4 month back my friend Vinit, a software engineer, had joined an e-commerce start-up dealing in apparel brand. The company was backed by biggies of the industry. With just 3 years of experience, he had got an excellent pay and grade, which was much higher than his expectation. He was still serving probation period and on one bad day, he got notice of termination, citing “shutdown” as a reason. As he was on probation he just got 7 days’ payout. He was totally clueless about what went wrong. Also, he had no idea that what exactly happened in last 4 month with the company which led to shutting down. “Sorry, it was a start-up,” he told to himself.
In the year 2017, we had more negative news than positives for start-ups. Many start-ups failed and many scaled down its operation. This caused job loss for many (in thousands) and also founders were seen struggling for a job. However, this year also has seen acquisitions and fund inflow to strengthen the businesses but overall it was a grey story for start-ups.
In the beginning of the year when Stayzilla founder Yogendra Vasupal announced the shutdown then it was a big shock for many. The shutdown list includes many big names like abof.com, Cardback, Eatonomist, FabFarnish, Taskbob, Hotels Around You, Roder, RoomsTonite, Shopo, yumist, Kaaryah, Eat Fresh, Tolexo, and many more. It is a common perception that start-up fails because of fund crunch only but it is not true always.
Why do start-ups fail?
NASSCOM 2017 report says 55% of failed start-up had received funds. So, it cannot be cited as the only reason for failure. But it is important to note that the Investors were more cautious this year. Signing a cheque wasn’t that easy. Profit-making is a prime target for any investor and the way Start-ups are failing, it is very obvious to be cautious while signing big amounts. Based on our research we have identified few major reasons for failure.
- Cash Crunch (Fund Crunch) was still a big issue: Recently Kaayrah shut down its business as it could not raise fund from last 18 months. Important to note that Kaayrah was funded by Ratan Tata and TV Mohandas Pai. A similar thing had happened with YUMIST and RoomsTonite. There are many minnows Start-ups which started with some initial funding but later shut down with no other option left.
- Demand Slowdown: While creating the start-up idea, demand is always a point of focus but during the process, it may not turn positive against the expectation. It may happen because of too many business rivals in the same domain or change in market dynamics. Many e-commerce companies have seen such issues as they could not get the responses as expected.
- Poor Execution and Network: Stayzilla cited this reason of not able to make an effective local network. Stayzilla had got the fund of $33.5 Million (more than Rs 210 Crore) and still, if they could not make an effective network then it clearly indicates case of poor execution. Many small and big start-ups fail because of poor execution. Also getting right sales team is part of the proper execution. Just hiring big names sometimes cost very dearer.
- High cost and low profit: This is a most common reason for the failure of any business. Establishing a complete brand and its operation requires manpower, money and proper execution. It all contributes to the cost. But profit starts after a gap. High cost doesn’t always turn in to high profit. It needs lots of patience. To show this patience any start-up must have funds.
Cost Cutting means Failure?
Snapdeal and many other had laid off thousands of employee to control cost. Cost cutting is corrective action to ensure a smooth run in future. Sometimes the business expansion doesn’t go as per plan and companies need to correct themselves before the breakdown condition arrive. It is not necessary that after cost control Activities Company will not fail but it reduces the chances of failure. Also need to understand that it is not necessary for companies, which are going for cost control is a sick company.
What happens to the employees?
Only a few companies try to accommodate excess employee (after shut down or scale down). When FabFarnish was closed, the parent company Future Group tried to accommodate most of its employees in other business units. Few start-ups owner try to provide placement to its employee to other companies before complete shutdown. But in a majority of cases employees are asked to leave without any option. This directly impacts employees and their families.
Survey says that most of the laid-off employees get a new job within 6 months of the disaster. But except a few, most of them get the inferior opportunity and they have to accept that to earn their livelihood. Such employees not only losses their high potential career but also struggles a lot to sustain in a new job.
I had the opportunity to talk to such employees. They don’t want to be part of a start-up anymore but the irony is that most of them get next job in a start-up only.
Should you join a start-up or keep a safe distance?
Start-ups are not very different from any other business. The only difference is high energy and low stability. When you perform in any start-up, you get a good rise and when start-up feels sick you are kicked off. The choice is very simple high-risk high gain or low-risk low gain.
In recent past, we have seen stable companies are also kicking its employees amid cost control. No one can guarantee all good for any companies. But big and stable companies take time to react to the slowdown. They don’t take immediate action on sensitive matters like “layoff”. And with good luck, if market regains positives then they continue without any layoff. But similar thing happens for appraisal as well. They follow a process and don’t opt for spike promotions.
This makes choice very simple. You need to opt for a career as per your need. And it is very obvious to suggest that don’t join a debt-laden company or any start-up. The fundamentals should be strong and you must check the past record. Rest is your luck. Good luck and bad luck never take a prior appointment.