The ongoing second round of layoffs in the start-up ecosystem are driven by companies’ operational performance taking a hit and some companies having to reset their business model because Reserve Bank of India’s new mandates, according to Sandeep Patil, Partner, Head of Asia at fintech-focused VC firm QED Investors.

He added that the current layoffs are different than the ones seen earlier this year. “Till September, layoffs were driven by the cost of capital correction. At that time, companies laid off people to improve their gross margins in order to maintain their valuations.”

However, the layoffs that are happening now are a factor of companies recording lower than expected revenue growth. This has led to a second round of belt tightening in the ecosystem and companies are cutting down growth teams. In the past few weeks, unicorn companies like Byju’s, Udaan, Chargbee have laid off thousands of employees. “In cases where revenue growth is not happening, we will see around 15-20 per cent team cuts, whereas companies where complete business models have been changed the cuts can go up to 70-80 per cent of the team,” Patil added.

The market environment has led to pretty meaningful correction in company valuations. Patil said that the deals that are closing in the market right now are at a discount from even last year’s valuations. People are using convertibles instead of down rounds to access liquidity. Whenever you are doing a convertible, one statement you are obviously making is that it is very hard to value the company right now.

Impact of downturn

Further, talking about the impact of current market downturn on QED’s investment strategy, Patil said,  “Our optimism and belief in the market has not changed. A fund life cycle is 10 years, so one or two-year market volatility is but expected. There is a reason why we are private market investor, and not public market investor. Underwriting this volatility is part of the game. Our fundamental approach to the market and a fundamental optimism for the market has not really changed.”

QED Investors are a fintech-focused venture capital firm which entered India in 2020. The fintech-focused firm has invested in companies like Jupiter, Refyne, and Financepeer. Patil noted that the firm tends to make anywhere between two to four new investments every year and expects to end this year in similar range. 

The firm started investing in India with its $550 million global 6th fund which was closed in April 2020.  Then, QED closed $1.5 billion 7th global fund in 2021 which is currently being used to invest in India now. Of the seventh fund, $550 million is venture fund (average ticket size of $3-$20million) and $500 million is growth fund (average ticket size of $20-50 million).

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