50K startup employees fear losing their jobs as India gets ready for 200 new unicorns

50K startup employees fear losing their jobs as India gets ready for 200 new unicorns

Two hundred unicorn startups are expected to arrive in India over the next four years, even though businesses there are continuously laying off employees to get through the “funding winter”, and over 60,000 people may lose their employment in 2022 alone.

The “ASK Private Wealth Hurun India Future Unicorn Index 2022” list shows that almost 122 companies from 25 cities are on the route to becoming unicorns (with a valuation of $1 billion and above), as many more prepare themselves for layoffs, leading by edtech and e-commerce platforms.

Ironically, investment is still available for startups in India, but layoffs are becoming increasingly common, with layoff news predominating the headlines.

To date, businesses like Ola, Blinkit, BYJU’s (White Hat Jr, Toppr), Unacademy, Vedantu, Cars24, Mobile Premier League (MPL), Lido Learning, Mfine, Trell, farEye, Furlanco, and others have fired close to 12,000 startup workers.

While some companies continue to get millions in funding, according to industry analysts, at least 50,000 startup employees are anticipated to be fired this year alone under the guise of “restructuring and cost management.”

Even a few unicorns, like Ola, Unacademy, Vedantu, Cars24, and Mobile Premier League, have let go of staff (MPL).

The Hurun Report, Anas Rahman Junaid, MD and Chief Researcher, Hurun India, noted that “there are some issues in the global economy that can affect the valuations and capital raising capability of Indian startups.”

“Additionally, some Indian startups are implementing layoffs and cost-cutting measures, raising concerns about an ecosystem slowdown. In our opinion, the growth story may see a short-term wobble, but the Indian startup ecosystem’s long-term prospects are solid and robust, “Junaid added.

On Wednesday, the largest online education provider, BYU’s, announced the elimination of over 600 positions, including over 300 at its Toppr learning platform and another 300 at its WhiteHat Jr coding platform.

The layoffs occur while the edtech industry is struggling due to the global macroeconomic environment and the reopening of schools, colleges, and traditional learning facilities.

Why Are Indian Startups Laying Off Their Workforce

There are many causes for the recent layoffs, but none of them has a conclusive explanation. Numerous people were made redundant and abruptly dismissed from the workforce due to India’s widespread layoffs.

This has already happened during business cycles, and some insiders had predicted the recent layoffs in last year’s estimates. One of the industries that have been severely impacted is the IT sector. Unacademy, an edtech startup, fired 600 employees in April, alleging non-performance and redundancy; this represents around 10% of the company’s overall staff. The company stated that it is trying to become profitable by Q4FY22 and intends to invest for expansion in their group companies as the basis for the personnel reduction.

Another edtech company, Vedantu, has fired 624 workers so far, or 7% of its whole workforce. The geopolitical crisis in Europe and the reopening of schools as COVID winds down were cited as the causes of the layoffs.

“Right now, the outside world is difficult. Fears of an oncoming recession, the European war, and the Fed’s interest rate increases have contributed to inflationary pressures and a major drop in global and Indian stock markets. Funding will be tight for the following quarter, given this scenario,”
says Vamsi Krishna, Vedantu CEO and founder.

Every sector is being impacted by the layoffs, which are not simply happening at IT companies. In May, the online gaming unicorn announced its exit from the Indonesian market by laying off 100 staff. 150 employees of Yaari, a social e-commerce company, received pink slips. Like Trell, another social e-commerce network, hundreds of employees were fired in March as part of an investigation into financial irregularities at the company. The following month, Furlenco, a furniture rental company, let go of almost 200 workers. Following suit, Meesho fired hundreds of workers from its subsidiary Meesho Superstore in April.

Until recently, startup investment was booming, reaching all-time highs in the first quarter of 2022. Across 506 funding deals, Indian startups raised more than $11.8 billion in Q1 2022, according to data from Inc42. This is 186% greater than during the same period last year and higher than the total annual funds raised in the year 2020.

The oncoming hyperinflation and stagflation, as the bubble is ready to burst, will cause a reduction in the helicopter money that certain venture capitalists (VCs) and early startups were enjoying. Therefore, the startups are turning to firing staff to trim the fat and reduce employee-expenditure expenditures.

Why the layoffs?

For startups, late-stage funding is slowing down and will finally run out. Investors prefer old profit-making methods to negative cash burn, and they urge corporations to return to these methods. They want to play a bigger part in how these companies are run and held accountable.

The used automobile reselling business Cars24 let off 600 workers from its many divisions. It raised about $200 million in November 2020. It recently finalised a $400 million transaction with Alpha Wave Global in its most recent fundraising round, making it the first unicorn firm in the used automobile market field. Last year, the corporation was valued at $3.3 billion. The corporation described the situation as “business as normal” in a statement.

Experts point to the problem of overhiring as a reason. During the epidemic, businesses invested heavily in human resources, emphasising the needs and demands of the curfew period. Their intentions have changed as the globe becomes more open to meeting its needs. Massive wage increases and hiring binges have now affected the businesses, costing them a lot of money to keep their personnel. It is understandable why these businesses are letting go of many of their employees.

“Unplanned hiring is a key factor in the layoffs… Startups frequently rush to hire talent that may turn out to be useless later on. Such layoffs and a toxic culture create conflicts and communication challenges which later impair the mental health of the employees,” explains Manas Pal, Co-founder of PedalStart, a startup enabler that supports early-stage startup founders, in an article by Forbes.

Employee stock ownership plan (ESOP)

Companies use ESOPs (employee stock ownership plans) for many purposes. Employee feels more invested and performs better as they feel like they are a part of the company, aligning their interests with those of the shareholders. This is accomplished essentially by giving the employee business shares. Both parties experience proportional growth. Companies regularly engage in this practice in an effort to keep talent, which they view as essential to their firm.

Startup businesses have long used the ESOP buyback approach to reward their employees. Many startup businesses sought to keep their staff while they continued to expand and raise money. Around $42 billion was funded by Indian startups in 2021, some of which were used for ESOP buybacks.

Over 20 Internet startups, including Unacademy, Zomato, FirstCry, Zerodha, and Swiggy, invested in ESOP buybacks last year, generating an employee value of more than $335 million.

The ESOPs contrast with the layoffs. While the corporations reinforced one group of their employees through ESOPs, they continued to underinvest in the other group, leading to a crisis that eventually resulted in layoffs.

“The hiring and firing practise employed by many of these internet startups will be harmful to the expansion of retail in the nation. Inflation and other market-related reasons lead to employee layoffs at many online startups. But we think this is just a passing occurrence. We believe that the online retail sector has enormous potential, and expecting this growth, we are inviting fresh talent into our organisation,” says Jitesh Agarwal, CEO of WallMantra, an innovative home décor solutions company.

The European crisis

Costs have gone up because of the Russia-Ukraine war. The macroeconomic issues influencing the nation as a whole are impacting startups, just like they do on any other type of firm. It is challenging for startups to raise money during times like these since corporations are going through a difficult time.

At these times, shareholders of established corporations tend to hold off on making sizable investments; instead, they prefer that startups keep their capital burn to a minimum and begin optimising.
Padmaja Ruparel, the co-founder of the Indian Angel Network (IAN) and founding partner of the IAN Fund, claims that the expenditures associated with the Russia-Ukraine war have escalated and that online business development is presently slowing down. In contrast, offline involvement has surged following the pandemic. These startups are now big businesses. She is mentioned in Forbes as saying that, like any company, they are impacted by several macroeconomic factors.

Interest rates are rising thanks to US Federal banks. Global issues that are impeding the growth of startups include the recent carnage on the US stock market, the geopolitical unrest caused by the conflict in Russia and Ukraine, the inflation of crude oil costs, and the shifting public market valuation for technology companies. The early startups would have difficulty adjusting to this tempo change.

In Q1CY22, VC investment in India slowed down a little bit from the record levels seen in the second half of 2021, according to KPMG’s Venture Pulse report. According to the study, VC investment totalled $7.9 billion across 300 acquisitions in Q1CY22.

“Yes, there will be additional team reductions if fundraising slows down. Companies will trim the fat and make wise hiring decisions, predicts Padmaja Ruparel.

Is there an upcoming recession on the horizon?

According to analysts and economists, the US, Europe, and China will experience a recession sooner than expected. The US recession that coincided with the pandemic was the shortest one in history. For the first time since 2018, the Federal Reserve recently increased interest rates from a range of 0.25 to 0.50 per cent. Recommending an additional increase in the federal funds rate to 2.5% or more by the end of 2022.

Fear of a protracted recession has increased due to weak demand recovery and pressure from inflation. Investors and economic experts are becoming more fearful due to the Federal Reserve’s attempt to combat inflation by raising interest rates.

In India, it would be what is referred to as a “technical recession,” when the GDP will fall for two successive quarters. A recession is characterised as a phase of economic stagnation that lasts for longer than a few months and is accompanied by a decline in economic activity.

There will be global repercussions if the US and Europe experience a recession. The most recent US recession began in early 2017 and lasted until mid-2019. The current economic crisis lasted the longest. Since then, many analysts have claimed that the recession has merely been postponed and is about to occur.

“The central bank has a lot on its plate right now. It must strike a balance between the story of inflation and the possibility of a recession in the US economy. Any further raising action will come with qualifiers going forward; we may see a more dovish approach to tightening, rather than the aggressive one we have been primed for over the past year,” says Giles Cooghlan, Chief Analyst at HYCM

Regarding the recent layoffs in India, it can be argued that large corporations that invest in startups in many nations have anticipated this development and are putting plans in place and taking the required actions to protect their businesses. The world market and the European crisis essentially support one another.

“The Indian economy is not overheating, in contrast to the US. Despite an overall slack in the economy, we haven’t seen demand fully recover in many industries, and as a result, inflationary pressures are present. In our opinion, the epidemic has triggered some supply-side devastation. Several changes had transpired during the epidemic, which is pushing to inflation notwithstanding the slack.,” says Sonal Varma, Chief Economist – India at Nomura, a global research firm, in an interview with ET Online.

During the epidemic era of the recession, the Indian government made its own decisions. Like other central banks, the Reserve Bank of India chose a loose monetary policy to slow development. However, this did not affect inflation, which silently continued to rise as the government travelled the path of economic recovery.

All of these regional and national issues essentially point to one thing: delay. The recession’s delay was brought on by inflation. Inflation resembles a dragon that is dozing off in its lair while it waits to rule the world.

Since the beginning of 2022, 5,600 startup employees have lost their jobs. Call it terrible management from the company’s end for overhiring during the epidemic, which they now have to make up for, the knock-on consequences of the European crisis, or the possibility that the vast corporations’ conference rooms are preparing for something that is about to happen. Time will only tell. The business cycle will continue to repeat.

Nevertheless, in the predicted and impending phase of prosperity, the startups that are still around today will have a difficult story to share.

edited and proofread by nikita sharma