but the nature of these two resources is fundamentally different. Considering a small, fast-growing entrepreneurial firm, we show that the firm's key bottleneck resource shifts from money to time as the firm grows, and we characterize hiring as an operational mechanism for trading money for time to accelerate growth. The optimal time for entrepreneurs to hire their first employee occurs as soon as their available cash is sufficiently large, in order to alleviate the time bottleneck. We show that the cash threshold determined from a one-step look-ahead policy is optimal when growth is deterministic and performs well, even when that is not the case. We find that hiring costs delay hiring, whereas hiring times may either delay or expedite hiring, because of the non-trivial tradeoff between the need to preserve the growth momentum and the need to hire, before the opportunity cost of time becomes too large. Hence, time and money should be managed as distinct resources in growth-oriented firms.
Number of Pages in PDF File: 36
Keywords: entrepreneurial operations, capacity investment, hiring, bottleneck, dynamic programming, super-modularity, heuristic
JEL Classification: C61, D24, M11, M13, M50
Date posted: June 26, 2013