Layoffs grip startups as funding dries up

“Just within my own close circle, I would have heard about 5,000-6,000 layoffs by startups in the last two months itself and that is way more than what we have seen in the past,” says an investor with a VC firm who did not wish to be named. Startup businesses that rely on external funding for sustenance are struggling to raise capital — with inflation rearing its ugly head, global central banks have hiked interest rates while a prolonged Russia-Ukraine war has only aggravated the instability of the macro-environment.

As investors assume risk averse postures and remain on the sidelines, startups have gone back to the drawing board to find ways of curbing costs. Unacademy, Vedantu, Meesho, Cars24, MFine, OkCredit, Trell, Furlenco and Lido Learning have together laid off over 3,000 full-time and contractual employees. Another 1,600 staff have been reportedly laid off by Blinkit in March.

Citing industry data, Sandeep Sinha, managing partner at Lumis says that VC funding into Indian startups has dipped to about $3.6 billion in the current quarter from about $8 billion in the January-March quarter. “This is a significant shift. When the funding level falls by 50%, it creates a significant impact on companies no matter how good they are,” says Sinha.

Layoffs is often a measure that startups undertake as a means to cut costs when a crisis hits. And understandably so. Employee expenses account for a considerable share of firms’ total cost structures, and hiring costs, especially in the tech space, have ballooned in the past couple of years. Also, when business is brisk, startups often tend to over-hire.

“In the last year and a half, people had started to expect multiple salary increments. Companies have been offering weird incentives. In some cases, we have actually gone and hired people in the Bay Area because we realised that in India, the productivity and cost equation of some of the employees when compared to their experiences was not turning out to be favourable,” says Sinha.

In the past 18 months, tech salaries had reached unsustainable levels. Engineers switching jobs were often getting a two to three times jump in salaries. Even though round sizes had increased, this level of employee expenses was putting severe pressure on company P&Ls, seconds Ritesh Banglani, partner at Stellaris Venture Partners.

“Founders build their teams in anticipation of high growth. When the supply of capital stops abruptly, the company has to quickly reassess its growth plans and sometimes reduce staff that it had hired based on the original assumptions,” says Banglani.

In the edtech space, firms may have also resorted to layoffs to cushion the estimated impact on business growth amid students’ return to schools and colleges. “Post pandemic, the growth of online education is expected to taper out,” says Gaurav Chaturvedi, partner at Kae Capital.

Vedantu CEO Vamsi Krishna even acknowledged in an email to employees that “with Covid-19 tailwinds receding, schools and offline models opening up, the hyper-growth of 9x Vedantu experienced during the last two years will get moderated.”

Still, some companies tried to soften the blow through cautious corporate messaging: placing it as a ‘fact’, Unacademy for instance, claimed that less than 600 employees/contractual workers have been laid off and in an organisation with a staff strength of over 6,000, “this is less than 10% of the workforce.” According to Cars24 that let go of about 600 employees, “this is business as usual performance linked exits that happen every year.”

Investors are advising their portfolio companies to keep a strict check on costs, cut back on unnecessary expenses and ‘ambitious plans’ for new product launches which have the propensity to suck up fresh capital, says Anup Jain, managing partner at Orios Venture Partners. Jain says that inflation has squeezed household savings and consumers may not be very forthcoming to experiment with new products and offerings.

Startup founders are deploying a series of mechanisms to stay afloat. “They are taking a pause on any new hiring and geographical expansion decisions. They are being smart about accepting conservative valuations in order to get funded,” says Jain.

Rather than spending millions of marketing dollars to acquire consumers, companies are ‘exploring different ways of organic conversions’ like emphasising on customer referrals. Companies are now focusing on business fundamentals.

“Founders are telling us that they will not pursue and experiment with new business verticals where the underlying target was to generate ROI in a year’s time. They want to focus on the core business,” says Chaturvedi.

A case in point can be Swiggy’s decision to scale down operations of Supr Daily, a subscription-based delivery service for milk, bread and other grocery items it acquired in mid-2018. Operations of the service have been suspended in Delhi NCR, Mumbai, Pune, Hyderabad and Chennai. The company said it was ‘yet to demonstrate a clear path to profitability.’

“There is immense pressure on some late stage companies to move towards profitability,” says Jain. After all, the funding garnered by startups over the past two years have been of a different order altogether and with availability of easy capital, firms were sold on the idea of showing growth at any cost, points out Lumis’ Sinha.

“Focus on unit economics had disappeared. Companies were spending way more to acquire customers than what they would pay them in their lifetime,” says Sinha.

Startups raised over $30 billion in funding in 2021 and the sector birthed over 40 unicorns. “We only recently celebrated the 100th unicorn. Many of them in current markets may have a valuation haircut, if they had to raise capital. We’re seeing a tempering of valuations across the board - as much as 30% compared with last year in some cases. That’s a very difficult thing for a founder or a CEO to grapple with,” Vani Kola, managing director at Kalaari Capital said at a recent event.

Some term sheets have been withdrawn, say few investors in the know. “I have personally seen large rounds fall through in a matter of days,” said one of them on condition of anonymity.

Investors want to know about companies’ path to monetisation. Unit economics is in focus more than ever. Industry experts do not rule out the possibility of closure of some startups. “Startups which are left with a very little runway will find it challenging to survive and a portion of them will have no choice but to merge with other startups or even shut down temporarily or permanently unless they are able to find bridge funding from new or existing investors,” says Jain.

The bulk of the brunt is likely to be faced by mid-sized startups. Banglani expects it to be very tough to raise Series C and D rounds in the foreseeable future. Most investors who lead these rounds are based abroad and these startups will have to compete with all their other priorities to raise capital.

Unfortunately, even some good companies may fail to cross this chasm and end up being acquired or liquidated, says Banglani. “Most startups are assuming that external funding will not be available for at least two years,” adds Banglani.