The curious case of startups and employment

The enormous Indian populace is postulated to replace China as the most populated nation by 2022, amplifying a core problem — unemployment. The World Employment Social Outlook report by the International Labour Organization says the number of job- seeking individuals in India will reach 17.6 million people by 2017.

Between April and August 2016, the overall rate of unemployment rose from 7.97 percent to 9.84 percent, as revealed by the monthly unemployment index maintained by the BSE in collaboration with the Centre for Monitoring Indian Economy (CMIE).

Startups play a core role in the current employment scenario. The startup growth engine spiralled ahead with maximum speed post 2011 and came to a screeching halt in mid- 2015. Venture capitalists backed innumerable startups, leading to massive hiring avenues. In 2015, the same venture capitalists restrained investments and with shortage of funds, employees faced the brunt of ‘downsizing’.

The impact is two-pronged. New employee hiring mellows down and existing employees are asked to leave, often without any conclusive reason. We have experienced a spate of employee retrenchment across the startup industry in the last 12 months; a few examples being Foodpanda, Zomato, CommonFloor, SnapDeal, Flipkart, and Ola.

Latest is the AskMe shutdown, spelling massive disaster for 4,000 employees. With salaries unpaid for two months, the employees are seeking alternative measures to find justice. A content writer with AskMe, Ankit Kesharvani, tells the Economic Times: “I have borrowed money from friends and not paid my rent. I am barely managing to survive”. These aren’t isolated cases; 4,000 AskMe families are under pressure. People like Ankit are depending on government intervention through the National Company Law Tribunal for a reprieve.

Per-enterprise average hiring

On an average, the startup ecosystem employed 125 people per enterprise in 2014 which came down to 21 people per enterprise in 2015, according to MeritTrac Services. The markdown is huge. Employable people are certainly demotivated to join the startup brigade, despite our Start Up India, Stand Up India campaign gaining prominence. The penalty of startup funding drying up is borne by the employees, making their present and future insecure.

Startups are a vulnerable ecosystem. 90 percent of startups either fail within the first two years of existence or realise the lack of a profitable business model. Both the situations increase the unemployment ratio. Youngsters and mid-level executives seeking a stable career suffer gravely.

Startups which survive the two-year period often successfully raise higher funding; however, does that guarantee employment security? It doesn’t, as is evident from some of the established startups retrenching recently. There is heightened pressure to scale and generate ROI, and one of the basic steps to save operational costs is to condense teams and departments.

Reasons for startup layoffs

There are two reasons for layoffs.

In the beginning, there is aggressive hiring. Manpower is needed to achieve growth targets and expand geographically. Investors begin to pressurise the founders for ROI, with the intent to achieve a better business valuation. When the expected company growth doesn’t happen, founders seemingly panic and the most impactful route to startup survival that time is mass firing.

Let me recount a conversation I overheard couple of days ago. It went something like this:

Investor: “Where are the bills”?

Founder: “Emailed you, sir. I haven’t added the entertainment costs, just the food bills”.

Investor: “...and the food bills total Rs 3,000 for a month”.

Founder: “Yes,” in a faint and almost embarrassed voice.

Investor: “Why are the food bills so expensive?”

The investor asks a little louder, disregarding the presence of other nine people in the same room and the reddening face of the founder. A team of three people spending Rs 3,000 a month on food in an expensive city like New Delhi certainly seemed like wastage to the investor!

Ever since then, they are rarely seen in the office. On a side note, is this how the founder-investor ratio works? It’s a micro example of circumstances escalating on a macro level.

The first reason for layoff is startup survival with possibly limited funds.

If the startup is acquired or merged with another entity, a complete restructuring happens. Evidently, there will be duplication of processes and job profiles, and they need to be straightened out. For example, CommonFloor had to fire 150 staff members after its merger with Quikr.

The second reason for layoff is removal of duplicated processes and profiles.

Startups are in a vulnerable state. It creates employment and unemployment, both. It’s tragic.

The need for employment reforms

Consistent and continued startup layoffs are a source of immense psychological pressure to the employees. They are stressed with downsizing and toxic work culture, leading to anxiety, lack of confidence, depression, low motivation, and other physical health hazards.

Here is a graphic representation of what employees are experiencing.

The unprecedented levels of anxiety are compounded further due to the lack of employment openings. The hiring phase is suddenly skewed, to a level that high-level executives are agreeing to even 50 percent salary cuts. While some are opting for freelancing or consulting options, others are stranded.

The future seems bleak.

You can read accounts of people talking about their experience of working in a startup and layoff here and here.

There is a drastic need for employment reforms. Personally, startup employees seem no better than glorified labour, hired and fired at will.

There is a big loophole in the Start Up India, Stand Up India initiative — registered startups are exempted from labour inspection for the first three years, according to the Employees Provident Fund Organisation (EPFO) circular dated January 21, 2016. According to the circular, startups can self-certify themselves in compliance with various labour laws, without any intervention from the government. Government inspection will happen only under specific circumstances.

The EPFO circular identifies startups as:

“...entities incorporated or registered in India not prior to five years, with annual turnover not exceeding Rs 25 crore in any preceding financial year working towards innovation, development, deployment or commercialisation of new products, processes, or services driven by technology or intellectual property.”

Given the current status of employment in the country, the self-certification law needs immediate amendment. It shouldn’t be easy for startups to fire employees without any valid reason. As business entities, they have a responsibility towards their manpower, and job security ranks on the top.

(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)