We have heard about 5k to 6k layoffs by startups in the past two months alone, more than what we have ever witnessed in the past. Startups that rely on VCs and other external funding struggles to raise capital amid inflation, global interest hikes, and the prolonged Russia-Ukraine conflict. These factors have further aggravated the instability of the macro-environment.
As investors remain on the sidelines, startups are looking for ways to curb costs. Lido Learning, Furlenco, OkCredit, Trell, MFine, Cars24, Meesho, Unacademy, and Vedantu have laid off more than 3l full-time and contractual employees together. Blinkit had reportedly laid about 1,600 team members in March. Read More
The industry data suggests that VC investing in Indian companies has dropped to nearly 3.6 billion USD in the current quarter from about 8 billion USD in the January-March quarter, according to Sandeep Sinha, the managing partner at Lumis. “This is a major change. When capital levels fall by 50%, it impacts companies, regardless of how good they are,” Sinha adds.
When a crisis hits, startups frequently resort to layoffs as a cost-cutting measure. And it’s understandable. Employee expenditures account for a significant portion of a company’s total costs, and hiring costs have risen dramatically in recent years, particularly in the tech sector. Also, when a company is booming, entrepreneurs tend to hire too many people.
Startups are Struggling to Stay Afloat
“Founders build their teams in anticipating continuous growth. When the supply of cash abruptly stops, the company must swiftly reassess its growth goals and, in certain cases, reduce the number of people it hired based on the initial projections,” said Ritesh Banglani, a partner at Stellaris Venture.
Likewise, a partner at Kae Capital, Gaurav Chaturvedi, also said, “in the edtech industry, downsizing may have been used to mitigate the expected impact on business growth as students return to schools and universities. “The rise of online learning is likely to slow down after the pandemic.”
In fact, Vamsi Krishna, CEO of Vedantu, even admitted the same in an email to its staff. “With Covid-19 tailwinds retreating, schools and offline models coming up, the hyper-growth of 9x Vedantu experienced during the past two years will get tempered,” said Krishna.
In addition, investors are telling their portfolio companies to retain tight cost control, cut back on excessive expenses, and avoid ‘ambitious plans for new product launches that have the potential to suck up additional cash. According to Anup Jain of Orious Venture Partners, inflation has drained household finances, and consumers may hesitate to try new products and services.
Besides layoffs, startup founders are also deploying other mechanisms to stay afloat. “They are taking a break from new hiring, expansion decisions. They need to accept conservative valuations to get funds,” added Jain.
Startups to Focus on Core Business
Instead of spending millions of marketing money to acquire new customers, businesses are exploring new ways for organic conversions, like customer referrals. In other words, startups have started to focus on business fundamentals.
“Founders have informed us that they will not pursue or take chances with new business verticals where they aimed to general ROI in a year. They want to focus on their core business,” said Chaturvedi. And this strategy aligns with our previous OpEd on How Can Indian Startups Emerge Stronger in 2022?
Swiggy’s move to reduce operations of Supr Daily, a subscription-based delivery service for milk, bread, and other grocery goods that it bought in 2018, is a good example. The company has halted its operations in Delhi NCR, Mumbai, Pune, Hyderabad, and Chennai, citing ‘Yet to offer a clear path to profitability.’
Overall, there is pressure on late-stage companies to move towards profitability.
In 2021, startups raised more than 30 billion USD in funds, and the ecosystem produced more than 40 unicorns. Only a few weeks back, we celebrated the 100th unicorn. However, if they had to raise funds in today’s markets, many would face a valuation drop. Valuations are being tempered across the board – by as much as 30% in some cases compared to last year. That isn’t easy to deal with for a CEO or founder.
Industry experts are considering the possibility of the closure of some startups or mergers in the near future unless they find funding from new or existing investors. But the trouble is the assumption in the industry is that external will not be available for at least the next two years.