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Why Are Start-Ups Laying Off Employees After Raising Capital?

As founders opt for a flatter organisational structure, prioritize profitability and focus on product initiatives, should staffers at start-ups be worried about their future?

Why Are Start-Ups Laying Off Employees After Raising Capital?
POSTED ON December 26, 2023 7:06 PM

First came the funding. Then, the firing.

This curious trend was seen in three start-ups that recently raised funds and within days retrenched several of their employees, leading to speculation whether 2024 could see a continuation of layoffs that peppered this year.

On 14th December, business-to-business e-commerce company Udaan raised $340 million in one of the most substantial start-up funding rounds of the year. The investment, comprising a combination of equity and convertible notes, was spearheaded by M&G, a London-based investment company, and saw participation from venture capital firms Lightspeed Venture Partners and DST Global. This funding injection is earmarked to bolster the company’s pursuit of profitability and prepare itself for a public listing within 18 months.

Within five days of raising this capital, it reportedly laid off around 150 employees, which is about 10 per cent of the company's workforce. Claiming that the number could well be over 150 staffers, Moneycontrol reported that these layoffs occurred across all roles and divisions and was because of a fundamental shift in the company’s operations.

In September 2023, Zerodha co-founder Nikhil Kamath backed Third Wave Coffee secured $35 million in a Series C funding round led by Creaegis with participation from existing investor WestBridge Capital and other angel investors.

On 15th December the specialty coffee and food brand fired around 10 per cent of its workforce, which came to around 120 employees. Confirmed the layoffs to the Economic Times, without disclosing the an exact number of workers laid off, the company said in a statement to the media outlet that this was a “one-time restructuring exercise to consolidate our teams, impacting less than 10% of the organisation…As an organisation we are in a strong position post the recent fundraise.”

In October 2023, news did the rounds that ShareChat, the short-video platform supported by Google LLC, was seeking additional investments of around $40 million to $50 million. However, its valuation was marked down to $1.5 billion, a massive drop from $4.9 billion in June 2022, when it had raised raises $78 million. Once again, the spectre of layoffs raised its head and ShareChat fired 200 employees on 20th December, or around 15 per cent of its workforce. This is the unicorn’s second such move in 2023, and the company stated that it took this “strategic restructuring as part of its annual planning for the year 2024. The decision reflects the company's commitment to streamlining its cost base and achieving profitability within the next four-six quarters.”

2024: A Year Of Layoffs? 

While trimming their workforce, the words mouthed by all the start-ups appeared synonymous—they were opting for a flatter organisational structure, prioritizing profitability and focusing on product initiatives. The question that is on top of everyone’s mind is why did it take a funding winter for them to start zeroing in on these core metrics.

Siddharth Pai, founding partner at 3one4 Capital, believes it can be traced to the start-ups' overindulging in rampant hiring when COVID-19 hit the economy, and when the funding tap was free-flowing. However, with the same flow turning to a trickle, new and existing investors are more laser-focused on the start-up’s long-term goals while they bring their chequebooks.

Siddhant Jain CEO and Co-founder Of Vdocipher
Siddharth Pai, founding partner at 3one4 Capital

“Investors’ expectations have drastically changed. They look at whether the company has a sustainable business model and is not just chasing valuation or profitability. So, these layoffs were expected,” Pai stated.

Sandiip Bhammer, founder and co-managing partner of Green Frontier Capital agreed that once funded in contemporary times, start-ups are facing heightened investor expectations to demonstrate profitability, leading to cost-cutting measures like workforce reduction. Moreover, external market conditions, such as the two ongoing wars and the recessionary headwinds are also impacting revenues.

Sandiip Bhammer, founder and co-managing partner of Green Frontier Capital
Sandiip Bhammer, founder and co-managing partner of Green Frontier Capital

This has compelled start-ups to reassess their financial condition and incorporate strategic pivots in business models, which could render certain roles redundant. However, he opined that this will not become an industry trend.

What About The Employees?

The ongoing trend of fundings followed by layoffs is sounding a clarion call of caution for employees who are understandably worried about their future. Siba Panda, founder and managing partner of ValuAble, a venture debt fund, blames this uncertainty on a keyhole vision while hiring, which is why start-ups continue to lay off employees even after being well funded.

 Siba Panda, founder and managing partner of ValuAble
Siba Panda, founder and managing partner of ValuAble

After all, a company can’t keep incurring expenses if the employee is not the right fit or is not contributing directly, as investors have now adopted an aggressive approach. This is where they need to focus on mindful hiring.

“In the past two years we saw that whenever a new funding round took place, companies focused on multiplying their profitability. In such a scenario, they would retain the best talent to help them in this course and fire the remaining. Start-ups still need to recognise the strategic method of hiring instead, but the current scenario is not going to become a trend,” he added.

According to the data from the layoff tracking site, more than 10,000 employees have been laid off by around 60 Indian start-ups since January 2023. This number could well breach the 25000 mark if one were to trace layoffs to 2022, when the funding winter set in.

Kartik Narayan, CEO of TeamLease Services, a recruitment and human resources company, also said that layoffs will not become a trend because it is quite common that modern businesses face myriad challenges when there's a shift in market dynamics. They need to realign and focus on key priorities since investments are aligned with enhancing productivity and hence, reducing non-essential roles becomes crucial.

Kartik Narayan, CEO of TeamLease
Kartik Narayan, CEO of TeamLease

Reskill, Upskill To Be Retained

The start-up landscape will be highly influenced by the changing funding dynamics mirroring trends in the USA stock market and significant shifts in hiring patterns are underway, but this would not lead to layoffs after fresh rounds of funding. Siddhant Jain, CEO and co-founder of Vdocipher says that prioritising profitability and sustainable growth is stragtegically focussed on roles directly contributing to revenue generation, hence, deliberate recalibration veers away from rapid expansion, emphasizing the formation of lean, skilled teams, hence skimming the workforce.

Siddhant Jain CEO and Co-founder Of Vdocipher
Siddhant Jain CEO and Co-founder Of Vdocipher

However, Pai noted that retrenchment decisions are not kneejerk ones that are taken overnight. It is deliberated extensively by the management and employees are often absorbed by other organisations through referrals, he asserted, optimistically predicting that 2024 is unlikely to be a year of layoffs.

As companies become more conscious about productivity, employee appraisals are also beginning to become more performance-based across sectors. If a business line is not contributing to the overall revenue or margins, then companies have no compunction of removing it entirely. “It is more of a governance guardrail that start-ups are adhering to,” Pai reiterated.

The popular opinion that layoffs are unlikely to become a widespread trend will come as relief to employees at start-ups who are on tenterhooks about their future. However, this is also the best time for them to upskill themselves to stay relevant and as indispensable as is possible to their current organisation.

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