25/03/2016 8:24 AM IST | Updated 15/07/2016 8:26 AM IST

Hire, Then Fire: Why Mass Layoffs Are So Common In Start-Ups

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A businessman getting booted from his job. The shoe and man are on a separate labeled layer from the background.

There's been a lot of gossip and rumours swirling around the recent firing of hundreds of employees of promising start-ups such as Food Panda, and CommonFloor. Hundreds and thousands of jobs have been created and then eliminated in a matter of months. Why? Is this simply part and parcel of the evolution of the start-up economy? Or is there more than meets the eye?

A typical 'for-profit' start-up experiences a growth cycle that goes through five stages:

1. Joy of Ideation

2. Height of Excitement

3. Slope of Uncertainty

4. Climb of Sanity; and finally

5. Stability of Growth.

Each stage brings a set of highs and lows in the form of opportunities and risks. The first two years of a start-up are definitive--as many as 90% shut down or discover they don't have a viable business model. Those that survive beyond this period end up getting investor funding and have a chance of staying around for the long haul. The likes of Flipkart, Snapdeal and Ola Cabs (India) are good examples.

There's nothing as awful as telling an employee, "You no longer have a job here."

As start-ups grow (and most do so at a fast rate these days), they set themselves bigger and bigger growth targets so they can maximize the intrinsic potential of their business model and products, and in-turn keep investors happy. But, of course, not every start-up can grow at such a fast pace. The process of business growth is both an art and a science, and has to be managed thoughtfully, by a skilled and experienced leadership team. Casualties happen often, and not only in India, as can be seen in the case of Groupon laying off 1100 people and closing down operations in seven countries. In February 2015, Zomato added 1200 more positions but six months later it laid off 10% of its employees (largely in the US).

Now, no start-up founder wants to fire people and it is one of the toughest decisions to make--one that carries immense stress and emotional pressure. There's nothing as awful as telling an employee, "You no longer have a job here." It is a drastic measure, and one that causes unwanted business disruption. Yet, sometimes there's no other choice.

There are two primary reasons why start-ups end up firing staff.

First, when audacious growth strategies don't work, targets are not met and cash-flow is a problem. Here is a typical example--a start-up hires aggressively to build necessary resources in order to achieve their desired growth targets (such as revenue, geographic expansion). When growth does not come easy (for a whole host of reasons), pressure builds-up quickly from investors seeking high returns and expecting a fast-rising valuation. Founders panic and look to cut costs and preserve cash. Headcount rationalization is seen as the fastest and most impactful route to survival, and so the mass firing begins.

[Employees are fired] when audacious growth strategies don't work, targets are not met and cash-flow is a problem.

Mass firings may also take place when a start-up gets acquired or decides to merge with another entity. When such deals happen, the buying/merging entities structure the deal on the basis of sound strategic and financial benefits that can be realized in the immediate and long term. For the deal to work, efficiencies are derived from avoiding duplication in people, processes and products. The recent firing of 150 staff at Common Floor, as part of the merger with Quickr could be an example of such an event.

The topic of 'hiring and firing' in start-ups is worthy of debate, but each case must be analyzed independently, and thoughtfully. Being empathetic towards both the start-up and its staff is essential. A knee jerk response or reaction--without analysis--is futile and unhelpful. Instead, acknowledge that there are many other variables and factors within the two situations described earlier, such as leadership decision-making, company culture and people management that can have a significant impact on the end outcome, and hence require further exploration.

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