Layoff, Loss, Financial Crunch: Is The Indian Startup Party Over?
| 7 minutes read
Every time we come up with some great information about startups, we will be talking about the continuous layoff in Indian startups in this article. W all know India is the third-largest country with a maximum number of startups, falling only behind the US and China.
This year in the first four months, we have seen 14 Unicorns in the country, and investors like Softbank, Tiger Global, and Sequoia Capital supported startups by funding.
Now the question is…
- Why are startups firing employees?
- Why is the funding drying?
- Why are startups facing losses even after getting the Unicorn tag?
You have to understand from the industry’s point of view. A few weeks back, when Softbank reported a $13B loss and decided to cut startup funding from that situation, Indian startups were cutting the number of employees. After all, they cannot afford to pay employees’ salaries because they have faced a massive loss in the market. Moreover, the majority of the startups had taken vast amounts of funding from international investors/institutions. So when Softbank announced they had a loss of billions of dollars, tension started to arise among startups.
- Lido Learning, a Mumbai-based ed-tech startup, had laid off over 150-200 employees.
- Cars24 has fired more than 600 employees, as per the ET report.
- In April, Unacademy laid off around 600 employees, 10% of its workforce.
- Vedantu had fired another 424 full-time and contractual employees, or about 7% of its workforce.
- Meesho laid off 150 employees from its grocery business in April 2022.
- mFine laid off over 50 percent of its total workforce (more than 500 employees).
After analyzing these announcements, one thing in common, they became unicorns a few months back (2021-2022). They made considerable commitments to their investors and spent a lot on their branding and promotions. That’s why sometimes overfunding is also bad for startups.
Since the beginning of 2022, at least 5,600 startup employees have been impacted by cutbacks, termination of contracts, and layoffs at many unicorns, global tech companies in India, and growth-stage startups. According to Venture Intelligence, startups in India mopped up over $10 billion in funding during the first quarter (January-March) of 2022. This is a 50 percent spike from the $5.7 billion they raised in the same period last year.
From ESOPs To Layoffs
It’s something that employees in the startup ecosystem have become more than familiar with. In fact, given the crunch and the talent wars for particular roles that startups crave, the talk in the past two years has been about retention.
As the Indian startups grew and raised new funding rounds, the year 2021 saw many companies retain employees and reward them through ESOP buybacks. Over $43 billion was raised by Indian startups last year, which led to several ESOP buybacks.
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Including Swiggy, FirstCry, Unacademy, and Zerodha, more than 29 tech startups executed ESOP buybacks last year and created a wealth of more than $335M for their employees.
This was not a good sign for startups because growth is not permanent with companies; downfalls also hit. But, on the other side, a section of the startup workforce might be enjoying ESOP buybacks, and the other section of the team is facing job loss.
Over 6000+ Startup Employees Lost Their Job.
Startups such as Lido, Vedantu, Unacademy, mFine, Cars24, and others have announced job cuts. For example, in early April, Edutech startups, Unacademy laid off 1000+ employees, 10% of its population. Other edutech startups like Whitehat Junior fired 800 employees as they didn’t agree to work offline.
Used car seller Cars24 is also letting go of employees to save costs and push to automation. The unicorn is laying off as many as 600 employees in this downsizing.
Do the layoffs raise some questions, like whether Indian startup growth is temporary? Do startups grow and get funds on market sentiments? Whichever the reason might be, startups need to learn how to utilize funding better. The startups firing employees have spent a lot on marketing and promotion because these startups have featured advertisements on TV.
Trell, a Video app startup based in Bangaluru, laid off hundreds of employees in March. The saddest part was they informed their employees on Whatsapp ‘that the company is suffering losses and I’m no longer required.’ The statement was reported on Forbes.
A spike in inflation and a hike in interest rates after the plentiful liquidity has had a knock-on effect on the startup funding crunch as investors slow down investments in public and private markets. Also, from February 24th, 2022, the Russia-Ukraine war has pushed up fuel prices and transport costs. So the sentiment has turned bleak, a stark contrast to the delight in 2021, where India minted a new unicorn almost every week.
According to data shared by market intelligence firm CB Insights, venture funding to India-based startups dropped to $3.6 billion in the second quarter of 2022 from $8 billion in the January-March quarter and over $10 billion a year back. The data also showed that venture funding slowed for the first time sequentially in the January-March quarter of this year since the October-December quarter of 2020.
“There was intense competition between private equity and venture capital firms over the last two years, thanks to the abundant liquidity in the system and rapid adoption of technology, which led them to deploy billions in tech startups,” said an investment banker requesting anonymity.
“But they made some losses either through IPOs or down rounds and have thus taken a backseat now. Sovereign wealth funds are still deploying cash, but they need clarity on the business models of high-cash-burn companies, so I feel larger rounds will slow down this year and will largely be led by sovereign wealth funds or pension funds. Profitable startups or companies with strong unit economics will get this money though, and high-burn startups will struggle,” the banker said.
“Most investors who can lead rounds of $40 million or more are based outside India. Many invest in a mix of asset classes. Even if they have funds to deploy, there are many claimants to that capital, including public equity and private investments in their home countries,” said Ritesh Banglani of Stellaris Venture Partners.
“Many have pulled the plug on ongoing funding discussions and even signed term sheets. As a result, we expect a prolonged period of pain for any growth-stage startup that gets caught with a short runway at this time,” Banglani said.
Stellaris has advised its portfolio companies that have recently raised capital and are looking to raise a growth round to plan a 24-month runway. However, Banglani said that an 18-month runway could be adequate for early-stage companies.
“For earlier-stage companies, such a long runway may be counter-productive: their objective is not survival but finding product-market fit quickly. A runway of 18 months should be adequate to achieve that objective,” he said.
“Of course, such advice must be backed by the willingness to fund the company further if they continue to perform, which is a commitment we are making to earlier-stage companies.”
Multi-stage venture capital firms like New York-based Tiger Global and Japan’s SoftBank Group, which have been aggressive investors in Indian startups, have also said they will be going slow on investments this year.
Over the last five years, SoftBank, an aggressive investor in India, said it would cut its investments to a fourth globally in 2022, compared to 2021. Tiger Global said it would back more early-stage companies this year, which is a shift for the late-and mid-stage investor. Tiger Global also marked its first seed-level investment in India this year.
Disastrous Tech IPOs and Hammering in Public Markets.
SoftBank, Tiger Global, and Sequoia Capital faced huge losses. Not only this, their invested tech startups gave disastrous results, and they lost their valuation in the market.
SoftBank’s Vision Fund investment unit posted a loss of over 23.29 billion for the January-March quarter against a net profit of 38 billion a year earlier as its portfolio of listed companies took a beating amid falling tech valuations across the globe with investors pricing in interest rate hikes and China tightening regulations on the industry.
SoftBank’s two biggest portfolio companies – South Korea’s Coupang Inc and China’s Didi Global – plummeted in the January-March quarter. Coupang Inc’s shares have fallen as much as 70 percent since its listing price. According to the company’s financials, SoftBank’s $8.2 billion investment in Coupang is valued at $2.2 billion.
Paytm’s parent One97 Communications Ltd, and PolicyBazaar’s parent PB Fintech Ltd, which are among SoftBank’s most prominent portfolio companies in India, are trading much lower than their listing prices, which bleed the Japanese financials. For example, the IPO price was around 2000 INRI (Indian Ruppess), and the current price of Paytm is about 500 INR.
These financial institutions had invested massively in new private firms. In addition, they had majorly invested in Series A or Series B rounds, typically the first and second stages of massive funding in tech companies.
“The hammering that some of the stocks like Zomato, Nykaa, Policybazaar, and Paytm have received in public markets is making investors wary of exits in the future, and that’s again a significant reason why some of the startups that had planned fundraising rounds or IPOs have either pushed back or cut down the amount and valuations,” said the investment banker.
“Startups that cannot run without money, and unfortunately we have plenty of those, are seeking down rounds or are also looking at raising debt,” the investment banker added.
Banglani of Stellaris said that more capital tends to flow to proven revenue and profitability models during down cycles.
“This presents an opportunity for early-stage VCs to take bolder bets in companies where the business model is unclear but who can execute with a low burn for an extended period. Such opportunities exist in core technology areas and certain segments in Fintech and SaaS (software-as-a-service),” said Banglani.
“Companies that will struggle the most relied on the high burn for growth and did not raise adequate capital in the previous financial year. Once the tide turns, it is tough to arrest the vicious cycle of cost-cutting, declining business metrics, low investor interest, and talent flight.”
As of now, investors should invest wisely. They should not invest based on sentiments. And startups should target steady growth rather than showing artificial growth; these sudden growths won’t last as an entrepreneur should utilize funds for the company’s growth and invest in R&D should also be your priority rather than excessive brand promotion.
Laying off employees, cutting costs, and shutting down a business, creates a wrong impression on your brand, and startups should avoid these. This can not be eliminated, but it can be minimized by learning from your own mistakes.
Unicorn and Funding these two magical words every startup founder wants to achieve for their startup. But entrepreneurs should understand that even after colossal funding, many startups fail miserably due to their wrong policy, working attitude, and failure to understand the market. When things go against you, then you start making these decisions.
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