Why are Well Funded Startups Firing Thousands of Employees Lately?

Nearly 2,000 full-time and contractual employees were fired from their jobs in the latest round of layoffs.

New Delhi: Nearly 2,000 full-time and contractual employees were fired from their jobs in the latest round of layoffs announced by startups like Unacademy, Meesho, Furlenco, Lido Learning, and Trell. But why the downsizing? Are these largely funded startups trying to save money? Is there any crisis brewing in the startup space?

With questions being raised behind the downsizing reasons, there are several factors at play here. The primary factor being put forth is constant pressure from investors on the profitability front and exit paths in many of the older startups. After the experiments for scaling up and growth in the past two years, the focus of startups is now on sustainability and extracting profits and returns. As per reports, investors have also started pressuring high-growth companies to go back to basics — chase profits and reduce their cash burn (in the case of loss-making startups).

Tough Transition Post Covid-19

Speaking to the Economic Times, Aditya Narayan Mishra, chief executive of Ciel HR Services, a staffing agency said, “These layoffs are happening across businesses and segments…. It is due to aggressive hiring by some startups and change of plans subsequently. Some companies are finding it hard to transition post-Covid-19.” He further added that most ed-tech startups are building products exclusively online and have found it difficult to deploy talent as the world is now opening up.

Mishra said, “While really good companies will still get money, it will be five times tougher to raise at a certain price,” said Ashwin Damera, cofounder and chief executive of ed-tech firm Eruditus, which raised $650 million in August last year at $3.2 billion valuations. “If somebody raised at a $1 billion valuation last year, they have to work harder now. This is also why investors are telling their startups that ‘unless you are okay with a down round, start conserving cash’…”

Duplicity of Talent

Another reason for the layoffs is the duplicity of talent in the companies due to a large number of acquisition deals last year. According to ET, 326 such deals took place in 2021-22. As the world is opening up, these companies are now being forced to remove the people with the same skill sets, for cost-cutting.

Unacademy alone acquired 10 companies between 2020 and 2021. The lay-offs did not happen last year because most companies usually add a clause in the contract, ensuring the retention of their employees for a minimum of 12 months after acquisition.

This period is now over for many companies like Unacademy and thus the current layoffs.