The truth about hiring and firing in the startup world

Growth, scale, funding, skyrocketing valuations, GMV, and other vanity metrics are fancy terms which are often flaunted by startups. However, these jazzy metrics do not appear to be helping them anymore like it used to. While investors are backing several me-too startups which prioritise scale over getting right and viable business, startups are now exploring ways to spruce-up the bottomline.

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Consequently, we see several startups, including biggies revisiting their strategies to curb burn rate and think about profitability.

Massive layoffs lingering Indian startups

Over the past six months, several early and growth stage startups are going for massive layoffs. After Tinyowl, Housing, Helpchat, now Info Edge-funded Zomato has announced 300 layoffs. In February this year, the company had over 1,200 positions opened and six months ahead it laid off 10 per cent strength (largely in the US).

Earlier Tinyowl allegedly fired over 100 employees while Housing laid off over 160 employees (though several media reported about 600 layoffs). Delhi-based Helpchat axed over 150 plus workforce in the wake of its pivot.

Last weekend, Zomato stated in a blog post, “Operations will need fewer people to run the show compared to the past. All these things will also significantly bring down our burn rate, and as we go along, make our businesses in these markets much stronger.”

The announcement also hints at the fast changing dynamics and sharp emphasis on alleviating ongoing burn rate. Last month the company secured $60 million round led by Temasek. Zomato is using proceeds toward strengthening new businesses such as online ordering, table reservations, point of sales, and whitelabel platform.

Shifting gears: road towards profitability

So why are these growth seeking startups forced to fire employees? Serial entrepreneur Kashyap Deorah, says, “Startups are shifting their focus from growth at any cost to road towards profitability.” Lately startups in India have overlooked profitability and unit economics over growth and scale.

Online grocery platform Localbanya, on-demand delivery platform Townrush have also fired employees and are evaluating possible shutdowns as they have failed to raise the required round to survive and lost focus on building sustainable business sans external capital.

Pivot, over-hiring and high burn rate lead layoffs

While firing by Helpchat can be attributed to pivot of business, layoffs executed by Tinyowl, Housing, and Zomato are largely because of over-hiring and increased focus towards profitability. Pivot requires a change in wholesome strategies. Various function and roles become redundant when goal and vision of startups change altogether.

According to Ravi Gururaj, NASSCOM product and executive council, startups fire employees under three circumstances: they don’t have money and want to raise funds; they don’t plan properly and over hire, or they hire the wrong talent.

Follow-on funding on basis of growth seems very difficult and Chinese connection

Experts believe that a trend of large-scale firing will continue. “Access to follow-on funding on the basis of growth looks very difficult now. VCs used to write cheques to scale oriented startups but now they are cautious owing to several reasons, including a slowdown of the Chinese economy,” adds Alok Mittal, former partner at Canaan Partners.

Owing to a slump in the country’s economy, for the very first time Alibaba and JD.com stocks had fallen by more than 35 per cent from its peak.

“Sudden slowdown of Chinese economy impacted strategies, including layoffs,” points out Kashyap. Startups are all about challenging the status quo and it includes firing. “It’s more like a natural progression. Early and growth stage startups have to revisit their hiring plan when priority changes. But sensible hiring with a long-term approach with each hiring can avoid mass layoffs,” says Navneet Singh, Founder of Peppertap that recently secured $36 million round led by Alibaba funded Snapdeal.

Over the past 10 months, hyperlocal startups had roughly amassed over $170 million risk capital primarily by showcasing scale and projected growth. “Euphoria for investment in this segment is subsiding as investors are turning skeptical about unit economics in on-demand startups,” adds Manmohan Aggarwal, Co-Founder of Yebhi, which ceased its operation last year. “Massive layoffs from startups indicate the fact that funding has dried for such startups,” he says. Yebhi also executed mass firing as it failed to raise further risk capital.

While a few stakeholders believe that if startups need to be 10 times better than other government-run companies or large MNCs, they have to fire 10 times faster. “Startups grow at such a rapid pace that there is no time for a half-yearly performance review and such,” said Anand, Founder of India Quotient, in an earlier interaction with YourStory.

Firing isn’t as easy in India as different geographies

However, aforementioned belief is very much relevant and true in economies like the US and the West. But India is a different market and massive firing doesn't fit us culturally. For instance, Amazon never tried COD in the US and other markets, Uber never hired specific country head to lead operations but it had to do in India. Presently, the job is considered as a long-term approach and an affair in India. Getting fired from a job is more of an insult in India but it’s not the case in mature markets.

“Firing was not a big low for me, but it was for my wife and parents,” adds a sacked employee of Housing.com on the condition of anonymity. Joining startup is rewarding and risky both. “On the one side it can be a roller coaster ride but on the other side it could be disappointing,” says, a mid-level executive of Yebhi.com. He had to face difficulties in securing the job with the same package at Nexus funded e-commerce firm which ceased its operation last year.

YourStory believes such layoffs are the need of the hour for startups that have hired recklessly based on investor backing on the pretext of projected growth/scale. Gone are the days when entrepreneurs attracted investment on unviable and projected metrics.

Going forward, founders, investors, employees, and the media should be prepared for such layoffs as the time for attracting easy risk capital looks difficult for early/growth stage ventures. The key learnings for startups in this context are, hire diligently, keep a hawk eye on the burn rate, and make strong business fundamentals that are not dependent on the investors' mercy.