What Investors Need To Know About Tech Layoffs Many startups have fired thousands of employees without giving them any severance or benefits

As per Paul Graham, a startup is a company designed to grow fast. Although technology is not a necessary condition for startups, most startups are tech companies. The startup playbook is simple. Build a product, improve it, and scale it up by marketing to a large audience. Facebook, a social media platform, Shopify, a marketplace solution, and Stripe, an online payments solution, are a few companies that have followed this playbook. You can contrast this approach with service-based Indian IT companies such as TCS, Infosys, Wipro, and HCL which help big corporation implement their tech solutions. These companies never stop implementing customised solutions for their customers. Hence, they always require an enormous workforce to work on new initiatives.

Sometimes, we incorrectly assume that these startups or new-age tech companies have weak business models when we see them firing thousands of people. There is a grain of truth in it, but the major culprit is the company life cycle. These businesses require a lot of engineering talent to develop the product and expand it. They need sales and partnership teams to market these products to the right audience and grow the user base. The sales team keeps growing as they continue to aggressively expand to newer territories. However, these companies don't have to develop new products all the time. The goal shifts to ensuring that products function with millions of users, and they continue to iterate to increase user engagement. Once a company becomes massive like Facebook or Instagram or Youtube, the growth stalls. The number of users can't be more than the population.

The last two-three years were unreal times for the global economy. Historic low-interest rates coupled with enormous quantitative easing (central banks printing money) made venture capital surplus. Investors were happy investing huge sums of money in late-stage startups without thinking about near-term profitability. Growth at all costs was the mantra. The script was simple. Hire people, spend on marketing, increase revenue, and raise capital at a higher valuation. The profits will come with time. This cheap capital also helped companies to invest in futuristic technologies like blockchain and AI without thinking about near-term returns.

But the Russian invasion of Ukraine and worldwide inflation forced the hand of central banks. They started increasing the interest rates, and capital became expensive. The era of cheap capital came to an abrupt end. The bond rates increased leading to investors demanding higher returns on startup investors. As the venture capital flow dried, VCs started asking founders to focus on profits. It meant cutting down losses. Mass layoffs are the easiest way to reduce burn (losses). Overnight, the objective moved from growth at all costs to sustainable growth. We can call it right-sizing rather than downsizing.

This rightsizing doesn't mean that layoffs in the tech industry will be widespread. Early-stage startups will continue to hire engineers because they need talented people to build products. They had not hired thousands of salespeople whom they could fire.

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However, one aspect that stands out in the recent layoffs is the founders' lack of compassion. If you follow Indian startup news, you would have surely noticed how reckless founders are about the welfare of their employees. This lack of sympathy is palpable when you speak with Indians working in startups.

It's human nature to expect fraud from strangers all the time. This makes us pessimistic. We don't care about our fellow human beings since we always assume the worst. Large Indian start-ups exhibit this lack of empathy or lack of concern for others, especially strangers. Founders and management can't personally know every employee in organizations with thousands of employees. In simple words, workers are mere statistics. Consequently, we are seeing start-ups firing thousands of workers in a highly impersonal manner.

It's common for startups to hire a lot of people when times are good and then fire them when the situation becomes difficult. Companies overhire when business is booming and venture funding is easy because they want to quickly expand. They then fire these same people during a recession to save money.

Startup employees work in a high-risk and high-reward atmosphere. Employees know their jobs are not secure. High salaries compensate for this risk. And mass layoffs are not just an Indian phenomenon. Global startups often do it. However, their approach is different and more humane.

Online payment giant Stripe fired 14 per cent of the workforce a few weeks ago. Patrick Collins, the company's CEO, explained the situation in an email. The email demonstrates he cares about its employees, although he cites the typical justifications for this decision (a poor macroeconomic environment, sluggish growth, etc.).

The fired employees receive accelerated ESOP vesting, annual bonuses, leave encashment, healthcare insurance, and severance pay. The company is helping people on work visas to find new jobs so that they can continue work in the US.

At the same time, the layoffs in the Indian unicorns are cruel and impersonal. Many startups have fired thousands of employees without giving them any severance or benefits. We can say that Indian founders get away with this because of the labour laws, but the issue goes beyond the law. It has to do with how we value and trust strangers in our society.