Layoffs in the Indian startup ecosystem: Is it the only way to go in times of slow economic growth?

Layoffs in the Indian startup ecosystem

Layoffs in the Indian startup ecosystem

In 2019-2020, the Indian start-ups were found making the following headlines:

  • Ola, the cab aggregator, laid off 500 employees
  • Paytm, mobile payments and financial services company released 500 junior and mid-level employees from service
  • Oyo, the budget lodging website axed 2,400 staffers
  • ShopClues, online marketplace about 250

These are just a few companies; there are more. Firing employees was the new-norm in the start-up ecosystem last year.

However, the scenario in India wasn’t always like this. Back in 2007-2008, when the global recession hit the world, the start-up revolution originated making it the golden era of India’s entrepreneurial journey. Even the employees of the country got the highest pay rise in the Asian region (an average increase of 6.3 per cent), as per a report by Hewitt Associates on Asia Pacific Salary Increase in 2009-10.

But now, the situation is precarious with 90% of the start-ups failing within the first five years as reported by IBM Institute for Business Value and Oxford Economics, due to weak revenue models, premature expansion, and the funding became selective. Furthermore, the country in the second quarter of FY20 witnessed a slowdown in the GDP growth to 4.5 per cent, the lowest in six years and a quarter, according to official data. This forced slow-growing and cash-strapped companies to serve severance notices to existing employees.

According to Mr Hari TN, BigBasket.com, “Businesses built on a ‘go big or go home’ kind of philosophy tend to go through wild swings in fortunes and sentiment. These businesses aim for rapid growth through discounts and excessive cash burn. The customers they acquire through such a strategy are not sticky and will desert them as soon as discounts and cashback are cut back. One failed IPO (like WeWork) is all it takes to reverse the sentiment and investors can suddenly flip and demand profitability in place of growth. In such a scenario, loss of customers and revenue is inevitable. Layoffs follow.”

Rationally companies that consider downsizing are usually trying to cut costs to either make the business more profitable or to sustain its existence. The reasons typically vary from a decrease in sales, loss of a credit line, over-staffing, automation, scalability, and fierce competition. From a business perspective, though, the justification is legitimate, yet nothing ever validates the loss of a job for an employee.

Nevertheless, the economy has matured over the years, and layoffs are no more considered shameful or uncommon. Yet, the question remains if this act is the only way to go in times of slow economic growth?

According to Amit Mehra, Founding Principal, Unicorn India Ventures, “Layoffs are a reality of any economic system, which is amplified for early-stage companies as they work with limited resources and untested business models. However, during economic downturns, the viability and strength of business models are tested, and only strong ones survive. Failure is the price of Innovation.”

Thus, it is integral for start-ups to build their framework on a sustainable business model factoring in variables like salaries, discounts, technological advancement, competitors, in the business plan and certainly before it goes on a hiring spree. The companies should also follow an agile methodology while planning and executing projects and keep testing its fitment in today’s ever-changing business environment.

Similarly, the employees too should analyse the pros-cons and the risks that come along with the hefty package.

Just like a start-up environment offers trials, the slowdown is a hiccup that India Inc is facing right now. As per Deepshikha Kumar, Founder, SpeakIn“The Indian economy is tough for all businesses at the moment. For some, the safety net will be to downsize while for others, survival will depend upon securing customers at all costs. But layoffs are never a preferred route for any start-up. They turn to be expensive, after all, companies have to pay severance packages, and it also hits the morale of the workforce.” During a downturn, layoffs may seem like the most likely option for many companies, but it is and will never be the first choice for them.

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