Tech startups in danger?

Mai Ghandour, Tuesday 14 Jun 2022

Technology startups worldwide have been laying off employees, with the trend now spreading to Egypt.

Tech startups in danger

 

Over recent months, the economic crisis has prompted some companies worldwide to slash their expenses, including by laying off staff. This has been especially noticeable in tech startups.

TechCrunch, a US-based online publication focused on tech startups, estimates that some 15,000 employees in Silicon Valley in California were let go in May alone.

The trend also hit closer to home when Swvl, the Egyptian tech ride-sharing service, announced that it was cutting 32 per cent of its staff members — or some 400 employees — in an attempt to make the company profitable by 2023.

Mohamed Hedayat, co-founder and managing director of Egyptian furniture e-commerce startup Kemitt, said that being profitable was the main reason anyone builds a company. “We can sugarcoat it by phrases like ‘disrupting industries’ or ‘making life easier’ or ‘changing the world’, but at the end of the day, it is all about numbers and profits,” he added.

Layoffs are part of the business cycle, Hedayat said, but laying off more than 30 per cent of staff may still be excessive.

Swvl said its layoffs would be concentrated in areas that it says can be fully automated, such as its engineering and product and support functions. The news came just two days ahead of its announcing expansion plans in the US market, as it was planning its debut in Mexico this month and in the US during the second half of 2022.

Swvl has also been on a shopping spree, acquiring Turkish company Volt Lines and European mobility platform Shotl last year. It also acquired other transit companies in Latin America and Central Europe in deals valued at millions of dollars.

The company management must take responsibility for adopting such an aggressive growth strategy, Hedayat said, noting that it was the employees who had had to pay for it when it backfired.

The company has simultaneously implemented a hiring freeze and trimmed the salaries of top management.

Global giants like Meta, Netflix, and Twitter have also announced a hiring freeze as well as layoffs. Tech job tracker Layoffs.fyi has reported that 66 tech companies worldwide have seen layoffs in 2022 so far, affecting more than 16,000 jobs.

“This might be the end of the ‘growth at any cost’ era, and maybe investors will now pay more attention to unit economics instead of overlooking it for the sake of the founding team,” Hedayat said.

Meanwhile, the head of growth at a tech startup in Cairo who preferred to remain anonymous explained that some startups prefer growing the number of their subscribers over profitability.

The layoff announcements have taken social media by storm, and many recruiters have shown their support for people who have been laid off. They include Swvl’s CFO, Youssef Salem, who has posted a list of the company’s “top global talents”, as he puts it.

“I feel that Swvl’s layoffs are just the tip of an iceberg. I believe that there is a much deeper wound in current tech offerings,” Mahmoud Salah, a business development manager, said.

Gorillas, a German on-demand grocery delivery startup, recently laid off 300 employees, but it has also raised $1.3 billion in investment since 2020.

One source that requested anonymity told Al-Ahram Weekly that another Cairo tech startup has announced layoffs over the past week but has also asked employees to sign non-disclosure agreements (NDAs) not to publicise the news.

Mohamed Yousri, a brand strategist, told the Weekly that the danger of the news appearing on social media and the company being attacked would make any business owner in a similar position do the same thing.

Meanwhile, Osman Farouk, analytics lead at Canadian telecommunications company TelusIt, said that it was just a matter of time before other ventures would be laying off thousands of employees.

“The tech venture bubble is bursting, and with it is the concept of just raising another round of money to stay afloat while increasing the valuation,” he said. “Raising money has been the prime focus for ventures, but they lack the understanding that being cash-flow positive and profitable eventually is the key to success.”

“I would like everyone working for a startup/tech venture to take this as an example and make sure they keep themselves covered for such a situation,” he added.

Alex Gault, an entrepreneur building technology startups and media companies, said that venture capitalists (VCs) were telling not-yet-profitable tech companies to cut spending and prepare to hold on longer without as much money.

The companies are reacting to the market downturn with layoffs and hiring freezes, he said, explaining that “this doom and gloom from VCs may be an effort to educate younger founders and encourage them to curtail spending in case of a downturn.”

Yousri, the brand strategist, said that these are tough times to be a business owner, especially when there is a global hedge fund and investors and shareholders breathing down your neck.

People are now gamifying stock trading, ignoring customer satisfaction, and putting growth at the forefront of their plans, he said, explaining that this raised some serious questions about the veracity and health of their business models.

“What we’ve been seeing over the past three years is that there are other types of investors now entering the market looking for quick wins. They’re looking for long-term growth, but they’re also looking for very expedient returns on their investments,” Yousri said.

Instead, companies should be focusing on educating people about both the pros and cons of tech startups and the potential downside, he said. “All the warning signs are there for more layoffs to occur. If you look at the forecasts, they’re quite gloomy globally, not just in Egypt.”

“That is one of the unintended costs of growing too big too soon,” he concluded.

A version of this article appears in print in the 16 June, 2022 edition of Al-Ahram Weekly.

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