If a startup’s Income statement was a rose bush, the top-line would be the rose and the bottom-line, the thorns. And as Alphonse Karr famously put it, one may grumble that roses have thorns or rejoice that thorns have roses.
Yes, let's admit it! While the 2nd-gen startups are still rosy about the top-line, the investors have started getting grumpy about the clingy-red-bottom-line.
To give you some perspective, let’s take you on a power-trip around the WeWork fallout: In November 2019, SoftBank wrote off its investment in WeWork (a co-working space startup, based out of the USA) by $4.7 billion that sent shockwaves across the entire startup ecosystem and threatened to change the game forever.
In the 1st week of January 2020, news surfaced that Oyo (often considered as SoftBank’s jewel in India), got a reality checklist from SoftBank, to get rid of contracts and businesses that are not EBITDA-profitable, by 31 March 2020. The VC also set the deadline for Oyo’s listing in the US bourses by FY 2023.
Before you start sympathizing with the young unicorn, it might be worthwhile to note that the startup recorded a 5.5X jump in its losses in FY’19 while the top-line magnified by 3.5X only.
Even the Founder cum CEO Ritesh Agarwal is not trying to refute as his Monday morning email to employees mentioned “…we will reorganise more teams across businesses and functions…”: which is a startup’s speak for: we’re eliminating jobs. Yes, you heard that right! On 15 January 2020, the startup confirmed that it will be bringing down its headcount by as much as 2400 employees or 20% of its workforce in India.
Zoom out: It’s not just SoftBank that has started to tighten its noose on its investees and worse, it’s not just Oyo that has resorted to high-scale layoffs as a means to cost-cutting. In the second half of 2019, other Indian unicorns also competed aggressively to layoff more and more employees.
Zoom out 2x: In a bid to magnify the top line, startups often indulge in what we call as ‘blitzscaling’ (growing at a very high pace) (E.g. Oyo penetrated into 800 cities across 80 countries within 6 years from inception), riding a triple-digit growth rate y-o-y, having a colossal impact on each function of the business. Issues start arising when not all functions of the business get a proportionate share of the management’s resources & investment.
Layoffs made by startups in the recent past is shown in the following infographic:
So we ask: As a common-man, we would tell you that layoffs are bad but as a businessman, we understand that sometimes it’s inevitable. However, the big question is: Are these startups doing it the right way?
Before you start framing your opinion, do read Sandra J. Sucher and Shalene Gupta’s Harvard Business Review titled ‘Layoffs That Don’t Break Your Company’ that gives a detailed analysis of layoff methodologies that landed well and those that did not.