Most investors in startups have now started putting pressure on the promoters to start thinking of profitability in their ventures instead of focusing only on aggressive business growth and lateral expansion.
The earlier impression was this was limited to SoftBank immediately after the WeWork fiasco. However, reports indicate other investors too, are thinking on similar lines. The net result of this is that there is widespread downsizing happening at most startups, including the unicorns in the Indian context, reports Economic Times.
The underlying reason for this is that employee costs have repeatedly shown up to be the largest component of expenses by internet and tech companies. Startups typically look for highly talented personnel to man key functional positions with the right kind of background and experience.
On many occasions, startups have to pay bonuses and offer ESOPS to retain the talent they already have and protect from poaching by competition. All these add up to employee costs and can seriously impact the profitability of the venture.
Some of the companies from which reports of sacking of employees have come include OYO, Ola, Quikr, Paytm, Zomato and Rivigo.
In terms of the numbers, OYO is likely to reduce its staff strength by 1,200 and a number of employees from its operations in China have already been let go.
Ride-share cab aggregator Ola is reported to have brought about an 8% reduction in the head count and has also cut down on the benefits extended to their employees. Paytm may also look at almost similar levels of staff reduction.
At Zomato, there was a 10% staff reduction. This amounted to around 600 employees being asked to leave.
Classified ad company Quikr, has cut down its employee-strength by 1,000. Flipkart had already revamped its fashion verticals Myntra and Jabong by merging their operations with the parent firm and letting go of a large number of employees in the process.
Sales, marketing and customer support are some of the functions which witness maximum pink slips.
When these are happening with such established startups with years in the business, the ones in the early stages and trying to find their feet cannot avoid being sucked into the same game. Reports are now emerging of early stage startups re-working the salary and compensation packages with their employees. They may scale down the packages they offer to those being hired now.
There is no universal thumb rule on what part of the expense in a business should constitute personnel expenses. It can vary with industry and due to the nature of the business being carried on. A company like Swiggy reports 40% of the expenses it reports are on its human resources while a gaming platform like Dream 11 claims it is just 9%. Experts feel it can be roughly pegged at around 15%. Startups do have a higher proportion before their turnover increases and a rationalization exercise is done later after the business achieves a level of consolidation.
The bottom line here is to have the best HR policies right from the beginning, have a balanced approach where business growth and profitability can converge and offer the investors a sense of comfort that their funds are going just to fill the pockets of the employees in the startups.