Young talent still open to joining startups but are asking more questions amid layoffs, funding freeze

Since February, over 5,000 employees were fired or forced to resign from the startup workforce.

She is 35 years old and has worked for four years with an e-commerce company whose human resources (HR) department called her and gave her a day to resign. “They said they will pay till today but they can’t employ me anymore. Can they do this?” asked the employee.

She refused to resign and was eventually relocated from Mumbai to Gurgaon. The company said it was shutting down some of its offices. The employee’s colleagues were less fortunate; they were let go the next day. Her identity has not been disclosed to protect her job.

Over the past few months, startups have laid off thousands of employees after a boom year in which they received multiple job offers and been hired for sky-high salaries and with offers of incentives like BMW cars.

But now, layoffs and shutdowns have become the norm in the face of a funding crunch.

Recruiters and investors in the startup ecosystem interviewed by Moneycontrol admitted that layoffs had become rampant. Even so, they said, demand for tech employees is still strong and young recruits were taking up startup jobs because of the attractive salaries still on offer. To be sure, they are asking a lot more questions about the business of their employers.

“Companies were raising funds in a high capital availability environment. To justify their next fundraiser, they also wanted to get growth at any cost,” said Krishna Kumar, founder and CEO of Simplilearn, an edtech startup. “To do that, they needed to get employees at any cost because they wanted to do things fast. So a lot of companies hired people at whatever price they were available.”

What has changed?

In 2021, Indian startups raised $42 billion and 46 joined the club of unicorns or those valued at $1 billion or more. After the blockbuster financial year 2022, the funding environment has turned less promising, Kumar said.

A report by business analytics company CB Insights projected venture funding to Asia-based startups to fall 31 percent sequentially in the April-June quarter. Venture funding to Asian startups had already fallen 36 percent in the January-March quarter on a sequential basis.

“The world is suffering the consequences of excessive liquidity without a corresponding increase on the supply side,” Siddarth Pai, founding partner of 3one4 Capital, said. “India’s startup ecosystem too is suffering, with many startups closing experiments and reducing their (cash) burn to survive the ongoing winter. This has been a wake-up call for startups wherein sustainability has entered their collective lexicon.”

Last week, marquee accelerator Y Combinator wrote a letter to the founders of startups in its portfolio. The letter noted that the economic situation doesn’t look good and advised them to accept funding from investors even at the same terms as in previous rounds if the money is forthcoming.

Because of the nature of fundraising, something that involves negotiation at every step, the incubator's letter spoke volumes about the state of the current capital market. In a similar letter, Orios Venture Partners advised the founders of startups financed by it to go low on hiring.

Over the past four months, startups including edtech companies Unacademy and Vedantu and CARS24, an e-commerce platform for used cars, among others, have laid off employees in large numbers. Since February, over 5,000 employees were fired or forced to resign from the startup workforce.

Also Read: Layoffs, shutdowns, funding crunch: The Great Indian Startup Party is over          

“Many of the hiring gimmicks that captured headlines over the past two years have been replaced by sombre news of lay-offs and restructurings,” added Pai.

CARS24 has fired close to 600 employees. “This is business as usual. It is a part of performance-linked exits that happen every year. This is not owing to any cost cuts,” a company spokesperson said.

Kumar said that if last year the company fired close to 50 employees and this year it has let go of more than 600, it cannot be termed business as usual.

“If you are laying off 500-600 hundred people for performance-linked reasons, then you are doing something fundamentally wrong,” he said.

Demand for tech talent

"The nature of startups is such that they keep raising capital to run their businesses," said Kamal Karanth, co-founder of Xpheno, a specialist staffing firm. “Now with the capital being tightened, clearly raising (funds) is difficult. Last year, we saw FEALD getting the most funds, and these are capital-intensive businesses but they are undergoing some tightening.”

FELD is short for fintech, edtech, agritech, logistics, and D2C, or direct-to-consumer.

“Also, it's not companies if you see that are being corrected, but the business segments which had gone rogue. For instance, in edtech, with schools reopening, some of the courses have taken a hit,” Karanth added.

He also said techies had been largely spared from the layoffs.

“Generally the layoffs are happening in roles which are templatised or can be automated, for example, I heard some in customer service. There are some which are happening across the bucket, also marketing, tech because the business per se is not doing well,” said Rituparna Chakraborty, co-founder and executive vice president at TeamLease Services.

Wage inflation

Orios Venture Partners, in its letter, asked founders to consider negotiating salaries. Interestingly enough, this is another issue that startups are confronting: wage inflation.

Chakraborty said, “One of the reasons that they (startups) come up with unrealistic, crazy, much above market rate for certain profiles is because they know that there is a risk associated with the business that they're kicking off.”

“Job seekers will have to make a much more informed decision about these choices because startups are not guaranteeing anyone that they will be here for life,” she added.

According to her, jobs at startups are a trade-off, one cannot expect both unreasonable salary packages and life-long job security.

Kumar said, “The wages will go up because four or five companies are trying to attract the same talent and everybody wants the person to join immediately.”

The job market has been in favour of job seekers rather than recruiters because demand for tech talent has outpaced supply.

“Hiring quality candidates is still an issue for all startups as many such candidates choose entrepreneurship as opposed to joining a company,” Kumar said.

Effect of layoffs

Chakraborty said candidates now have to do much better research of companies they are interviewing with, and ask difficult, awkward, direct, and pointed questions of recruiters.

Not all is doom and gloom, though.

On the effect the layoffs will have on the startup ecosystem, Chakraborty said, “It seems as if there are a lot of layoffs, but if you keep in perspective the total number of jobs that startups contribute to the ecosystem, it's negligible.”

Only a handful of companies have resorted to layoffs, said Kumar. “We don't yet see any lack of demand at this point in time, hiring still is tough. But if more and more companies start doing such kinds of things, I'm sure there will be a larger impact,” he added.

In addition, the startup job market has still not run dry and employees fired from one company are getting absorbed by another, experts said.

“...the re-absorption rate of those who have been laid off is high, with such startups creating rosters of lay-offs and circulating it among other startups who are eager to onboard talent to sustain their growth,” said Pai.

Startups like business software maker Zoho and wearable watch brand Noise, among others, have been on a hiring spree.

Change in outlook

“The lack of tech talent is still a major issue that most founders grapple with regularly,” Pai said.

“For companies that pursued massive layoffs, new joiners will now seek comfort and clarity on the durability of the business and its reliance on external capital as well as whether the roles they’re being hired for are core to the business or a new offshoot. Hiring practices have changed considerably, with the full effects only emerging in the coming months,” he adds.

Many agree. “I expect startups to be much more frugal with their business plans, with their money, with the funds that they raise,” said Chakraborty.

Sentiment around the ecosystem has changed with funding rounds slowing and unicorns and other startups going into cash conserve mode. After their red-hot streak in 2021, startups are staring at winter, experts said.