There’s a new craze sweeping through Silicon Valley – profitability. After the public markets largely rejected technology’s loss-making giants last year, startups are now taking steps to hurriedly turn user growth into profits. Unfortunately, this means layoffs are inevitable.
A handful of companies have announced job cuts in recent weeks, in an apparent backlash against loss-making startups with huge VC backing.
Lime, the electric scooter startup announced in January it will lay off 14 percent of its staff and pull out of a dozen markets. Co-founder and CEO Brad Bao said in a blog post: “Part of realizing our vision to transform urban mobility is achieving financial independence; that is why we have shifted our primary focus to profitability.”
Lime will fire approximately 100 people as part of the cuts, and will pull out of markets including Atlanta, San Diego, San Antonio and Phoenix. Fellow scooter companies Bird, Scoot, Lyft, and Skip have all announced layoffs or retreated from markets in the past year. The scooter craze blew up around three years ago when hundreds of electric scooters appeared on the streets of major American cities. The scooters are unlocked via an app and users are charged per minute for riding them. Regulations and public outcry have hindered the sector in recent times.
The electric scooter space has been a prime example of the growth-at-all-costs culture which has gripped the Valley for several years now. Lime and it’s main competitor Bird are both unicorns, but face very little chance of an IPO until they can prove there is at least a path to profitability. There was a clear pattern last year of loss-making companies, propped up by VC dollars and huge valuations, attempting to go public and failing badly. These include the transportation startups Uber and Lyft which had disappointing performances on public markets, and Pinterest. Office space startup WeWork was the worst example, as it never even reached an IPO.
SoftBank Group was at the forefront of the trend to invest huge amounts of money into companies with promising growth but huge losses. The Japanese conglomerate invested billions of dollars into WeWork and was left to pick up the pieces when CEO Adam Neumann led the company into perilous financial figures. Recently, Softbank CEO Masayoshi Son has changed his strategy. In an event in November last year he said companies should go public when they are “profitable, with great cash flow, sustainable cash flow,” marking the shift from growth to profit.
“Every VC, in the U.S. or in Asia, will have the word ‘profitability’ engraved to his/her mind while looking for companies to invest” in during the new year, Qi Lei, principal at Alliance Ventures, a strategic venture capital fund operated by the alliance of Renault, Nissan Motor and Mitsubishi Motors, told Nikkei Asian Review.
“Enterprise-faced startups will benefit the most from it, especially those who have already secured clients, because they are the one that have a clear profit model,” said Qi.
Softbank-backed companies appear to have taken that message to heart, and several others aside from Lime and WeWork have cut staff numbers. The Colombian on-demand delivery unicorn Rappi reportedly laid off hundreds of employees in January, according to Axios, and Bloomberg reported hotel chain Oyo Hotels is firing thousands of staff across China and India. Also in January, the robot pizza chef startup Zume, which raised $375 million from SoftBank a little over a year ago, laid off 80 percent of its employees, as reported first by Business Insider.
Softbank is just one investor concerned with the lack of profitablity. The public markets will be extrememly tricky to navigate in 2020 given last year’s high profile failures and the election in the United States, so we may well see more painful layoffs in the months to come.