Extant theory holds that employee turnover (i.e., employees leaving the firm) negatively impacts firm performance. Based on matching theory, we nuance this relation by theoretically and empirically demonstrating that such adverse effect is attenuated for startups. We propose that for early-stage ventures, employee exit may be associated with firms’ learning about their “right” employee type and thus correct for hiring mistakes. This beneficial matching effect counterbalances the negative consequences of disrupting organizational capital embodied in the exiting employee. Using a unique dataset that combines Crunchbase with LinkedIn data we find support for the notion that employee exit is less performance detrimental for early-stage ventures. Moreover, firms are less likely to survive when exiting employees are older and stable in their job roles, yet this effect is attenuated in startups. This study contributes to a nuanced understanding of the effects of employee turnover in startups with significant implications for entrepreneurs’ retention strategies.
