Startup Layoffs: Overall Funding Is No Less This Year, But Why Firms are Firing Employees

Although start-ups are resorting to lay-off of employees as they cite cost-cutting as the primary reason, data show that the overall funding for these new-generation enterprises during January-April this year is almost the same as last year and even the number of companies raising over USD 100 million is also higher than last year. However, experts say startups are laying off employees to conserve cash for shoring up profitability as big-ticket fundings are now slowing down due to the ongoing volatile market conditions.

About USD 12 billion was invested in growth and early-stage companies between January and April this year, compared with USD 11.2 billion pumped in during the corresponding period last year, according to data sourced from Venture Intelligence.

Interestingly, the data showed that the deals involving funding of USD 100 million and more are also higher this year as compared with last year. About 33 companies raised funding of USD 100 million or more during January-April 2022, while the number was 29 during the same period last year, according to the Venture Intelligence data.

Popular startups in India including Unacademy, Cars24 and Vedanta, have let go of over 5,000 employees in India this year. Ola has laid off about 2,100 employees during January-March this year, followed by Unacademy (over 600), Cars24 (600) and Vedantu (400).

This apart, e-commerce firm Meesho has laid off 150 employees, furniture rental start-up Furlenco 200, influencer-led social commerce start-up Trell 300 employees and OkCredit has let go of 40 employees.

Ajay Malik, managing director and head (investment banking advisory) at RBSA Advisors, said: “Given the current volatile market conditions, startups are aiming at conserving cash and shoring up profitability. Lay-offs by start-ups may have been accelerated due to capital crunch worries.”

According to the latest Venture Intelligence data, 33 Indian startups raised about USD 7.34 billion during January-April 2022. However, the Indian Tech Unicorn Report 2021 showed that in 2021, only 11 companies had raised about USD 7.16 billion through public offerings. “One97 Communication (Paytm) raised India’s largest-ever IPO with an issue size of Rs 18,300 crore (about USD 2.46 billion).”

According to the data, 29 deals worth USD 100 million or above during January-April 2021 covered about 71 per cent of the overall start-up investments, whereas 33 such deals this year accounted for just 60 per cent of the total funding.

RBSA’s Malik said that overall, this year has seen almost the same funding during January-April as last year but the amount involving top deals are less as compared to the last year. “Falling valuations, slowing funding rounds and shrinking deal sizes are adding to the startups’ woes,” he said adding that the bleak market environment might slow down funding in the near future.

Recently, in a letter to employees, Unacademy co-founder and CEO Gaurav Munjal has said, “We must learn to work under constraints and focus on profitability at all costs. (Funding) winter is here. We must change our ways. We will focus on organic growth channels instead.”

He added that some people are predicting that this funding winter might last 24 months. “We must adapt. This is a test for all of us. We must learn to work under constraints. We must focus on profitability at all costs… We must survive the winter.”

Sequoia Capital’s Note For Companies

In a 51-page note, leading venture capital firm Sequoia Capital recently told founders of its portfolio companies that the era of being rewarded for hypergrowth at any costs is quickly coming to an end with investors shifting towards companies who can demonstrate current profitability.

“Capital is becoming more expensive while the macro is becoming less certain, leading to investors de-prioritising and paying up less for growth,” it said.

Sequoia also said loose monetary policies globally in the past two years had led to negative interest rates, making fundraising effortless for growth companies and driving up valuations. Now, with interest rates rising, money is no longer free, which can have massive implications for valuations and fundraising.

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