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Lights out for struggling startups

Covid-19’s stress test has laid bare the harsh realities of working for a startup

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LIGHTS OUT FOR STRUGGLING STARTUPS: Covid-19’s stress test has laid bare the harsh realities of working for a startup.

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LIGHTS OUT FOR STRUGGLING STARTUPS: Covid-19’s stress test has laid bare the harsh realities of working for a startup.

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Zenos Schmickrath, former co-founder and CXO of co-living operator Hmlet, says startup founders can link ex-employees up with founders in the community that are hiring, since skill sets are quite transferable.

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Employees who have a strong cultural fit and share the company's goals would tend to merit further consideration when a startup mulls layoffs, says Nodeflair co-founder Adrian Goh.

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Having a smaller budget makes it difficult for startups to provide larger compensation packages and pay for outplacement specialists, says PeopleStrong's Adrian Tan.

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Rishi Israni (above), co-founder of Zimplistic, people are more understanding when there is greater communication, mutual respect and a close community.

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HRnetOne's Catherine Yeow (above) says startups are limiting hiring to critical hires, backed by justification on return on investments.

When circuit breaker measures are lifted, 29-year-old David Lim* will return to his office. He will have to learn new skills, to cover for some of his colleagues who were let go. He will work for longer hours, even though his pay was cut, to keep his job. He will wonder if the startup where he has spent the last two-and-a-half years, will fail. David's office - although still "trendy" with its ping pong table, Nespresso machines and idea boards - will not feel the same again.

Startup employees are bearing the bulk of the strain from Covid-19's impact on the venture industry, and the sector's go-big-or-go-home mentality is not making it any better. Norms that were tolerable during boom times - long working hours, high turnover rates and below market salaries - were maybe even brandished like a badge of honour and part of the unicorn dream. Now that the crunch has come, harsh realities have set in and employees are feeling the heat.

The coronavirus pandemic has demolished revenue streams and slowed funding activity, but fixed costs remain. Companies that were struggling to break even before now face an uphill battle as losses continue to widen and cracks in business models start to become more apparent. Without an abundance of fresh venture funds as padding, this crisis is forcing many startups to grow up, or go home.

Some 74 per cent of startups saw their revenues decline since the beginning of the virus outbreak, a global survey from research firm Startup Genome shows. Although most startups experienced a "relatively modest decline in revenue", the survey noted that up to 16 per cent of startups still saw their revenue drop sharply by more than 80 per cent.

With the exception of superapps, startups often only have one main driver of growth. As such, they are likely to be more susceptible to economic shocks than larger corporates which have a diversified portfolio, industry players say.

The pandemic is exposing the tougher, more cut-throat side of the startup world: the need to run lean, cut fast and adapt quickly, or fail. For many startups, this will mean having to cut payroll, slash marketing budgets, negotiate extended payment terms with vendors and scratch for additional capital in order to ride out this storm, which is likely to last till 2021.

That's bad news for the 20,000 people employed by 3,800 startups in Singapore, according to the latest December 2018 figures from the Department of Statistics.

It's crunch time

Startups will have to let go of employees who were hired for growth, which has stalled, put staff on unpaid leave, or implement pay cuts to reduce the impact of the pandemic on the company's cash flow, industry players say.

Indonesian unicorn Traveloka, for instance, in April was forced to cut about 100 people, or 10 per cent of staff, after travel cancellations and demands for refunds pummelled the firm, the Nikkei Asian Review reported. Some staff were laid off only days after starting their new role at the company, BT reported.

Several employees across different startups say they are usually the last to know of such cost-cutting measures.

Thirty-two-year-old Jeslyn Lee*, who had been working at an e-commerce startup for almost two years, received a notification on her computer to attend a Zoom conference call with her bosses and assumed it was for the team's usual Monday meeting. But during that call, she was asked to sign a termination agreement on the very same day, or risk having her compensation cut. Other colleagues went through a similar process.

There was no warning at all, much less compassion, the marketing executive says. "It felt like all the hard work and long hours I had put in for the company before this didn't even matter."

With dropping revenues and an uncertain sales trajectory, new employees whom companies had hired in advance to fill roles needed for growth will be made redundant in the current economic climate. Keeping them on the payroll would take an unjustified toll on a company's cash flow even with a 75 per cent government subsidy on wages, says Adrian Choo, chief executive of HR consultancy Career Agility International.

That said, the startup world is no stranger to layoffs. Pivots come at a cost, and more often than not, transitions require some roles to be rendered redundant.

For example, co-living operator Hmlet laid off around 10 per cent of its employees, according to reports by Tech in Asia in February. The layoffs came after the startup moved towards a more "asset-light model" in a bid to improve its bottom line. The startup - which usually rents, renovates and operates properties - is now in talks to partner more landlords to help run Hmlet-branded properties on a profit-sharing and management-contract basis instead.

Telco startup Circles.Life, with some 500 employees across its Singapore, Taiwan and Australia offices, had been cutting staff since November last year, BT reported. "This is nothing out of the ordinary, given the fast-paced nature of the organisation. There are bound to be some changes along the way as we expand," Rohan Talwar, Circles.Life head of corporate development told BT in February.

Many other startups in the region, including budget hotel chains OYO and RedDoorz, insurtech startup CXA Group and online fashion platform Zilingo have likewise cut staff during reorganisation exercises.

Many threats

Layoffs, pay cuts and rescinded job offers are not the only threats that startup employees face. As the Covid-19 storm rages on, the cons of working in the startup industry start to pile up.

A number of startup employees BT spoke to expressed a deep, almost guilty resentment towards some parts of the culture, citing reasons such as burnout.

"Startup culture seems to suggest that if we toiled relentlessly and networked 24/7, we could change the world with our ideas," says 29-year-old Mr Lim, an employee at an established e-commerce startup in Singapore.

"You wouldn't be seen as enough of a team player if you chose to go home instead of troubleshooting with the team about a new project. But there are always new projects," he adds.

It is expected that employees should put in extra hours, especially when a major milestone is coming, when the company secures a new project or when new problems emerge, says Yvonne Tan*, who works at a fintech startup in Singapore.

"You don't join a startup to work from 9am to 5pm. That is rare. Most will expect that on top of the work that is required, you will stay to help colleagues out as much as you can, take on other responsibilities that are not in your job scope if needed, and take the initiative to problem-solve with the team.

"Startups work very fast to solve problems. When there is a bug in the system or a red flag, we would have to put in the extra hours immediately to solve it... Work-life balance is pretty much non-existent since we usually stay in the office till around 9pm," she adds.

Now, Mr Lim says that tasks are piling up and work hours are increasing, under the guise of flexible working hours.

"This was expected. Some of my colleagues were let go, and it makes sense that we would have to take up their responsibilities, at least until they hire someone new," he says.

Catherine Yeow, group business leader for the Singapore, Bangkok and Seoul offices for recruitment firm HRnetOne, says: "Startups are still hiring during this period, but this hiring is limited to critical hires, backed by justification on return on investments.

"At the same time, hiring for replacement headcounts due to attrition is limited due to the slowing down of the economy. Many roles and functions are being distributed and shared among the existing team to keep the payroll cost low and to increase the value of each employee through higher efficiency."

Starting from scratch

Being a team player counts for a lot in the fast and furious world of startups, and employees might be asked to fill roles that are not in their area of expertise - especially in early-stage startups.

"I joined an early-stage tech startup a year back to contribute as a mechanical engineer. Instead, the company had me working on data analytics, setting up infrastructure, drafting up marketing pitches and running social media channels - which was way out of my expertise and job scope. I had to learn many things almost from scratch," says Renee Yong*.

Ms Yong, who has joined another startup, added that this gave her a wider perspective and greater experience, but "it was doing too many things at surface level without any depth to the matter".

For early-stage companies that are struggling with fundraising, staff will more often than not have to bite the bullet and wear multiple hats, Ms Yong says. She adds that founders too, could be in charge of a wide range of functions including HR, marketing, finance and sales.

This, all in hope that their startup won't be part of the 90 per cent that fail.

Right now, startups - especially early-stage ones - have started re-forecasting projections, revenues and cash flow so that they will have a better idea of how much they need to cut in order to survive or to reach their next milestone. Companies would then consider if an individual is able to contribute to the process, says Adrian Goh, co-founder of tech career platform Nodeflair.

"Those who have a strong cultural fit and share the company's goals would tend to merit further consideration, even if their roles might not be entirely relevant with a new direction," he adds.

On top of this, startups tend to have a smaller budget compared to larger corporations due to limited funds, which makes it tough for them to provide larger compensation packages and pay for outplacement specialists, says Adrian Tan, a practice leader at a HR solutions and technology company PeopleStrong.

Outplacement services - to help terminated employees re-enter the workforce as soon as possible - vary from a few hundred dollars to several thousand dollars per employee, according to a Randstad RiseSmart post, depending on the services offered.

Startup founders however, can link ex-employees up with founders in the community that are hiring, since skill sets are quite transferable for those in the industry, says Zenos Schmickrath, who was co-founder and CXO of co-living operator Hmlet before he left the company last December to pursue other opportunities.

"Although measures such as layoffs might be necessary and often the last resort, founders will try their best to mitigate the layoff's impact such that it affects the company's employee base the least. It's our responsibility as the manager or the boss to learn how to do it in the best way possible," says Mr Schmickrath.

Rishi Israni, co-founder of Zimplistic, which invented an automated flatbread making machine called Rotimatic, says the company has been transparent with its employees ever since it encountered difficulties in February, when its supply chain in China was disrupted.

"There were many conversations before we implemented it (the pay cuts). We knew what was coming and discussed with our employees what was the best option forward... The team then considered employees' backgrounds - whether they were single earners, had to provide for many kids, or had other major financial commitments," Mr Israni says.

The agenda was not personal, and people are more understanding when there is greater communication, mutual respect and a close community, he adds.

But startups should refrain from knee-jerk reactions such as immediately slashing marketing expenses or funding for research and development, lest they end up damaging the business irreparably, Chua Kee Lock, chief executive at Vertex Ventures told BT in an interview in March.

Mr Chua has cautioned Vertex's portfolio companies to trim their staff size carefully, if needed. "Startups could face the need to hire similar positions again 12 to 15 months down the road, which might prove even harder then."

Employees' reluctance to take on multiple roles can be managed too. Ms Yong says that at her new workplace at a renewable energy startup, employees are encouraged to explore other roles in their team, but these do not stray too far from main roles.

"This encourages employees to expand their skill sets in complementary areas, which I really liked."

What's the deal?

Despite the toxic work conditions, most startup employees BT spoke to say they would, given the chance, join a startup again.

Some found the close community - with a shared mission and greater responsibilities - to be one of the main draws of working in a startup.

"Founders will often carve out time to get to know employees personally either through coffee sessions or team gatherings. This builds a strong rapport with the team, and keeps employees excited to contribute to the shared vision of the business," says Kevin Yu*, an employee of an online marketplace startup in Singapore.

"It really is about throwing your hands out, getting your hands dirty and developing something that supports a cause or an interest that's close to your heart. In a startup, both employees and founders get to put their own stamp on its impact and contribute to its development, as well as to share in its success, which is special in itself," says Nisha Paramjothi, senior vice-president for investments and strategy in fintech startup MatchMove, who joined the company after over a decade at CIMB.

"What a startup gives employees is a chance to be more than just a cog in the wheel. It's a challenge, where they have a greater responsibility, are able to learn valuable skills and lead teams earlier on in their careers, as well as to have more control over their learning experience," says Hmlet's Mr Schmickrath.

Since early-stage startups are often not able to offer competitive salaries compared to larger corporations, they often entice employees with an employee share option plan (ESOP). Through this scheme, startups can award stock options to employees, officers, directors, advisers, and consultants, allowing these people to buy ordinary shares in the company when they exercise the option.

Companies typically set aside about 10 to 20 per cent of its share capital for this scheme.

Many startup employees in Silicon Valley and in China have become millionaires through stock options, making these options appealing to those looking to join startups and work for the company's long-term success.

"Startups look for candidates who are aligned with their business objectives and exhibit passion to be part of their venture. Potential candidates are often willing to join even with a reduced salary from their previous jobs in view of the big upside from their equity stake should the venture be successful," says Ms Yeow from recruitment firm HRnetOne.

"We see their profiles as either young professionals with little financial liabilities or those who have achieved financial independence and are now seeking new challenges in their career," she adds.

* Names have been changed to protect identities.

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