From Unicorns to Thrift Warriors: How Indian Startups Slash Appraisals in a Battle for Survival

Over 100 startup unicorns in India have implemented cost-cutting measures by reducing their appraisal budgets for 2023. About 30% of these unicorns have allocated meagre to zero funds for employee increments this year.

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In the wake of the Covid-19 pandemic, Indian companies, particularly the much-celebrated startup unicorns, have found themselves caught in a whirlwind of financial woes. Layoffs, drying funding, lack of talent and work-from-home challenges have become the order of the day, all while facing the daunting macroeconomic headwinds of a looming recession and rising inflation. In a recent revelation, Aon, in collaboration with MoneyControl, has unveiled eye-opening data that sheds light on the cost-cutting measures taken by more than 100 Indian unicorns for the year 2023. As these startup unicorns strive to maintain financial stability, they have significantly reduced their appraisal budgets. About 30% of unicorns have allocated meagre to zero funds for employee increments this year. Yes, you heard that right—zero!

The days of generous salary hikes and opulent incentives seem like a distant memory. The average appraisal budgets of these once-mighty unicorns have plummeted from a lofty 12.1% of salary expenses in 2022 to a mere 7.7% in 2023. A staggering decline that sends shockwaves through the business landscape.

However, these cutbacks are not confined solely to the startup realm. The data reveals that one in five Indian companies, regardless of their size or sector, has also chosen to allocate minimal to zero budgets for appraisals to their employees this year. Simultaneously, the average salary increases across the board have experienced a sharp decline, dropping from 12.4% in 2022 to 8.2% in 2023.

These staggering figures paint a vivid portrait of the harsh realities businesses face in these turbulent times. The rollercoaster ride of economic uncertainty has forced companies to make tough choices in their quest for survival.

According to Mayank Kumar, co-founder of upGrad, an edtech unicorn, a significant number of companies have opted to either forego appraisals entirely or delay them by a couple of months. These companies have calculated an average monthly churn rate of 7%, meaning that a significant chunk of their workforce – about 15% – might bid farewell before the appraisal process concludes. This, in turn, would lead to a reduction in the overall increment payout.

Kumar further mentioned upGrad has taken a different approach. They have already completed their appraisals and have boldly initiated revised salary disbursements starting from April 2023, right at the beginning of the financial year.

The prevailing mindset among companies is that “no appraisal” is perhaps the best “increment” one can receive in the current job market, according to Prateek Shukla, another cofounder of edtech and skilling startup – Masai School. He reveals that his company has allocated a 10% budget for salary increases, acknowledging the challenging market conditions and adopting a cautious approach in these uncertain times.

Indian Startups’ Cost-Cutting Measures

Cost-cutting has emerged as a key strategy, enabling startups to streamline their operations, optimize resource allocation, and demonstrate a clear path to profitability. In this pursuit, Indian startups are implementing a range of measures aimed at reducing expenditures and improving operational efficiency.

In the dynamic world of Indian startups, the year 2021 and 2022 witnessed a flurry of hiring activities, fueled by remarkable investor interest and a string of successful fundraising rounds. Over 4 lakh new jobs were created in 2021 and 2022 by startups in India, according to the Department for Promotion of Industry and Internal Trade (DPIIT). However, as the funding pipeline begins to dwindle in H2 2022, a dramatic shift has occurred. Notably, in Q3 2022, the funding in Indian startups dropped a massive 57% QoQ and 80% YoY to just $3 billion. This trend continued till Q1 2023.

Tech startups, once focused on growth at all costs, are now in a race to achieve profitability by trimming the excess.

At the top of their cost-cutting agenda is the reduction of employee benefits, which had skyrocketed just a year ago. The sudden change in strategy has led to significant repercussions. Since the beginning of 2022, about 90 Indian startups have bid farewell to nearly 25,700 employees, all part of their concerted efforts to curb cash burn.

In contrast, smaller startups or bootstrap ones, such as Zerodha and Zoho, heavily rely on their talented employees, offering better hikes to retain their vital workforce, as they continue to build their product and tech capabilities.

Anshuman Das, the CEO of Careernet, has shed light on the consequences of the recent layoffs in the startup industry. In an interview with Moneycontrol, Das emphasized that while these layoffs have indeed helped in reducing expenses, the newfound focus on frugality will inevitably impact hikes and bonuses for employees this year.

Das pointed out that in 2022, startups were known for providing substantial hikes ranging from 20 to 30 per cent. However, this year the salary hike is expected to dwindle to almost single digits.

The adjustment from substantial hikes to minimal or moderate ones has created a sense of stress and concern among companies and employees.

The challenges faced by startups in the realm of employee compensation extend beyond salary hikes and bonuses. Aon’s report highlights another notable issue: the inability of startups to demonstrate appreciation for their Employee Stock Options (ESOPs) due to declines in company valuations. This is attributed to investors adopting a more cautious approach, conducting stricter due diligence, and asking more probing questions in the aftermath of the exuberance witnessed during the Covid era.

ESOPs have traditionally been an attractive component of compensation packages in the startup ecosystem. This is an alternative to motivate and retain employees in the absence of the usual avenues of compensation. However, the decline in valuations has dampened the perceived value of these stock options, making it challenging for startups to effectively leverage them as a means of employee appreciation.

Unacademy, an ed-tech startup backed by SoftBank, has taken a proactive step to address employee compensation challenges. In an effort to compensate employees, the company has accelerated the vesting period of Employee Stock Options (ESOPs) by one year. This move comes after Unacademy’s announcement in February that it would not provide salary increments to employees in the fiscal year 2024.

However, despite the decrease in appraisal budgets and the absence of appreciation for ESOPs, Indian startups are expected to maintain their focus on recognizing skill addition and higher contributions through promotions. While there may be a slight decrease from the average of 16.5% observed last year, startups are still prioritizing promotions as a means to acknowledge the growth and value provided by their employees, even as they implement cost-cutting measures.

Declining Attrition Rates in Indian Startups

Interestingly, attrition rates at startups are showing signs of easing, attributed to the limited availability of job opportunities in the market and a general hiring slowdown. Despite receiving below-average pay hikes, employees opt to stay with their current employers due to a bleak job market and the lack of enticing alternatives. This trend has created a sense of concern among employees, who prioritize stability over immediate financial gains amidst uncertain market conditions.

The declining attrition rates have important implications for startups. A stable workforce provides continuity, fosters a sense of loyalty, and allows companies to focus on long-term goals rather than constantly filling vacant positions. This trend also highlights the increasing value that employees place on job security and the overall work environment.

Consequently, a higher percentage of employees are eligible for appraisals this year than in previous years. Companies that experienced significant attrition rates in the past are expected to allocate more substantial budgets for increments. However, it is important to note that the cost of rehiring always outweighs the benefits of providing higher increments. Startups, therefore, face the strategic challenge of maintaining lower attrition rates while offering above-average appraisals to create a stable and cost-effective work environment.

As the startup landscape in India continues to evolve, it poses a crucial question: Will this intense focus on profitability and cost-cutting pave the way for a leaner and more resilient breed of Indian startups, or will the consequences of these measures dampen the spirit of innovation and growth that defined this vibrant sector? Only time will reveal the answers as the startup saga unfolds!

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