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Why Start-ups are Laying Off Employees
With investors tightening the funding tap, things are unlikely to turn around very soon
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R.I.P Good Times—a memo by Sequoia Capital during the 2008 economic crisis—perfectly portrays the present condition of technology start-ups in India. After years of lavish venture capital (VC) funding and investor tolerance for cash-burning, the peaceful days seem to be ending for these firms. Since January 2022, around 8,000-10,000 start-up employees have received pink slips.
How did the start-up story turn sour?
A series of global macro events, including stock market crashes, rising inflation, interest rate hikes, and the Ukraine war have significantly eroded the value and volume of VC deals. Both domestic and global funds have been facing delays in raising money, with their investors reassessing financing commitments over concerns of high valuations and lack of profitability, and increasingly demanding more investment discipline.
As start-ups sag under economic stress and pressure mounts from investors, they are forced to resort to austerity—cut the flab in the organisation and pivot to a leaner structure that prioritises profits over growth. Edtech start-ups, heavy on sales and marketing headcount, are among the first in the list of suddenly frugal firms. In February, Lido Learning asked around 1,200 of its employees to resign. Unacademy laid off 925 employees in April; Vedantu handed out pink slips to over 600 people in May, and FrontRow sacked 145. Some of the most-funded tech ventures—including Meesho, OKCredit, Cars24, MFine and MPL—have also resorted to layoffs to tide over the funding drought, which is likely to last beyond 2022.
The edtech crisis explains the risk in the hustle-driven growth model. In the past two years, India has seen five new edtech unicorns—Unacademy, Emeritus, Vedantu, upGrad and Lead School—and one, BYJU’S, become a decacorn. The massive digital shift has brought substantial investor dollars to edtech firms, forcing them to amp up their growth engines around tech, marketing, sales and content teams. As the wheel of time rolls towards a funding winter, investors have asked their portfolio firms to cut costs and preserve cash.
The current crisis is a “crucible moment” for the ecosystem, warned VC firm Sequoia and said it doesn’t expect a V-shaped recovery. Similarly, start-up accelerator Y Combinator sent out a letter titled ‘Economic Downturn’ to its founders, advising them to prepare for the worst by cutting costs and extending the runway immediately. Several others, including Orios Venture Partners, Beenext and Lightspeed Venture Partners have sounded out similar warnings to their portfolio companies.
As more and more start-ups are forced into conservative operational models, calls for cost reduction and, therefore, layoffs will only grow louder.
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