Founders Or VCs: Who’s To Blame For The Indian Startup Layoffs Spree?

“We are great. You are great. Russia-Ukraine war, so we have to let go of some people,” a partner at a Mumbai-based growth-stage VC sums up a typical founder’s attitude and communication style for layoffs at Indian startups.

Since the beginning of 2022, we have seen nearly 23K startup employees being laid off and several more displaced after being moved into other roles and performance improvement programmes. After the downturn during peak Covid in 2020-21, this is the second slowdown to cut deep into the startup ecosystem. But unlike Covid, there’s something different about the 2022-23 slowdown.

In stark contrast, the mass layoffs and downsizing in the past 14 months has been accompanied by statements about the focus on extending runways and creating sustainable businesses. Somehow startups seem to have remembered critical details such as unit economics and customer acquisition costs.

But during Covid, the narrative was completely different. We saw startups band together to create action groups; investors teamed up to raise emergency funds as a whole new wave of essentials-focussed businesses rose up. Collaboration and collective action have been set aside; what we are seeing in the past year has instead been rough and ugly.

• So what exactly changed between 2020 and 2022, and how did layoffs become the only way forward for startups?
• Are VCs pushing startups towards letting go of employees as it’s the easiest way to cut costs?
• What happened to the founder pay cuts and zero salary approach seen during Covid?
• And along the way have startup founders fumbled on some of their responsibility when it comes to overhiring and FOMO-led experiments?

Startup founders and investors believe there are some gaps in the communication around downsizing, and also pointed out how some companies are not taking complete responsibility at the very top for their plans that didn’t work.

Are Layoffs The Only Option?

Perhaps the biggest difference between Covid and now is that founders never had the fear of funds running out during 2020. There were no missives from VCs calling for a tightening of the belt. For instance, even though Sequoia called Covid a ‘Black Swan’, that was definitely more optimistic than its ‘Crucible Moment’ memo in 2022.

Startup founders had become used to having a lot of cash in the bank and even when Covid hit, there was no panic about the funding tap drying out. Indeed, many used the market transitions in Covid to venture into new lines of businesses that gained them more funding the following year. Only to retreat now as fundraising continues to remain complicated.

Meesho, which jumped on to bandwagons such as live commerce, grocery shopping and more, had to cut its workforce due to these short-lived experiments.

Others point out that one of the biggest problems with layoffs is that it is only addressing the symptom, but not the actual problem. And it also creates a culture of panic and fear among those still in the company.

For instance, ixigo cofounder and CEO Aloke Bajpai believes that there is a way to be transparent about a bear market. And the best way to reflect this in the culture is showing that the cuts begin at the very top.

“When people are generous enough to work for a low salary to get us out of the woods, it builds trust and motivates them more. You can double down on new ideas because of that higher motivation. It is a function of circumstances,” he told Inc42 earlier this month in a separate interaction.

Bajpai added that the company did not resort to layoffs or downsizing, but instead focussed on hiring in the right way to stay lean even in an up market.

The VC Stance On Layoffs

The fear of running out of funds only cropped up last year when investors cautioned about a slowdown in funding. But does this mean VCs piled on the pressure to kickstart layoffs? That’s a sentiment many did not agree with.

“If investors did not tell founders about what to expect, the situation might have been a lot worse. At least, this way, founders have been able to plan for the slowdown and prepare,” said a founding partner of a Bengaluru-based SaaS investor.

Replying to a question on Twitter posed by Stellaris VP’s Ritesh Banglani about layoffs vs pay cuts, Bajpai doubled down on his belief, “Don’t agree. How transparently it is communicated, how much belief the team has on the vision and how deep the cuts for founders/mgmt is has huge bearing. Founders she [sic] lead from the front and go to near-0 salary. War time @ startups is no different than a fight for the motherland.”

One might not agree with the jingoistic analogy, but there’s some truth to this, given that many companies took the non-layoff route during Covid to arrest costs.

Covid posed these very questions of survival and cash in the bank for many startups, but VCs banded together to offer enough stimuli to keep businesses running. Unfortunately, this is not a ‘Black Swan’ event and expecting similar collective action might be asking for too much, said the founding partner quoted above.

But other investors told us it’s not all down to VCs asking startups to get leaner. There are other factors at play, including the shift away from remote operations and the responsibility on the founders who might have been a bit too bullish on the vertical expansion front.

With remote working becoming less prevalent now, businesses are also realising that there was some bloat in their work-from-home workforce. Startups are realising that the productivity gap of remote working meant they hired more even when they didn’t want to.

“Now that bloat is being cleaned up. We can’t call these layoffs, because there’s an element of performance evaluation here. But of course, we must also talk about how not many founders had the foresight to think beyond the Covid years,” the Mumbai-based investor quoted earlier in the story added.

Are Founders Taking Responsibility? 

That brings us to whether founders are doing enough to take responsibility for perhaps becoming too reliant on funding to set their plans in motion. And when these VC-fuelled bets do not work, there’s not much ownership of these missteps.

Incidents such as the FTX collapse globally, and fraud-hit GoMechanic and liquidation-bound Zilingo in the Indian ecosystem also raise questions over how much of layoffs are linked to founders stretching the truth or mismanaging funds.

But layoffs are often blamed on market conditions and not on bad business decisions.

In the Indian context, the likes of Info Edge are seen as examples of large tech companies being transparent in their communications. “It’s important that the founder thinks this through and understands the importance of true and fair accounting, speaking the truth, giving bad news early, not disguising unit economics. Contribution margin 1, contribution margin 2, contribution margin 3 is all rubbish,” Info Edge founder and chairman said earlier this week.

Incidentally, Info Edge admitted to making a mistake with its INR 520 Cr investment in Rahul Yadav’s 4B Networks, which has now been written off. Among the reasons, the company stated “the current state of affairs and other relevant factors including excessive cash burn, prevailing liquidity issues and significant uncertainty towards funding options.”

Instead of transparency, when it comes to announcements of mass layoffs that impact lives, founders often adopt a cold approach.

In his letter to employees, BYJU’S cofounder Byju Raveendran blamed the macroeconomic conditions as well as a push towards profitability for the layoffs of 2,500 employees. Many have since called out the company for signing large multiyear sponsorship deals while also letting go of employees.

“These days it’s easy to rely on macroeconomic factors to cover for mistakes or perhaps really bold bets that were not well thought through. VCs are slowly talking about their bad bets. Founders need to also own up to over-hiring, crazy salaries, FOMO-based decision making,” the Mumbai-based investor added.