Layoffs In Indian Startups: The Dire Need Of Thoughtful Analysis Of Indian Startup Ecosystem.

The Indian startup ecosystem, like that of the United States, has been struck by a prolonged financial winter, resulting in major layoffs and the loss of thousands of jobs. According to data from CIEL HR, a recruiting and staffing company, around 70 startups lay off more than 17,000 employees in the first half of 2023 alone. Furthermore, layoffs at Indian companies have crossed the 30,000 mark since the start of 2022, with the renowned unicorn BYJU laying off an additional 4,000-5,000 staff. If data is collected from the beginning of 2022 to date, 95 startups have laid off almost 31965 people. Many firms, including Dunzo, BYJU, Cuemath, and others, have implemented consecutive rounds of layoffs. 

But what is forcing such great layoffs in the Indian startup ecosystem that was once the shining star in the sky? 

The dependency on foreign capital triggered the layoffs.

While COVID-19 appeared to be the end of the world economy in 2019, it ushered in a golden era for the Indian startup environment. As significant financing continued to stream in, Indian businesses quickly became the favourite of foreign investors. The fact that Indian entrepreneurs raised $13.2 billion in investment in 2019 and $10.9 billion in 2020 demonstrates this. The next year, 2021, proved to be a ‘year of unicorns’ for the Indian economy, with Indian companies raising a record $35.2 billion in investment and spawning at least 34 unicorn startups. However, the golden time appears to have come to an end. Only two years later, the Indian startup sector is suffering a severe financial problem.

Due to a drop in investor funding, startups that rely largely on external capital to drive their development have been compelled to shrink. The absence of new investment in the market has become the most difficult obstacle for these firms, forcing them to minimise costs, conserve cash and do layoffs. According to PwC estimates, startup investment dropped considerably to $3.8 billion in the first half of 2023 from $18.3 billion in the same time the previous year, marking a roughly 80% year-on-year reduction.

The fading charm of overvaluation acts as a catalyser for layoffs.

Furthermore, foreign investors are quickly learning that many Indian firms that they previously supported were grossly overvalued. For example, Blackrock reduced the valuation of Indian EdTech firm Byju from $22 billion to $11.15 billion. Swiggy’s valuation was also reduced by a quarter by Invesco. Investors are expecting significant corrections in Indian company valuations. For example, despite leading the fundraising boom in previous years, Softbank has stayed away from Indian firms in the last year. All of this has had such a negative influence on the startups that the only way to rescue the company is to lay off the employees who were once its foundation.

Investors are looking for a robust business model whose absence can create a scenario of termination.

It has been stated that all investors are now pressing their portfolio firms to enhance unit economics and seek long-term growth plans. According to a RedSeer assessment of over 100 unicorns, nearly 20% of them may encounter issues in the next years owing to uncertain business models, regulatory impediments, and dwindling demand, with some likely needing to shut down, pivot to other models, or be acquired. 

When someone begins a new business, they expect to create the next big thing. The majority of people left their employment to establish their own businesses. They aspire to be the next Uber or Airbnb. However, companies failed because of a lack of understanding about market demand, competition, and other factors. In India, many businesses fail because they do not tackle an existing market issue hence marking their entry into the series of layoffs.

Layoffs and shutdowns as GST charges real-money gaming companies.

The decision to levy a 28% goods and services tax on online gaming at full face value has already begun to shake up the real money gaming industry with layoffs, shutdowns, and funding issues. Many smaller businesses are either closing down or attempting to merge with larger platforms. Venture capital firms who were in the midst of fundraising conversations with certain real money gaming startups are now trying to invest their funds in gaming areas unaffected by the GST ruling. Investors anticipate significant valuation reductions for the ecosystem’s biggest companies.

Furthermore, venture capital is gravitating towards more stable enterprises, emphasising top- and bottom-line resilience. The industry (real money gaming) may have high cash flows, but regulatory concerns may deter private investments. 

Hike, a web3 gaming firm that shifted away from instant messaging, laid off 22% of its workers, or roughly 55 individuals, in response to the GST Council’s decision to levy a 28% GST on online gaming. According to sources acquainted with the situation, the layoffs occurred as the gaming firm faced a 400% rise in taxation. 

Following the GST Council’s decision to implement a 28% tax on online gambling, gaming unicorn Mobile Premier League (MPL) chose to remove 350 positions to minimise costs. The decision comes more than a year after the business laid off 100 workers in May 2022.  The company head blamed the new imposition of 28% GST on full face value for real-money gambling, telling staff that it had raised the company’s tax burden by as much as 350-400%. 

The change in dynamics of the industry can be a driver for laying off employees.

Following the merging of Truebil and Spinny Max with its main Spinny platform, the Used car platform Spinny cut around 4.5% of its overall staff, or approximately 300 people, out of a total of 6,500. The Gurugram-based firm deliberately purchased its competitor, Truebil, for an unknown sum in 2020, motivated by the country’s booming market for secondhand automobiles. Spinny Max, a used luxury automobile marketplace, was introduced in 2022 by the firm. While Spinny remains optimistic, there has been a noticeable slowdown in used automobile sales across India, particularly in the last nine months, as a result of negative macroeconomic conditions and recession worries, which have caused consumers to reconsider luxury spending. 

Car firms like Cars24, Spinny, and CarDekho, who have received significant money from large investors, have taken a careful approach to developing their operations. CarDekho apparently exited the used-car sale sector entirely in January. However, opinions differ on whether the slowdown in used cars for sale is due to a shortage of buyers in the market or potential purchasers waiting for newer models to enter the used car market.

Early and growth-stage startups are affected by market conditions.

Actyv.ai laid off more than 60% of its staff across many functions, including product, marketing, human resources, sales, and solutions. The layoffs were a “response to current market conditions,” according to the corporation. Actyv.ai is a B2B SaaS platform with embedded Buy Now Pay Later (BNPL) and insurance products through financial institution partnerships. During the most recent fundraising round, the company claimed to have worked with more than 20 institutions and to have onboarded over 25,000 distributors and one lakh shops on the platform. Several early growth stage companies have cut their headcount in the last six to seven months after obtaining significant funds. 

Legal complications and Financial irregularities.

Let’s take the example of BYJU. Over the last year, the edtech business has faced a slew of issues, beginning with numerous rounds of layoffs that resulted in the dismissal of thousands of employees. Its issues have worsened in recent months, with the Enforcement Directorate (ED) conducting investigations, some high-profile board withdrawals, numerous value reductions, delayed financial reporting, and even an ongoing court struggle over a $1.2 billion term loan.

The most layoffs have occurred in edtech, followed by consumer services and e-commerce. Since last year, 51 companies in these three industries have laid off 20,769 workers. The edtech sector, in particular, has come under fire. Since last year, 22 Indian edtech businesses, including five of the seven edtech unicorns, have laid off 9,871 workers.

Another firm, GoMechanic, has laid off 70% of its workers as the Sequoia India-backed startup struggles with funding after current and prospective investors discovered that the founders had misrepresented facts, paving the establishment of financial irregularities. The move comes as Gurgaon-based GoMechanic, which provides vehicle services such as repairing and carwashing, has been failing to obtain funding for more than a year after reaching advanced stages of discussions with multiple investors.

K12-focused edtech firm Lido Learning has been making headlines for all the wrong reasons since the beginning of the year 2022. Lido Learning, a Mumbai-based edtech business, became the first to lay off staff in 2022. In February, it laid off approximately 150 staff.  In addition, the firm was unable to acquire a fresh round of investment after one of its investors pulled out. Following this, the startup’s creator, Saahil Seth, looked into a combination of Vedantu and Reliance. Unfortunately, the acquisition discussions broke through, and the company declared bankruptcy in September. Unilazer Ventures, Anupam Mittal, Vijay Shekhar Sharma, BACE Ventures, 9 Unicorns, and Mukesh Bansal, among others, supported Lido.  

The need to upgrade the employees resulted in layoffs.

Navi Technologies, an IPO-bound fintech startup, reportedly laid off roughly 200 staff across several divisions. According to media estimates, the layoffs at Navi have affected up to 70% of the product development and management teams. A spokesperson for the fintech startup said the layoffs were due to a standard performance evaluation. Navi conducts performance appraisals twice a year, which results in expected departures from the company, stated the spokesperson. Employees who exhibited outstanding performance were given pay raises during these reviews, while underperformers were given warnings and opportunities to improve. According to this most recent HR policy, promotions will be provided in assessment cycles, and layoffs occur throughout both appraisal cycles. 

Closing non-performing verticals of the startups resulting in layoffs.

Mamaearth, the D2C startup, will close Momspresso MyMoney, Momspresso’s influencer engagement platform, later this month due to the latter’s rising losses. According to reports, Mamearth has cut off 80-100 individuals in the brand marketing sector. According to Mamaearth’s DRHP, Momspresso’s net worth (assets less liabilities) at the time of acquisition in December 2021 was 16.2 crore. Momspresso’s loss increased 42X to 10.9 crore in FY22, from 25.7 lakh the previous fiscal year. Its sales climbed by just 1.1X, from 27 crore in FY21 to 31.2 crore in FY22.

Conclusion.

Without question, the Indian startup ecosystem has grown exponentially in the previous five years, making it the world’s third-largest startup ecosystem behind the United States and China. The record-high capital inflow in the country in 2021 pushed the pace of Indian entrepreneurs even more. Then came 2022, which will be remembered for all the wrong reasons in the future. Although 2022 began with a bang, with the emergence of 13 unicorns between January and March, the commencement of the Russia-Ukraine war, growing global prices, and worries of an approaching recession tarnished most of it. 

At this point, investors began to tighten their purse strings, leaving Indian entrepreneurs with little choice except to decrease expenditures in order to remain financially wealthy. As a result, news of layoffs, consolidations, and startup closures began to dominate the news virtually every other day. Startups must carefully examine their financial health in order to have a long-term future, along with a robust business model and compliance with laws.

One of the primary reasons for so many companies failing and, as a result, laying off people is that they underestimated their growth potential and, with heavy investment boosting their firms, went on a recruiting binge. There is no universal rule for avoiding failure. However, a few real and cautious efforts may be taken, such as assembling the correct team, conducting significant research before launching the product, and working together towards speedier execution. Similarly, one should always have a backup plan in place in case of market volatility. At the end, the layoffs will be less if the company enjoys sound health.