Manoj Gupta quit his job as a venture capitalist with Nexus Ventures a year ago to join his wife in founding Craftsvilla.com, an online store for Indian handicraft. In the past 12 months, he has been focused on growing the business, expanding his product catalogue to over 1,000 products from 10 states.

However, it is not business development, but human resources that is giving Gupta sleepless nights. He has interviewed 200-250 people but is yet to find the 20-30 hires he needs. A talent crunch is turning out to be a big headache even as entrepreneurship is going mainstream and dozens of start-ups are raising millions of dollars in venture capital.

Snapdeal, an online group buying site, has just closed a $40-million second-round funding from Bessemer Ventures and wants to increase its headcount from 500 to 800 in 12 months. “Rohit (Bansal, co-founder of Snapdeal) and I have sat though 3,000 interviews for senior talent,” says the company’s co-founder, Kunal Bahl. But many slots are still vacant. Its HR managers are interviewing candidates by the hundreds every day, but with little success.

Start-ups like Snapdeal are facing two problems. Money is the first. According to some estimates, freshers can be paid just around Rs 13,000-15,000 at startups, but large IT, telecom services and consumer goods companies pay 20% more. They also offer job security and clear growth paths.

A smart executive can climb up to a Rs 70,000 monthly salary in three years. Multiple estimates suggest that start-ups are already spending anywhere from a fifth to half their revenues on people costs and can’t afford this any more. Even though VC funding has significantly improved in the last few years, young firms still struggle to pay for the best talent.

“We generally invest very early in the lifecycle of a company …. where the risks are high,” says Subrata Mitra, partner with early stage investment fund Accel Partners.

Start-ups are built on potential
“Hiring good talent continues to be a primary challenge (at these companies).” Start-ups are built on promise and potential. But risk-averse candidates are making life difficult for founders. “Applicants don’t want to talk about grandiose plans for stock options and the long-term,” says Gupta of Craftsvilla.com. “They are interested in upfront cash and perks.”

Entrepreneurs such as Gupta have frequently seen near-certain prospects walk away from start-up jobs. Finding a talent pool deep enough for the unique skills that start-ups often need is the second challenge. Rahul Bhalchandra, co-founder of the Bangalore-headquartered YLG Salons, needs to hire 500 people in the next 12 months, mostly stylists and therapists.

He expects he will have to interview at least 3,000 people. Finding stylists is hard enough, but explaining stock options to them is harder. “Esops and other long-term benefits can be appreciated only by few people who are willing to take longerterm bets” he explains. Adds Venkat Sastry, a partner with Korn Ferry, a multinational HR consultancy: “It is an uphill battle. Around 3-5 % of talent at small start-ups account for most innovation, so balancing out the HR budget is tricky.”

iPhone application developer Sourcebits, which is funded by Sequoia Capital wants to become a $100-million firm by 2015, and to feed this growth, it plans to hire 350 people in the next year, says Mahesh Badrinath, assistant vice-president of operations for the firm. He will have to plough through plenty of candidates to meet this target. “Being a designled engineering company, our focus has always been quality and creativity… hence, our hiring standards are quite stringent,” says Badrinath.

This stringent quality standard is only adding to the pressure. Sanjay Bansal is looking to ride on the booming opportunity for high-end video conferencing solutions called TelePresence with his firm Business Octane. He needs only 20 people in the next year, but has been able to recruit barely one in 10 he interviews. While he does want to hire the best talent available in the market, Bansal also has to keep an eye on his budget. “In our overall budget, around 50% goes to HR,” he says.

“We believe retaining talent is essential for the growth.” Online health benefits firm BenefitsPlus is also riding its own growth curve. It acquired Koovs .com, a discount retailer to expand into the consumer side of the internet and plans to hire up to 100 people more in the next year.

Vikramjit Singh Sahaye, head of operations and marketing for BenefitsPlus India, says his firm, like many other start-ups tries to curb people costs by leaning on informal networks, rather than hiring expensive HR consultants. “Entry-level candidates are unable to appreciate the value of stock options, and desire definite perkclad packages.” Talent-starved start-ups are finding some solutions though. Bahl of Snapdeal says that they can structure compensation differently (up to 40% in variable pay for his sales staff, for instance) to try to keep costs low and yet attract good talent.

And, as ET reported on Tuesday, many startups are hiring big time from small towns. Finally, as the entrepreneurial ecosystem matures, a stint at a start-up could be a highlight in a CV. “Even if the company didn’t succeed financially, the experience could hopefully provide the grounds to eliminate more risks (and therefore, better the chances of success) in a subsequent job,” argues Mitra of Accel.

Part of the challenge, says Alok Mittal, managing director of VC firm Canaan Partners (and a former entrepreneur), is the lack of celebrated employee successes at these fledgling firms. “We invariably hear of the success of a firm in terms of business growth or new round of funding,” he says. “We don’t hear a great story about how an employee quit an established firm and built a great career at a start-up.”