Layoffs, often seen as a quick solution to cut costs, can have detrimental effects on organisations, particularly startups. While they may offer short-term financial relief, layoffs can erode employee morale, trust, and loyalty, which are vital for fostering a positive work culture and driving long-term success. 

In startups, where every team member plays a crucial role in innovation and growth, losing skilled employees can significantly hamper progress and disrupt workflow. Moreover, layoffs can tarnish a company's reputation, making it challenging to attract top talent in the future and damaging relationships with clients and investors. 

Furthermore, the aftermath of layoffs can lead to a loss of institutional knowledge and experience, hindering the organisation's ability to adapt to challenges and capitalise on opportunities. Instead of resorting to layoffs as a knee-jerk reaction to financial difficulties, startups should explore alternative cost-saving measures, such as renegotiating contracts, optimising processes, and reallocating resources. 

In an exclusive interview with People Matters, Pranay Prakash, CHRO, Baazi Games, emphasised on prioritising employee well-being and investing in retention strategies, so that organisations can build resilient teams and sustainably navigate economic uncertainties while maintaining their competitive edge in the market.

Excerpts from the interview: 

In what ways has "The Great Downsizing" impacted startups, especially in terms of scaling and growth opportunities?

Building a sustainable and scalable business is the ultimate objective every business should have, start-up or otherwise. However, the great downsizing has largely been a result of organisations following the approach of “throwing people at problems.” By hiring more people than necessary, or to propel growth exponentially, such companies were forced to right-size their workforce. They were adversely impacted, especially w.r.t. their brand and ability to scale.

The financial benefits that these organisations receive from these layoffs are misinterpreted to be a long-term advantage, while the reality is the other way around. In the long run, such companies lose the trust of their employees and customer perception. Such actions put corporate decision-making under public scrutiny. Now, even more so, owing to social media platforms. And deservedly so, as such actions by organisations are major life events for employees, putting their financial and economic survival at risk. 

Companies have come to recognise that beyond the legal contract, they also have a psychological contract with their employees. Any severance or layoff that takes place can lead to a breach of this contract, resulting in a loss of trust and loyalty from employees. 

What are some key strategies that startup leaders can employ to scale their businesses during economic downturns?

While today’s business environment is quite turbulent, having a well-defined strategy for scaling and growth is critical for any startup. Some organisations, while scaling, deploy funds toward expanding internal teams and investing in partners. However, having a clearly defined strategy would make the growth more efficient and financially viable.

As companies move through the Series A to Series D phases, they tend to invest heavily in building teams. As your firm grows, you need to develop a robust and consistent performance management strategy that can help optimsze outcomes and mitigate layoff-related risks. Manage the way you allocate resources and regularly analyse key performance indicators to track your progress. This will help you make and adjust your strategies based on data-driven metrics.

With time, the strategic goals of organizations evolve, so it is important to maintain flexibility and frugality in your decision-making process. With agility, startup leaders can create a culture of innovation and growth that allows their teams to grow regardless of economic downturns.

Thus, before jumping to permanent changes such as layoffs, it's important to carefully examine all options. Restructuring, furloughs, and re-assignment of roles and personnel are just a few of the options that should be considered to scale your operations. 

What are some practical tips for startups to manage financial challenges and maintain sufficient runway for growth during economic downturns?

During phases of economic downturn, companies that maintain a sense of financial discipline throughout their processes manage challenges and maintain an adequate runway for growth. Avoid common mistakes like spending on incorrect priorities or insufficient allocation of funds for people and reserves. Consider developing plans B and C based on different scenarios to pivot quickly if things start going south.

Keep an eye on changes in policy, regulations, access to capital, consumer behaviour, and other external factors that could affect your business. While this may sound a bit too early, investing in developing a research or strategy team member dedicated to this task can help identify potential risks and opportunities early on. 

Ensure that there is a seamless flow of timely and accurate data across different systems to reduce manual workload and create visibility for stakeholders. This will help in making quick and data-backed decisions when required.

During all of this, remember to consistently monitor cash flows to account for factors like loan and debt repayments, delayed customer payments, and seasonal variations in business. This will help provide a clear picture of the financial health of your startup and ensure you have enough runway for growth.

How can startup leaders effectively lead and motivate their teams during periods of economic uncertainty?

Leading teams during periods of economic uncertainty requires leaders to display a combination of empathy, transparency, adaptability, and decisive action. During such unpredictable times, teams expect their leaders to lead by example and provide clarity and direction. Goals, priorities, and expectations need to be clearly and consistently called out as and when changes occur. This communicates to the team members an understanding of their roles and how their roles will evolve during these changing times.

To avoid any confusion, maintain open, transparent, and consistent communication with the teams to keep them informed about the changes and challenges expected to affect the organisation. Fostering a two-way feedback mechanism not only answers the questions that team members might have but also helps sustain a culture of trust and collaboration.

Nurture a culture of resilience within the team by emphasising the importance of perseverance, problem-solving, and learning from setbacks. Encourage experimentation and rapid iterations to test new ideas and approaches. Fail fast if you need to, and adjust faster. Inculcate a growth mindset and provide opportunities for professional and personal development.

One common mistake is to bring in senior specialists and then not listen to them. These are people with solid functional as well as cultural diversity and expertise, and hence listening to them always pays.

Finally, always remember to celebrate successes and milestones, even the small ones. Acknowledge your teams’ contributions to boost morale and maintain motivation.

You can also read: 

• How should HR deal with difficult employees?
• Sceptical about AI in the workplace? Lauren Huntington of Qualtrics on bridging the gap between technology and humanity
• Noncash to Retention: Types of bonuses and how they work

Are there any key lessons or insights that you've learned from your own experiences that you would like to share with startup leaders facing similar challenges?

Working with startup founders has been a diverse and multi-faceted experience for me. I have come across leaders with a razor-sharp focus that helped me learn from their failures and successes. Their commitment to the larger vision for the organization ensured no layoffs, strengthened the brand, and made their teams more efficient.

This continued even during times of extreme crises like the pandemic, when layoffs became regular news, and they showed empathy by going out of their way to extend a helping hand to the team and their families. Constant communication was maintained with their downline teams, addressing questions at various levels and providing clarity, leading to the growth of a multi-billion-dollar listed organization.

Similarly, there were founders, when faced with changes in external circumstances, who struggled to sustain their businesses and made frantic decisions just to keep afloat. Top-down communication barely existed, which resulted in dissatisfaction among teams. The revenues and margins dropped, and the runway was reduced significantly.

Blindly trusting people for reasons beyond functional capabilities (families, friends etc.) almost always becomes detrimental to the interests of the Company, and goes all the way to destroy the culture. Founders, in such situations, end up entrusting a lot of power in people who may not possibly bring any merit to the ecosystem, and hence unable to add value. Also, their focus continues to remain on their own survival rather than the benefits of the Company.

However, in such scenarios, there was one common thread: the use of technology and data-driven solutions. These solutions not only helped these organisations scale but also sail through challenging times.