Startups trim team size to woo investors

Mumbai: The less, the merrier - that's the mantra in the startup and venture capital space, where there's an increasing shift towards building smaller teams. More investors are now also considering the size of a startup's team while weighing potential funding - it is not a big determining factor yet, but at least it is a metric being considered, with the 'revenue per employee' metric making its way into investor discussions.

AI has a part to play in this shift - the tech is not leading to wide-scale job reductions, but it certainly is eliminating the need to hire more, and nudging companies to redeploy human capital towards more complex tasks.

"Investors have become intensely focused on startups that demonstrate capital efficiency and a high revenue per employee ratio. The excesses of the last funding boom, marked by aggressive headcount growth has given way to an era where impact is measured by output, not team size," Manu Iyer, general partner at Bluehill VC, which funds early-stage startups, told TOI, adding that, on average, today, series A (early stage) startups globally and in India come to market with fewer full-time employees.

Even as startups as big as Paytm and Ola are betting on AI to cut inefficiencies at work, the trend of building smaller teams is more rampant among deep tech and AI-native startups. "...one emerging benchmark is $1 million ARR (annual recurring revenue) per employee. This wasn't even a talking point a couple of years ago, but now...it's becoming a sign of capital efficiency and strong product-market fit. Investors are increasingly asking not just about growth, but about productivity per headcount," said Neelabh Shukla, chief business officer at talent solutions provider Careernet.

Startups across segments have been using AI to cut costs. Lower fixed costs mean startups can weather economic shifts and stretch investments (investor funds) much further, said Iyer. Viswanath P S, MD & CEO at Randstad India, said that the narrative in startups has shifted from "how big is the team" to "how effective and scalable is this team's execution model".

"Investors are increasingly prioritising startups with smaller, more focused teams when making funding decisions, particularly in venture capital and angel investment circles," Joshi said. Investors, however, are closely watching how startups are using AI and assessing the real and perceived benefits that AI integration can bring," said Ankur Mittal, co-founder at Inflection Point Ventures.


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