Layoffs: Decoding the New Trend in the Start-Up World
It is not all happy-go-lucky in the startup world. A new trend of "layoffs" has gripped this world. How? Read on.
Let's get straight to the point. The recent lay-offs in start-ups are due to a broken system of preference to speed over efficiency.
Media has taken to de-humanising the executives of these companies. The problem has been, however, caused by something else. The pandemic has just accelerated the pace and amplified the severity of the problem.
In the start-up world, growing, or "scaling," at break neck speed is called "Blitzscaling." The term is a wordplay on 'Blitzkreig,' the German war strategy to quickly break into enemy lines, without enough rations / support, and wreaking havoc (it was a super popular and cool move during World War II).
The start-ups, to attract best talents, market themselves as a "great place to work at," and that they immensely care for their people (the 'Bean-Bag culture' that Google started to make its employees super comfortable was copied across tech-companies, without realising that Google, first, is a highly profitable business, and hence can afford to spend). They fail to realise that they don't have the money to do so.
As the companies grow, the problems that they tackle everyday keep increasing, and they start throwing people at problems. They hire more and more, so that the current staff is not overburdened. Plus, they need one team to make a mess, and another to clean that up.
But this short term pain relief measure is proving to be a bitter pill for start-ups to swallow.
They are permanently laying off hundreds of workers as we speak. These new-gen job creators have revealed a flaw in their plan. They are far, far away from being resilient to business shocks.
This trend of super fast paced growth in extreme uncertainties is nothing but capitalism gone crazy. The trend, now, is to "move fast and break things," popularised by Mark Zuckerberg (Facebook Founder).
Speed, over efficiency.
It's all about "jumping off the cliff, and then figuring out how to build a plane."
Enter, Venture Capitalists.
Venture Capitalists (VC) are folks who invest in budding and growing companies (ventures). These VC's now want start-ups to enter a market, scale up the businesses at lightening speed, capture higher market share (no. of customers who choose you / total no. of customers for a product) and dominate the world.
Imagine your 6 month old self trying to run a 100m dash! It's that crazy. You fall so many times, that you risk breaking your neck. And that's what these companies are being made to do now. Their business models are not sorted yet ('still evolving' is the politically correct term); yet, they are required to scale up fast, lest their funding dries off.
Alas, these companies bit more than they could chew. The Virus turned out to be a reality check for a lot of them.
Take a look at some of the companies that Blitz-scaled, and are fighting for survival now (and have started laying off workers).
However, Blitzscaling is not bad in itself. Just that the underlying business model (how a company earns from it's consumers) has to be sound enough to at least survive sudden shocks. Without a business model, it is like looking into an abyss, and the abyss looks back at you. Clueless. Fragile. Weak.
High gross margins, strong network effects and high switching costs - these are the traits of companies that can afford to Blitzscale (Google, Facebook, Amazon, Twitter, AirBnb, and our very own - Reliance Jio). Others just fall into the traps of capitalist greed and the investors' preference to a back a strategy that has worked before. They call it "risk-rationalising," meaning, reducing risk. No kidding.
Not knowing / having a strong business model makes a company go bust. Frankly, without a business model, one is just pursuing a commercial hobby. To make a start-up grow, blindly copying the Silicon Valley giants won't help.
Hopefully, this will serve as a wake-up call to the 'unicorns' who have turned devils in the eyes of employees.
Hopefully, the employees will understand that these start-ups have just been dealt a bad hand in this high risk, poker-like game. Are the dealers to be blamed? Or just the format of the game? Or the players?
You decide.
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Book Recommendation
1. "Blitzscaling" by Reid Hoffman (LinkedIn co-founder). It's an absolute must for employees, investors and founders who want to / are Blitzscaling.
2."Antifragile: Things That Gain from Disorder" by Naseem Nicholas Taleb. Antifragility is beyond resilience or robustness. The resilient resists shocks and stays the same; the antifragile gets better.
Noob's Corner
Revenue is the amount that you get for offering your goods or services to a willing customer. It is the amount that you plough back into the business, by using various resources like men, machines and material.
Business Model comprises of the cost model, revenue model and the profit model. Cost is the amount you pay to make a product ready. Revenue is what you get for selling the product you made. Obviously, if revenue > costs, you make a profit. If revenue < cost, you make a loss.
Gross Margins is the excess of revenue over variable costs. Variable costs are the costs that vary directly in proportion to the production of your goods. Example, cost of gold is a variable cost in making gold coins. If you make a 1gm gold coin, you need 1gm gold. If you make a 10gm gold coin, you need 10gm gold. And so on.The higher your gross margins, the more cash you will have available to grow your business.
Network effect refers to the positive feedback loop that a social network creates. Imagine Facebook. Initially, they were only in some colleges. As more and more people joined facebook, it became even more relevant for a new user to sign up (as most of their friends were already online). This is a network effect; when your business grows exponentially, using social groups of people. Watch "The Social Network" to know more about how Facebook started (a good movie).
High switching costs - let's understand this using an example. Tata Sky used to have its own set-top boxes (those ugly greyish DVD player like things + the antenna on your terrace). Now, a customer who signed up for Tata Sky would not quickly shift to another DTH operator, because the cost to swtich would involve paying for another set-top box. Hence, higher switching costs makes customers stick to their current products (customer retention, as a jargonist would call it).
We made another new term - jargonist. Sounds like arsonist with a "j".
Wow. Slow claps.