SoftBank-backed Indian startups cut costs by 50-75%, lay off over 5,000 people to weather funding winter

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SoftBank Group Corp's investee companies in India have followed the lead of the Japanese investor and adopted a "total defence" approach in the last 15 months, implementing various cost-cutting measures to navigate the widely discussed funding slowdown.

Since the start of 2022, Indian startups in SoftBank's portfolio have reduced costs by 50-75 percent to extend their runway by at least 12 months, people aware of the matter told Moneycontrol. Startups have done this by laying off thousands of employees, reducing employee benefits, and cutting expenditures such as advertising, the people said, requesting anonymity.

According to the latest numbers available with SoftBank, the median cost-cut among its portfolio companies is 70 percent, the people added. Some of SoftBank's most heavily funded unicorns, including Unacademy, Meesho, Swiggy and Cars24, were among the companies that reduced costs the most, according to the people.

Employee benefits often represent one of the largest, if not the largest, expenditure categories for technology startups. Over the course of the last 15 months, companies supported by SoftBank have collectively reduced their workforce by over 5,000 employees, resulting in significant cost savings.

Cost cuts at unicorns

Besides layoffs, the companies have taken a number of operational cost-saving initiatives. Unacademy has scrapped free meals for employees at offices and handed pay cuts to top management and founders, among others. Cars24, meanwhile, shuttered operations in non-core countries like Indonesia and Saudi Arabia while Meesho integrated its grocery business unit into its core application.

These cost-cutting initiatives have helped Unacademy bring down its monthly burn to about Rs 20 crore from over Rs 200 crore in 2021. Cars24's monthly burn rate has fallen to $6-8 million from over $22 million a year back and that of Swiggy's has come down to $20 million from about $45-50 million. Meesho has cut its monthly burn to $4-5 million from about $40-45 million in peak 2021.

While the majority of the companies that slashed costs had huge losses on their books, some of SoftBank’s profitable portfolio companies have also reduced expenses significantly to improve operating and net margins, according to sources.

Questions sent to Cars24, Unacademy, Meesho and connected 10 of its portfolio companies  Swiggy did not elicit immediate responses. SoftBank declined to comment.

Following SoftBank

In response to challenging macroeconomic conditions, SoftBank's portfolio companies have followed a highly conservative strategy, mirroring the approach taken by the Japanese investment giant, which cut investments by more than 90 percent between April 2022 and March 2023. In India, which has been one of its favourite markets, the Japanese investment conglomerate has not invested in a single company since July 2022.

These measures have proven helpful for these companies in navigating the funding downturn. SoftBank's CFO, Yoshimitu Goto, highlighted during the recent earnings presentation that 94 percent of the portfolio companies now have a runway of at least 12 months. According to sources, Indian companies in SoftBank’s portfolio have a runway of more than 20 months.

“When SoftBank decided to cut investments last year, there was a clear message to portfolio companies to prepare for difficult days ahead. Runway extension for a few companies was inevitable,” said one of the people quoted above.

“So you have seen so many companies in SoftBank’s portfolio taking the bold and hard steps of layoffs and doing whatever is necessary in times like these. For now, growth for many technology companies has slowed throughout and so investors are ready to accept 30 percent growth but with greater sustainability versus 80 percent growth with huge losses. That’s what SoftBank’s companies are focusing on,” the person added.

According to the person, some of these companies, especially the B2C (business-to-customer) companies might stop the cost-cutting exercises by June this year as they gear up for a "very critical" festival season.

"Right now since there is very little growth, this festival season happens to be very critical for some of these consumer-focused companies," the person said.

"These companies, especially late-stage firms, might clean up their books by June and then start investing for growth again as they would want to show some growth for this and the next calendar year. In the process, if the festival season is good and they are able to show growth, they might again look to raise funds by the end of this year for the next phase of growth. But that will depend on the macroeconomic situation," the person added.

Just like SoftBank, investors worldwide have adopted a cautious approach towards high-growth investments since the beginning of 2022 due to various challenging macroeconomic factors. These include rising inflation leading to increased interest rates, a disruptive war in Europe impacting global supply chains, and escalating tensions between the United States and China, the two largest economies. This stands in stark contrast to 2021.

Furthermore, the instability in the global banking system in 2023, with institutions like Silicon Valley Bank and Credit Suisse going bust, has further negatively affected overall investment sentiment.

However, after investing less than $500 million in the previous three consecutive quarters when SoftBank followed a ‘total defence’ approach, the Japanese investment conglomerate is slowly transitioning into ‘offence’ mode, Goto said at the earnings presentation.

“...when an opportunity comes, we want to be positive. Last year, unless unusual happened, we would rather pass on an opportunity. But this year, if we are comfortable after checking every aspect, then we want to take steps one by one. So it’s not like right away we start investing but it’s more like taking opportunities,” Goto said.

Listing plans

While SoftBank has taken a very conservative approach to investing in India, the Japanese investor has been preparing late-stage companies in the country for a potential listing. Last year, SoftBank connected 10 of its portfolio companies that are eyeing a potential public listing in three years with mutual fund houses in Bengaluru. Swiggy, Meesho, Unacademy and Lenskart were among those portfolio companies.

At the earnings presentation, Goto said that late-stage portfolio companies of SoftBank having a cumulative fair value of about $37 billion are ‘poised to list publicly’, without divulging any further details.

SoftBank, a prolific startup investor in India, has backed 27 companies in the country, including 20 unicorns. In the last seven years, the Japanese investor has become particularly aggressive and has invested more than $10 billion through its two Vision Funds. However, last week, it reported a massive loss of 4.3 trillion Yen ($32 billion) on the Vision Fund investment unit.