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Photo: iStock
Photo: iStock

Lessons from layoffs at Zomato, TinyOwl and Housing.com

Are they the first signs of a bursting bubble or that the start-up ecosystem is robust and can make mid-course corrections?

The past few weeks saw a series of layoffs in Indian online start-ups. Housing.com, still recovering from bad press and the exit of its chief executive, is set to lay off 200 people, on top of the 600 it fired three months ago. Zomato, which has operations in 22 countries and is one of the few Indian unicorns (start-ups with valuations exceeding $1 billion), is firing 10% of its employees. TinyOwl, a food delivery start-up, saw some ugly scenes at its Pune office after it gave pink slips to over 100 employees, two months after it fired 200.

Layoffs suggest trouble and some see it as the first signs of a bursting bubble.

Are they?

Sceptics have long been worried about the seemingly incessant flow of money into start-ups, and the start-ups’ ability to give returns, any return.

First, the valuations at which start-ups raise money seem unjustifiable. E-commerce start-ups are overvalued, Sharad Sharma, co-founder of iSpirt, a lobby group for software product start-ups, wrote in The Economic Times back in June. “This is no longer a contentious claim. The only question is ‘how will the bubble unwind?’"

Consider: Flipkart’s $16 billion valuation places it ahead of listed giants such as Indian Oil Corp. Ltd, Tata Motors Ltd and Mahindra and Mahindra Ltd. Snapdeal’s $5 billion valuation exceeds that of Yes Bank Ltd, Titan Co. Ltd, Vedanta Ltd or Tata Steel Ltd. One can argue over the justification for the valuations of these specific companies. But in the world of investment, these numbers also influence how other start-ups are valued. Because the system as a whole—entrepreneurs, investors, analysts and media—tends to anchor its expectations based on these numbers. Next to $16 billion, a couple of millions might not seem big.

Second, there are questions on whether start-ups will hit the wall because they don’t have the management bandwidth to handle growth. Forget experiencing the dot-com boom of the late 1990s, some start-up founders haven’t even seen the financial crisis of 2008. (Or as one venture capitalist, or VC, put it, “Never even used Internet Explorer"). The TinyOwl co-founder who was held hostage by the employees is just 24 years old.

Age is no indicator of ability to manage well—sometimes experienced people goof up, while youngsters do a great job. But anecdotal evidence suggests that a lack of experience could be creating problems. Housing.com might be the flashiest of the lot. But that’s not the only one. (Some of the bigger ones are addressing that by hiring from outside—much like the way Google hired Eric Schmidt, a Sun Microsystems veteran, Facebook hired Sheryl Sandberg, a Google veteran, and Uber hired Joe Sullivan, a Facebook veteran.)

The fundamental question is whether a young team can deliver. When more and more money is thrown at a problem like customer acquisition, metrics cease to give useful information. It becomes hard to see whether the growth is happening because customers see a long-term value or if it’s happening just because of short-term venture capital-funded incentives such as discounts. In this context, these words from Zomato founder and CEO Deepinder Goyal’s memo to employees a few days after Zomato fired 10% of its workforce gave a shock of recognition to more than a few in the start-up world: “We are far behind the numbers that we promised our investors."

However, this broader context doesn’t say much about the question on hand because it has been true for a couple of years now. A number of start-ups have survived these questions on valuations, business plans and their ability to execute it several times over to raise funds.

The question that remains though is whether the layoffs in the last few weeks are an indicator that the end is near. Or does it merely show that the start-up ecosystem is robust and can make mid-course corrections by shedding fat, making tweaks and pivots to keep the ship going.

First, a reading of the memo by Goyal, or the statements by TinyOwl founders, or the changes at Housing.com show that there is acknowledgement of the issues by the executives and a willingness to take action. Some of it could have come because the VCs are twisting their arms, but that doesn’t take the benefits away. TinyOwl is shutting shop in four cities; Zomato pulled the plug on Zomato Cashless—for good reasons, primarily high customer acquisition costs.

Second, it’s fair to expect that these layoffs—which are grabbing headlines and dominating cafeteria conversations at the software hubs—will nudge other dot-coms (nudge other VCs to prod the CEOs of the portfolio companies) to think hard about running a tight ship. In some cases, it just might not be possible to do that and some of the firms might die for want of funds, and some might have to be sold off for a pittance. Bad for the individual start-ups, but not so bad for a system that’s willing to learn. That’s how feedback loops work.

Yet, it’s hard to predict which way things will go. Predictions are tough because a system reacts to a prediction by adjusting itself. For example, imagine a sports expert. He looks at the training schedule of a sports team, observes how they train and predicts that they will fail. However, a good sports team will study the prediction and make necessary adjustments, and might end up winning. Predictions work against themselves in a responsive, dynamic system.

It’s true of a sports team, it’s true of much larger systems. In 1848, The Communist Manifesto gave a long list of reasons why the capitalist system will collapse. It pointed to the weaknesses in the system and why it’s not sustainable. But the capitalist system seems to be doing better than it was during the time of Karl Marx and Friedrich Engels. How did that happen? “In one way or another, in the advanced capitalist countries, quite a few of these things...have been done," John Kenneth Galbraith wrote in The Age of Uncertainty, a book based on a TV series on the history of economic ideas. “And these reforms have helped take the raw edge off capitalism. Thus they have had the effect of postponing that ‘forcible overthrow of all existing social conditions’ for which Marx called. In such fashion did Marx work against Marx."

In a similar fashion, those who make predictions about start-ups tend to work against themselves—if the system is responsive.

Nikesh Arora of Softbank, one of the better known and more articulate VCs, recently responded to one of his Twitter followers, who questioned him on Housing.com’s over-the-top ad spending: “They shouldn’t have :)..."

Softbank is the biggest investor in Housing.com. He might well have said, “We shouldn’t have."

“Shouldn’t have" is a passive, helpless and tragic thing to say after the world has collapsed.

“Shouldn’t have" is a good thing to say when it hasn’t yet and when there is still time to correct.

To read more, go to foundingfuel.com

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