Lessons from layoffs: Your startup might need to downsize soon

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January 25, 2024
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3 min read
layoff

The global tech industry has consistently experienced episodes of layoffs over the past two years, with 2023 particularly challenging. The early signs in 2024 suggest a continuation of this trend.

Despite layoff reports that have emerged since the second week of January, analysts are cautiously optimistic that the industry will not experience what it did in 2023.

The narrative in Africa is not different from the rest of the world as data collected by Intelpoint indicates that African tech companies disclosed laying off over 4,500 employees between May 2022 and January 2024*.

The major reasons for these layoffs, which can be categorised under restructuring and macroeconomic conditions, offer important insights. These can help startups avoid a similar trajectory or make peace with an impending layoff.

Dire need for restructuring

The most recurring reason cited for layoffs in the last 20 months is restructuring as shown by stats from Intelpoint.

Restructuring in any industry involves trimming certain operational costs to enhance business efficiency and profitability. This is usually spurred by challenges like cash flow issues, declining profits, redundancy, inefficient processes, and flawed management structures.

For instance, B2B eCommerce startup, Alerzo's three layoff rounds typify the restructuring trend. In March 2023 when its second layoff was reported, it was attributed to the need to restructure and reduce payrolls to bolster profits, acknowledging its prior overhiring. Eight months later, the company further optimised its operations by introducing warehouse automation, thereby making its workforce smaller.

Similarly, one of Africa's oldest fintech startups, Cellulant, responded to the report of a silent layoff which included some senior-level executives, citing the "execution of strategic initiatives" as the reason. This may have suggested the intention to focus on core competencies to realign the company with its long-term goals.

Redundancy emerges as another prevalent reason for restructuring, with many tech industry players acknowledging it as a side effect of overhiring and expansion during the pandemic-induced tech boom.

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With reality setting in, it was clear that either some roles were no longer necessary, operational expenses were not needed for some locations, certain tasks could be performed by fewer individuals, or streamlining departments had suddenly become important.

When Shola Akinlade, Paystack CEO/Co-founder shared that the company would be letting go of 33 staff in markets where it isn't serving effectively, he confirmed a need to revisit a previous plan to recruit talent regardless of the location.

This further attests to the significance of understanding these issues to properly navigate long-term sustainability.

Macroeconomic factors - The primary culprits

There's a chance that every other matter resulting in layoffs is influenced by broader macroeconomic factors, mostly external influences.

These factors often reflect the economic health and stability on the local and global scales, capable of impacting businesses variously.

More than a year ago, Nigerian crypto exchange, Quidax reduced its workforce by 20% in response to unfavourable macroeconomic conditions. Analysts explain that this might have been a reactive measure by the business to survive the global downturn and the backlash of FTX’s bankruptcy on the wider crypto industry. However, the startup neither confirmed nor denied this claim.

If anything, a volatile crypto market could have led any business playing in it to make difficult decisions like workforce reduction to sustain operations, or outright shutdown, like Bundle Africa and Lazerpay did.

Similarly, African fintech unicorn, Chipper Cash, which has also undergone multiple rounds of layoffs (four times within a year), pins its decision on a need to focus on core products and markets amidst changing economic conditions.

Unfortunately for the startup, unfavourable events involving FTX and Silicon Valley Bank (SVB) further complicated already existing inflation rates, recession, and low investor confidence, thereby putting a strain on its funding and operations stability.

In another example of how a shift in market dynamics can influence recalibrating business efforts, Ghanaian-founded healthtech startup, mPharma, laid off 150 employees in what the founder considered its first-ever layoff. This came as a response to economic conditions driven by the naira's devaluation.

The naira is currently experiencing its worst phase since 1999 and has continued to register new lows in depreciation. This can significantly impact citizen's purchasing power and influence the economic landscape.

Considering these possible disruptions, startups that are yet to be hit by layoffs and those barely hanging on are compelled to make strategic decisions, one of which is a reevaluation of their finances.

* - Stats as of January 25, 2024


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Human enthusiast | Writer | Senior reporter | Podcaster. Find me on Twitter @Nifemeah.
Human enthusiast | Writer | Senior reporter | Podcaster. Find me on Twitter @Nifemeah.
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Human enthusiast | Writer | Senior reporter | Podcaster. Find me on Twitter @Nifemeah.

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