Startup layoffs to continue as exuberance takes a break; will curb attrition across sectors

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From healthtech company MFine to edtech firm Vedantu, and from Unacademy to Lido Learning and Cars24, startups have been laying off staff in recent weeks. Recruiters, staffing firms, and HR experts say the retrenchment in startups and young technology enabled companies will accelerate for at least the next few months.

They say the trend is indicative of three key factors – focus shifting to profitability over customer acquisition and unmanageable expansion, subdued investment environment, and fear of a possible recession.

Experts contend that while the layoffs are a net negative and will affect the larger formal job market in the short run, it also indicates a break from the exuberance in the startup ecosystem that has pushed up valuations.

Also read: Healthtech startup MFine lays off over 500 employees amid funding crunch

The silver lining, though, is that with the layoffs and a crop of freshers entering the market, spiralling attrition will gradually cool off, and the escalating cost of talent acquisition will be curbed to an extent.

“A sense of pressure due to the war in Europe, money losing value due to inflationary issues, and investors asking hard questions on outcomes are contributing to the present scenario,” said Aditya Narayan Mishra, chief executive officer of CIEL HR, a staffing firm. “The aggressive hiring by some firms as part of the talent war were made ahead of plans and now it is cooling off.”

Rachit Jain, founder of career and employment platform Youth4Work, said people got greedy and with ample funding in hand, tried models that were suitable and available in the US and China.

“What they forgot is that the Indian market is different and Indian customers are different,” Jain said. “The current shock was a necessity to normalise things and cut down unreasonable exuberance. The flux we are witnessing now will continue at least for the next six months. You will see layoffs, you will see rationalisation of valuation, and I would not be surprised if a couple of unicorns shut down operations or simply get merged with others.”

He said hyper-valuations have stifled innovation to some extent and have jacked up salaries for certain verticals, but this will climb down. Losing jobs is not a great situation but normalisation of hyped-up sectors will help the employment market in the mid to long run.

“As people focus on profitability, cut down on very high wages for a segment of workers and become real, you will see they are serving the job market better,” Jain added.

Survey findings, industry voices and even clarifications by some startups that have laid off people echo this sentiment.

Vedantu cofounder Vamsi Krishna told his employees last week that currently, the external environment is tough.

“War in Europe, impending recession fears, and Fed rate interest hikes have led to inflationary pressures with massive correction in stocks globally and in India as well. Given this environment, capital will be scarce for upcoming quarters,” Krishna said in a blog post explaining the decision to let go 7 percent of the workforce.

Investments by private equity and venture capital firms in Indian startups fell to $1.6 billion across 82 deals in April 2022 from $3 billion in April 2021 across 41 deals, according to a report published this month by industry group IVCA and consulting and auditing firm EY. Not only has startup funding reduced, deal sizes have become smaller too.

Achyut Menon, founder of Hyderabad-based Options Executive Search, said PE and VC money for Indian startups had jumped significantly in the past two to three years and pumped up valuations.

“But remember, value and valuation are not the same thing, and 80 to 90 percent of the unicorns are not profitable. As young firms chase profitability and exuberance climbs down, you will see some shocks. This shock may continue for the next few quarters,” Menon said.

Hiring is relatively easy, but managing the workforce is not that easy, more so when expansion had happened without profitability, he said.

“Young professionals have seen only the ups and now they have to digest the downs. In the next few quarters, you will see attrition cooling down and people realising that Rs 100 in hand now is perhaps better than Rs 200 which may come day after tomorrow,” Menon argued.

Party not over

Although thousands of people are losing jobs, experts maintain that the startup party in India is not over.

“No one wants to close down a startup but a certain scenario makes you do that. You can talk about bad planning, lack of focus on profitability or unwanted expansion, but we must not forget that startups are about taking risks,” said the founder of an edtech startup who declined to be identified. “Exuberance is cooling down and rationality is prevailing gradually.”

Jain of Youth4Work said 5 to 10 percent of the startups that are making news do not represent the entire startup ecosystem.

“You may agree that MSMEs (micro, small and medium enterprises) and small startups are creating more jobs than valuation-rich firms,” he said.

“We are working with many startups in the service sector, in manufacturing, in renewables and all sorts of segments. I don’t forecast a gloom-and-doom scenario as yet. The startup party is not over… investors are still backing startups, the talent quality is good, and they have a risk-taking ability,” Mishra of CIEL explained.

Both Mishra and Menon said the changes in startups will have a positive impact on the attrition rate.

“Talent spread may happen better and it will curb attrition to some extent,” said Mishra.
With the Great Resignation – the trend of employees reigning en masse – playing out for the past one and half years, attrition levels in Indian companies are high. This has increased talent acquisition costs, especially tech talent.

IT companies reported 20 to 29 percent attrition in the past quarters and experts argued that well-funded startups are paying high salaries, leading to a flow of talent from established companies to young firms in several sectors.

There has been a wave of resignations in India as just over one-third of respondents (38 percent) have been at their current jobs for not more than two years, global recruitment firm Michael Page said in its survey on April 19, predicting at that time that the churn was set to continue.

Firing is on

Healthtech startup MFine sacked about 500 people on May 21. Last week, edtech Vedantu let go of 424 employees, taking the total number of laid off employees to 624 so far in May.

Earlier this month, cars platform Cars24 asked 600 employees to leave and in April, edtech Unacademy laid off almost 10 percent of its workforce. In February, education startup Lido Learning asked 900 to 1,200 of its employees to resign.

There are similar instances of layoffs in startups such as OkCredit, Trell, blinkit, Meesho and Furlenco.