As funding crunch intensifies, start-ups resort to second round of layoffs

An increasing number of start-ups like Byju’s, Unacademy, Udaan have announced a second round of layoffs in 2022 amid concerns of capital crunch extending for much longer than the earlier estimates. 

Speaking to businessline, Pearl Agarwal, Founder and Managing Director at Eximius Ventures, said, “While inflation has started to cool down globally, it has still remained above expectations for the last few months and has forced the Fed to increase its expected rate to 3.75-4.0 per cent. This will further reduce the supply of capital available in the market and could potentially make it harder for start-ups to raise larger rounds. Hence, it is now important that start-ups focus on a path to profitability and reduce their burn rate.”

Adding to this, Pratip Majumdar, Partner at Inflexor Ventures, noted that as the markets corrected earlier in the year, most companies started adjusting their outlooks for the coming quarters and took actions such as lay-offs and other cost-cutting measures to conserve cash and extend the runway. 

“Now it appears that the inflationary tendencies in the western markets are not subsiding, and this is causing central banks to adopt quantitative tightening. The ripple effects of these measures are gloomy markets, and the second round of lay-offs may be consequence of that. We expect a few more rounds of lay-offs over the next few weeks, but we expect the industry to bounce back positively,” he added. 

More stable companies are now approaching lay-offs as a precautionary measure in line with their adjusted short- and long-term futures. Younger start-ups, on the other hand, are viewing lay-offs as more of a survival mechanism aimed at conserving cash and extending runway. While the fundraising for growth-stage start-ups is expected to continue as venture capital funds still have a large deployable capital pool, the impact of the capital crunch is visible in various forms. 

Exercising caution

“Caution is back in boardrooms and we are seeing extended funding rounds. Hiring is under scrutiny and capex-heavy plans are getting a reality check.  Boards are still continuing to support growth, but with an eye on cash burn and sustainability, various risk mitigation plans are taking shape,” said Deepesh Agarwal, Co-Founder & Partner at Silverneedle Ventures.

As valuations corrected, start-ups are raising capital through convertible note instead of raising at a lower valuation. “The market environment has led to pretty meaningful correction in company valuations. Whenever you are doing a convertible, one statement you are obviously making is that it is very hard to value the company right now,” Sandeep Patil, Partner, Head of Asia at fintech-focused VC firm QED Investors, added.

Some pockets in the start-up ecosystem are seeing a deeper impact. B2S SaaS (software-as-a-service), automation, and technology-enablers are still seeing good traction from VCs, but the ones around discretionary spending such as consumer tech, and education, etc are getting a reality check. Marketing and ad revenue are also under pressure, impacting tech companies and start-ups focused on such revenue, Agarwal noted.