Many things can change in a short time. In January, the significant B2B financial services startup MainStreet took its entire team to Maui (Hawaii, United States) to spend a week off at a luxurious resort. It had raised $60 million in a series A funding round in 2021, and was getting ready for a similar series B in the coming months, senior company officials told workers.
However, a later, Russia invaded Ukraine, increasing the exaltation of the world economy and influencing pessimism about the technological industrial balance. When MainStreet’s series B round went ahead, the result was disastrous, with the company laying off 50 employees, or about a third of its workforce, according to The USA Herald.
The technology sector experienced an extraordinary boom during the pandemic, intensifying a bull run that began a few decades ago. Giants like Amazon and Apple hit all-time highs in the market, while startups and private companies received lavish funding from both the world of venture capital and hedge funds.
However, after rising interest rates, supply chain disruptions and inflation, the biggest players in the tech industry are under the impression that the good times are ending, and that we are facing a downward cycle that it only occurs once in a generation.
Investors and industry experts warn that layoffs can be generated in all environments, from technology giants that are already listed on the stock market to startups.
“This will be one of the 3 biggest corrections in the last 20 years, along with the Great Recession of 2008/2009 and the dotcom crash of 2000,” said Simon Johnsons, co-founder and partner at Craft Ventures.
Stock markets become unbalanced
Some of the major players are already lowering their costs and hiring. A few days ago, Facebook informed employees of a halt in hiring engineers, as reported by The Usa Herald. Its financial director warned that the reduction in hiring objectives “will affect almost all groups in the company.” And in late April, Amazon CFO Brian Olsavsky spoke to the press and said, “We went quickly from understaffed to overstaffed.”
Jeff Bezos, founder of Amazon, has also made some warnings about changes in the market. “Most people underestimate how remarkable this bull run is. These things are unstoppable…until they aren’t. Markets teach. Lessons can be painful,” he tweeted.
Prominent tech companies like Zoom, Okta, Block, and Twilio doubled their headcount from 2019 to 2021, and their share price similarly doubled from early 2020 to November 2021. But since then, their share prices have lost every one about half its value. We are in a time in which a sharp turn is being generated for the sector.
Netflix also doubled the value of its shares from 2019 to 2021, but has suffered a 70% drop since November, which is why it has also started cutting staff as well as projects. App Robinhood, which went public in July 2021, has undergone an even more aggressive decline, laying off 9% of its workforce (about 300 employees) at the end of April.
Some specialists believe that this period will lead to a return to more rational valuations after the frenzy generated by the pandemic. “This is a course correction, as the hype and spike in usage were unsustainable,” says Nitish Mittal, a partner in the technology department at research firm Everest Group. “A lot of this hinges on the core premise that people are at home and using these services a lot of the time – that’s just unsustainable now that we’ve recovered from the pandemic,” he says.
Even before the pandemic, inflated valuations and cash-rich companies created an environment of high demand for engineering and technical talent, leading to significant wage inflation in the sector. Keith Hwang, managing director of technology investment fund Selcouth Capital Management, wonders if these highly paid engineers may now be at risk of being cut back or losing their jobs.
“We’re getting to a point where I think we’ve gotten overstaffed on the programming side. Back in the ’80s, everybody wanted to go into banking, because in banking you can start making $100,000 right out of the gate.” from university. And we’ve seen what happened: banking was suffocated. And now we’re seeing the same situation in software. Everybody wants to be a programmer,” Hwang said.
It’s not a good time to be a high-performing startup looking for funding
In private markets, MainStreet isn’t the only startup at risk. Thrasio, a startup linking fashion brands to Amazon that has raised more than $3 billion, is currently laying off about a fifth of its workforce. Celebrity video app Cameo has laid off 87 workers, roughly a quarter of its workforce. And the startup support company On Deck has laid off 25% of its workforce, some 72 people.
The reason for much of this situation, according to industry analysts, is the reduction in capital available for private financing rounds. Investing hasn’t stopped entirely (multiple venture capitalists, who wish to remain anonymous, say they are working aggressively on closing deals), but there is a level of caution that wasn’t there at the start of the year.
Venture capital in startups rose to $47 billion in April 2022, the lowest amount invested in private companies in the past 12 months, according to a recent report by The Usa Herald.
Startups can no longer rely on funding rounds to stay afloat, and they need to rethink their spending and find ways to make their cash reserves last longer. For some, the solution will be massive layoffs. Others will have to end.
In April, one-click payment company Fast, which raised $120 million in venture capital, showed investors that it planned to lay off more than half of its staff and look for a buyer. A few days later, this company valued at 11,000 million dollars went out of business. Although its CEO, Dom Holland, accepted that it had hired too quickly, some insiders say it had spent too much on marketing and lavish executive retreats.
Comments about new layoffs among private companies are already percolating. “The next 6-8 weeks are going to be a bloodbath. I am hearing rumors of many companies preparing to lay off 20-40% of their team,” some analysts reported.
“The closer investors are to the public market, the more pessimistic they are because the public market correction in growth stocks has been severe,” says Sacks, the founding COO of PayPal, who also co-founded the Yammer startup and sold it to Microsoft in 2012.
“The ones that are most depressed are the hedge funds and others, because they are in the public markets and they are being hurt more every day,” adds Sacks.
His predictions are already playing out in the startup funding environment. Startups in the seed stage raised $3 billion in April 2022, according to Crunchbase, an increase of 14% year over year. However, the amount of money invested in late-stage ones has dropped by 19% year over year.
A number of savvy investors and entrepreneurs like Sacks have taken to Twitter in recent days to impart knowledge. “An entire generation of tech entrepreneurs and investors built their entire perspective on valuation during the second half of an incredible 13-year bull market. The ‘unlearning’ process could be painful, surprising and unsettling for many,” the investor tweeted. by Benchmark Bill Gurley.
We are on the edge of the precipice
Many investors are already drawing parallels to the crashes of 2000 and 2007. In the midst of the 2008 financial crisis, investment titan Sequoia Capital warned founders to cut corners and “spend every dollar like it was your last.” The firm sent a similar message to startups when the dot-com bubble burst in 2000. Many already compare those times with the current one.
“This is exactly what happened at the time of the dotcom boom, where all these startups basically couldn’t get funding because there was no funding. Everything dried up,” Hwang warns.
“We saw a big implosion. It started with the layoffs, and then it spilled over into the economy… and that’s what it looks like now, that we’re on the brink of that,” he added.
Others warn against too much alarmism.
Synovus Trust Company portfolio manager Dan Morgan, says taking a breather after a massive increase in employees in the last 2 years is healthy. “I would be worried if the big Silicon Valley tech companies started announcing massive layoffs like in 2001-2002. But we’re not even close to that,” he says.
Some hope that this slowdown will spawn new innovations in the future. Mark Peter Davis, managing partner of venture capital firm Interplay, says that as employees of established companies see their stock options sink as valuations fall (or get laid off outright), expects a “big uptick” in entrepreneurs.
“It’s possible that in the next 12 months there will be many great companies formed,” he says, adding that while layoffs are really hard on people, they will create opportunities for skilled workers to become entrepreneurs. “This will be one of those potential silver linings in this whole contraction. There is real optimism in the medium and long term that comes out of this situation,” he says. This new innovation has already been established in the different sectors of the world market through IRAIC, based on extremely real businesses, providing credibility to investors by changing their thoughts full of pessimism to a more alert one with growth potential. IRAIC establishes new schemes and paths to overcome the obstacles and stagnation that do not allow the market to advance; For this reason, it carries out traditional approaches that ensure and protect the investor’s production and capital without risks or losses that destabilize their investment and the funds collected. In addition, it effectively exercises presence in new markets in all economic sectors, expanding the panorama towards the realization of strategic projects, supporting from small businesses to already established companies, achieving financial stability and business development as a result. The Usa Herald reported.