Why Start-ups are Laying Off Employees?

Why Start-ups are Laying Off Employees

Start-ups in India had a ball of a time in 2021. Emerging from the pandemic, they attracted $35 billion in private funding, produced a record 44 unicorns (start-ups with a valuation of $1 billion or more) and went on a hiring spree to pursue their ambitious growth targets. They were the toast of the town and it seemed like the party would never end.

ut a cloud of geopolitical and macroeconomic factors has proved to be a party pooper and Indian start-ups have sacked more than 11,000 employees since the beginning of the year. Those pulling down the streamers and blowing out the remaining candles include some of the most well-known names such as Ola, Blinkit (formerly Grofers), Unacademy, Vedantu and BYJU’S-owned WhiteHat Jr and Toppr. “I expected the lay-offs to be much higher,” says serial entrepreneur K. Ganesh, Promoter of bigbasket, Portea Medical, HomeLane and BlueStone.

When asked why, Ganesh explains that start-ups raise money from venture capitalists (VCs) on the promise of exponential valuation growth. Then they hire a huge number of people to deploy in projects. But not all projects, verticals and geographies work, and the redundant employees are laid off. “But it’s not a cause for worry,” he says, as the lay-offs are less than 2 per cent of the estimated 1.4 million jobs created by start-ups during their halcyon days in India.

The 75,000 start-ups registered with the Department for Promotion of Industry and Internal Trade (DPIIT) had generated more than 750,000 jobs as of August 3, 2022. “But the actual number may be higher as not all start-ups are registered with the government, ” says Ganesh.

Lay-offs are not new among start-ups. But the astounding number this time, experts say, is also a reflection of how the space has grown in the country. Five years ago, India had around 5,200 DPIIT-registered start-ups. “Start-ups are no more small employers. And the lay-offs are in single-digit percentage. That’s always a healthy churn in any sector. Even global firms churn out the bottom 10 per cent every year,” says Anshuman Das, CEO and Co-founder of Careernet, a recruiting firm. But “it will become concerning if the figures hit 30-40 per cent,” he says.

A funding winter in India triggered by the global slowdown, fall in tech stock valuations, inflation and geopolitical instability and the subsequent austerity sparked off the lay-offs. “The capital flow slowed down this year. A lot of start-ups were on high cash burn. Even investors are advising [them to] rationalise costs,” says Siddhartha Das, General Partner at Ventureast, which is invested in firms such as Acko and Portea. PwC India’s ‘Startup Deals Tracker - Q2 CY22’ pegs the decline in fund flow at around 40 per cent to $6.8 billion in April-June 2022, compared to more than $10 billion raised in each of the three preceding quarters.

Yet, experts are bullish on the Indian start-up story, calling private and public markets’ investments cyclical. “The tough funding climate is temporary. But these temporary shocks bring in a reality check and start-ups learn to build businesses more sustainably,” says T.N. Hari, Co-founder of Artha School of Entrepreneurship, and former CHRO of bigbasket. Neither do they find the lay-offs too concerning. “Some events can trigger these cyclical slowdowns. They are challenging, but nothing we’ve not seen before. In the last 20 years, we’ve seen the dotcom boom and bust, the 2008 economic crisis, telecom meltdown, the pandemic, the Russia-Ukraine [war] that disrupted supply chains. Each cycle has its own characteristic,” says Ventureast’s Das.

But there is some consensus that the stress is more in the growth- to late-stage start-ups. “Growth-stage start-ups have also been more vulnerable since they were sitting on loads of cash and went overboard in hiring and creating markets in unsustainable ways,” says Hari. Karan Mohla, Partner at B Capital, who handles early-stage companies such as Bounce, FirstCry, HealthifyMe, Xpressbees and CropIn, says the drying up of funding and the valuation drops are at a much lower level in early-stage ventures. “From what I’ve heard from the growth- and late-stage start-ups, the deals space is a lot less active now than it was. Their valuations have certainly come down.”

The edtech sector stands out in terms of lay-offs, as several well-known firms let go of employees. Last year, edtech was the third most-funded sector after e-commerce and fintech. It attracted $4.2 billion in funding and produced three unicorns—Eruditus, upGrad and Vedantu, according to data from Venture Intelligence. Unlike the more permanent thrust digital payments got from 2016’s demonetization, the pandemic’s fillip to edtech has paled since. “Online education was only a stop-gap. Now, no one wants to send their children to online classes. Subscriptions and renewals are not happening,” says Careernet’s Das.

And as it’s getting harder to raise funds, gaps between fund raises are expanding, and bigger cheques are harder to come by, VC firms are telling their investee firms to just weather the storm and stay afloat. Their diktat: conserve cash and ensure an 18-24-months’ runway. Anything lesser, according to Ganesh, is risky. “Any VC’s nightmare is that companies will run out of money before they are able to raise the next round of money.” B Capital’s Mohla concurs. “It’s not easy to apply brakes on such fast-track growth. But it’s better to pick up the pace when things improve. You can’t keep applying brakes every six months. You can’t fight the market forces whether in the private side or public side. If there is uncertainty, you have to adapt.”

As start-ups reset targets and focus on sustainable growth, talent cost is certainly one of the things to cut down on, says Mohla. “Last year, the focus was on growth at the cost of profitability and high cash burn to increase valuation,” says Ganesh. Now valuation doesn’t matter as much as the runway. “One of the main levers of extending the runway is to cut manpower,” he adds.

Flipkart and Darwinbox declined to comment, while Delhivery didn’t respond to?Business Today’s interview request.

Apart from laying off employees, start-ups are going slow on hiring. Last year, DPIIT-recognised start-ups alone created 200,000 jobs, the highest in four years. Careernet’s Das says every quarter in 2021 saw a 50 per cent sequential increase in hiring, hitting a peak in October-December. Now, start-up hiring is down by nearly 50 per cent compared to the period last year and it is restricted to critical and specific roles only. He estimates April-June 2022 hiring to have been at 60 per cent of the figures in the corresponding quarter last year and the levels will drop this year to 40 per cent in July-September and further to 20 per cent in October-December.

However, “there’s no hard stop in hiring,” says Sanam Rawal, Partner at Passion Connect, the HR advisory firm of Blume Ventures. “But there’s definitely a slowdown to re-strategise,” she adds. Rawal, who is currently hiring for 370 roles, sees a bounceback in two-three months, if external factors do not worsen. On Naukri.com, searches by start-up recruiters jumped 54 per cent during April-June 2022 compared to a year ago. In June, Naukri recorded over 1.5 million searches, a jump of 59 per cent compared to a year ago, as per data shared with BT.

Salaries are also getting pruned. “There may be 20-30 per cent salary cuts in a few jobs. Those who got overpaid are at risk. In a lot of cases, people jumped from Rs 50-60 lakh to Rs 1.2-1.4 crore. Now they are on the lookout for jobs, as it is highly likely that their companies are under stress. They will have to take [pay] cuts,” says Careernet’s Das. Hari of Artha says both start-ups and candidates are becoming more realistic. “Candidates are realising that start-ups are not just sugar and honey but entail reasonable risk that they were not prepared for.” Besides, experts agree that increments are also likely to be muted. Even tech professionals will find it hard to earn 30-50 per cent hikes.

It just goes to show that risk appetite is required not just of entrepreneurs, but also of employees who want a slice of the start-up- and wealth creation pie. But it’s crucial to understand the start-up’s growth stage as well as the importance of the business function, experts say. According to them, new initiatives, exploratory functions and projects that are not crucial for the company’s near-term growth are the ones to be let go usually. Covid-19-induced projects and verticals that have no relevance any longer will also be discarded. Those in business functions such as sales, marketing, HR, operations and administration also have to evaluate how they can move forward in their current organisation, as big-ticket marketing spends get slashed and hiring turns conservative. “The revenue functions will never get affected even during lay-offs. Tech does not get touched at all because it is the core of the company,” adds Rawal.

For those considering joining a start-up, Rawal suggests that a mid-level employee should ideally be in such a venture for two-three years, before it reaches a cash-burn stage. “Spending three-four years in a growth-stage company not only gives you expansive experience of having an autonomous role but also the most wealth creation via ESOPs. The minute you go into a scaled-up start-up, there is a likelihood that it will reach a cash-burn stage and then the middle level will be largely removed in case of lay-offs.”

But Careernet’s Das suggests an even longer term of at least four-six years to really reap the benefits of working in a start-up. He sees the stop-and-go approach as the core reason why some companies and employees are in trouble. “Start-ups are not a 20-20 game. It’s a wrong notion people have built up.”

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