Why layoffs were unavoidable in funded startups during COVID-19?

By John Sundarraj on Monday, June 1 2020, 20:56PM

Hope you know that big investor funded IT/software startups like Swiggy, Zomato, Uber, Oyo, MakeMyTrip has started an initial round of layoffs due to Coronavirus (COVID-19) pandemic. Many ask why these startups were unable to overcome just 2 months of lockdown. Even some try to compare startup layoffs with other non-IT sector layoffs, which is actually wrong.

First, we need to understand the way how startups work, only then we can understand why the layoffs are unavoidable during this COVID-19 pandemic. Let me break down the B2B/B2C startups into two major models.

  1. Investor Funded: If a company receive funding from external investors, then it is investor funded startup.
  2. Bootstrapped: If a company only operates with founders funding and revenue, then it is a bootstrapped startup.

How investor funded startup works?

In India, both the B2B and B2C startups depend only on investor funding from the US, namely Silicon Valley & Wall Street. That's why most of the Indian originated B2B startups have headquarters in the US, i.e. incorporating in the US. Over the past 5-6 years, investors from Singapore, China, and Hong Kong also funded billions of dollars to many large startups in India.

Usually, the investor funded startups extravagantly spend money to promote their brand and grab the fat portion of the market. For example, if the CMRR (Committed Monthly Recurring Revenue) at the rate of $1 million, they spend at a rate of $10 million every month. Their ultimate aim is to take their brand to customers/consumers in a very short period, so they follow a hypergrowth strategy which is non-organic. They allocate a huge budget for all types of sales and marketing to quickly gain more customers. They put lots of cheap offers to customers/consumers to showcase that they can deliver something with good quality for very less price. They also offer fatty salaries, costly machines, gadgets, food, entertainment, luxury office, etc., for their employees. They create hype to retain their customers and employees.

These are the reasons why they could not generate profit even after a decade and still seek for external investor funding. At the same time, they try to file for IPO (Initial Public Offering) to become a public company to gain public investment. Hence investor funded startups totally depend on external investor funding to operate.

How bootstrapped startup works?

In India, we have Zoho, a total bootstrapped B2B startup. Zoho is an Indian origin company having headquarters in the US. We see very few bootstrapped startups in India, we can count it with fingers.

Usually, a bootstrapped startup always try to operate within profit margins. They don't spend extravagantly like investor funded startups as they don't follow hypergrowth strategy, hence organic. Initially, they cannot offer fatty salaries, costly machines, gadgets, free food, entertainment, luxury office, etc., for their employees, but later on, they can offer these. They cannot afford to give cheap offers to customers/consumers but can provide good quality with better price.

They don't create hype to retain before customers and employees. They maintain control over the CMRR and monthly spending. Normally, bootstrapped startups don't file for IPO as it is controlled only by the founders. Hence bootstrapped startups totally depend on founders fund and generated revenue.

Why funded startups first do layoff during COVID-19 while bootstrapped startups don't do it?

This COVID-19 pandemic has triggered a deadlock over every business around the globe. First, B2C startups were badly affected, then the B2B startups. It doesn't matter whether a startup is an investor funded or bootstrapped because the COVID-19 pandemic affected both startup models. But, it is very important to understand how these startups are handling the crisis.

Investor funded startups triggered the initial round of layoffs as they heavily rely upon external investor funding every year to operate their business. The COVID-19 pandemic may totally freeze the external investor funding in the near future. Most of the investor funded startups generate very less revenue compared to the received external funding, so they cannot rely on their revenue at all. That's why they started to initiate layoffs immediately as a precaution to save money, so they can keep the business alive for a year without external investor funding.

On the other hand, bootstrapped startups don't do the layoffs very soon because they purely depend on revenue and operate within profit margins. There could be pay cuts for their employees, but it's very rare to see a layoff. A bootstrapped startup can easily survive this COVID-19 pandemic when compared to investor funded startups, because of the strong foundation and organic growth.

Hope it helps. Thank you.

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