It’s no news that the global tech ecosystem is experiencing a “winter period” and this is especially the case for crypto startups. Startups globally are struggling to keep their finances in check during this period and many of them have adopted staff layoffs as a strategy to keep their running costs low.
However, some companies have made this a norm. Take Robinhood for instance, the CEO and Co-founder, Vlad Tenev has admitted to the fact that they had to lay off more staff than usual because of the company’s hiring frenzy in 2021.
You wouldn’t blame any company trying to put its financial affairs in order by laying off staff that seem like an extra burden on the company’s finances. It is however quite strange when it becomes a trend, it makes you wonder how much restructuring a company really needs to be up and running again.
According to layoff tracker, layoffs.fyi , Over 65,000 employees have been laid off from about 483 startups in 2022 alone, that’s quite a number if you ask me.
But why are certain companies experiencing recurrent layoffs?
Why Have Layoffs Become a Trend for Startup Companies
Nolan Church, CEO and Co-founder of Continuum has noted a few reasons why the leadership of a company might need to do multiple rounds of layoffs within a short period of time. We will briefly discuss these below.
Worsening Economic Conditions
When there’s a forecast of a downward turn in a company’s finances, founders begin to look for a variety of ways to cut down on financial burden. Most times, the need for this arises from the general worsening economic situation in the country where that business is located or what tech sector the business operates in.
CEO of Coinbase, Brian Armstrong cited the need to manage Coinbase’s burn rate and increase efficiency. He said:
“We appear to be entering a recession after a 10+ year economic boom. A recession could lead to another crypto winter, and could last for an extended period,” Armstrong said, adding that past crypto winters have resulted in a significant decline in trading activity.
It is worthy to mention that earlier this year, Coinbase said it planned to add 2,000 jobs across product, engineering and design. “Our employee costs are too high to effectively manage this uncertain market.
In times like this, the company is left with no option than to lay off staff and continue to ease that burden depending on how bad the economic situation gets.
Ineffective Layoffs
Is there even such a thing as ineffective layoffs? Yes, there is.
Of course, when companies lay off their staff, they actually stop people from working but Nolan Church opines that sometimes, some companies try to avoid “cutting too deep” in their layoff process. They try to be too lenient with the process and in the end, it only results in a repeated layoff process.
Continuum recently raised a $12 million Series A round to scale a suite of fractional work tools, including a service that helps startups conduct more humane layoffs. The company connects a client in need of support when conducting layoffs to a seasoned executive for anything from day-of support in sharing the news to high-level advice. According to Nolan, he hasn’t seen any double rounds of layoffs among clients, which he attributes to the fact that his execs encourage founders “to cut once and cut deep.”
Minimal Funding Inflow
In the projection of an economic recession, funding from venture capitalists, angel investors and many other funding sources often drops because everyone is looking to manage their resources as much as possible. What this means for companies that are dependent on external funding sources is that their burn rate has to reduce significantly. Most companies would go after their employees first or would rather introduce salary slashes.
The African Perspective on Startup Layoffs
African startups are known to depend heavily on foreign investments which necessitated fears about how the African tech ecosystem would survive in the face of an imminent recession or funding winter period. It is safe to say that the continent has fared quite well and has managed to secure even more funds.
However, the sweeping wave of layoff trends has not left the continent out. Companies like the Egypt-born mobility startup SWVL laid off 32% of its over 1,330 employee workforce. The company stated that “the planned layoffs will impact teams responsible for functions that have been automated following investment in engineering, product and support functions.”
Kenyan logistics startup Sendy has laid off 10% of its 300-strong workforce, In a statement, CEO Mesh Alloys said Sendy made this decision in June in response to the “current realities impacting tech companies globally.” He further stated that it was in July that the company downsized its workforce, “which affected 10% of our headcount.”
Another African startup that has had to let go of some of its staff was Wave, francophone Africa’s first unicorn that laid off 15% of its staff in June while healthtech startup, Vezeeta has also laid off 50 employees in a bid to downsize.
Conclusion
While startup companies can’t be blamed for trying to make smart decisions and downsize, some experts believe that the continuous layoffs can all be traced to the threat of a global recession. This has led to a downturn in the tech ecosystem which in turn has dwindled the valuation of startups, increased prudence of tech venture capital (VC) investors and shifted funding focus from growth stage startups to early stage startups.
