What the hell is happening in the Tech Industry?

Temptation of Saint Anthony, Hieronymus Bosch

Disclaimer: this article makes a huge generalization of an industry that is vastly diverse. For the purpose of objectiveness, more specific challenges faced by tech companies such as growing competition inside named segments, won’t be accounted for. Feel free to complement and share your views on the comments.

According to Layoffs.fyi, at the time I’m writing this piece, almost 120.000 people have been fired from startups all over the world since March 2020. More than 700 startups on all levels of investment rounds have discharged from 1% up to 100% of its workforce. “the tech market is crashing”, some are saying.

Venture Capital investment has dropped 19% QoQ on the first four months of 2022, an unprecedented fall since 2018. Nasdaq (USA tech stock exchange) has melted more than 27% since January 2022. “the tech market is crashing”, some are sure.

The situation is dire, but nothing is crashing just yet. Fasten your seat-belt and stick with me because we’re about to get way more technical than usual…

I’ve made a follow-up article to this one, exploring what might come after the storm. If you want to see a more positive outlook on the fallout after the crisis, check it out: Silicon Valley crisis and the Tech Diaspora

How did we get here?

It’s undeniable that things were out of hand. Everybody became a Unicorn on the last 10 years. Pitches without a product or even a team assembled could raise millions on seed investment. While the “real world” economy was suffering the consequences of the pandemic for the past 3 years, tech companies all over the world were enjoying the perspectives that the “new normal” presented.

Although COVID accelerated technology adoption on several fronts by decades, this alleged “new normal” wasn’t so new after a lot of the restrictions were lifted. Even worse, it had to live alongside disrupted logistics chains, high oil prices and the prelude to WW3. Despite the industry’s booming, the consumer market has been feeling the consequences for almost 3 years now. Inflation, unemployment, mental distress… what looked like a fast recovery for the economy at first, now settles down as unfulfilled promises for better days.

People now think twice before consuming anything. Paying a Netflix subscription instead of buying beef is moronic if you can watch it for free on your cousin’s account. Buying a house can wait the mortgage rates come down, it doesn’t matter how amazing the UI of your real state app is. Product Led Growth (PLG) doesn’t seem to be the go-to strategy anymore when consumers have to address more basic expense priorities.

Investment and the lie of exponential growth

Taken from wolfstreet.com

Until recently, tech companies worked mainly under the premise that if revenue growth wasn’t exponential, you were as good as dead. Exponential growth, in theory, should be about doing more with less. From Salim Ismail words:

An Exponential Organization (ExO) is one whose impact (or output) is disproportionally large — at least 10x larger — compared to its peers

Pretty in theory, but far from reality on a lot of tech companies.

Growth (some times not even exponential) has been heavily funded by investors money. Companies toss people at problems until they get sorted out, everything in the name of scale. Need an entire closing team because you’ve just bought a TV prime time add? Sure. Want to hire engineers worth their weight in gold to make buttons change color? Why not?

Tech businesses don’t need the cash flow to do it, they can just show how much they’ve grown the revenue in the past year and funding will come. Although I know it’s not easy to gain funding, the truth is that this was the momentum of the market until now.

The graph at the beginning of this section helps to illustrate how heavy hitters of the industry up until 2020 were still burning money, despite being far from their seed stage of earning market-share. Being big and being sturdy are different things, and a lot of the tech startups out there are paper tigers. When the investor money runs out, they have no foundation to hold themselves up.

A little bit about interest rates

Taken from rsmus.com

It’s said that we are facing difficult times because interest rates are high in response to scaling inflation. Investors would prefere to leave the money sitting at the bank instead of spending it (I myself said it some days ago). It’s not wrong, but it’s also not that simple.

The USA central bank (FED) is a good proxy of global economics. Not only most of the tech capital comes from north america, but dollar treasury bonds are the safest investment in the world. Buying a piece of american debt, the only country in the world liable to print dollars, means you will never not be payed.

When you look at the graph above, FED interest rates are actually pretty small and 10+ years bond yields (how much money you’ll earn compared to how much you’ve spent when you acquire a treasury) are close to 2018s levels. Nobody was firing at 2018. What’s with that then?

The full explanation is way too technical for the purpose of this article, so I’ll jump to the conclusion: Bond yields skyrocket, as seen above, due to lack of demand or because the market expects inflation to linger for longer. Investors are not resorting to safe assets as a simple “easier to make money” tactics. If that was the case, we would’ve seen the current scenario more than once in the past 10 years.

Investors are armoring their capital against the foreseeable melting of their earnings to inflation in the long run.

Not a crash, a landing

I hurled A LOT of information at you… don’t leave me just yet, lets recap:

  • People are thinking twice before consuming, hurting revenue.
  • Tech companies from all maturities have been burning money hiring people to grow revenue at the expense of profitability.
  • Investors expect inflation to last for longer, reducing their gains on current investments in the future.

Inflation, both at the end of the user as well as of the investor, is putting pressure on a wheel that was rolling at full speed not long ago. Investment leads to hiring that leads to growth that leads to more investment. With worried investors and people consuming less, the cycle shrinks and hiring has to follow up.

Hiring has to be adapted to the new reality

Investors in general put their money on startups thinking in the long run. For the purpose of receiving a massive payback when the invested company goes public or gets sold, it’s ok to burn money. But what happens when the perspective of receiving that payback gets further and further away? What if all that money sank never sees the light of day again? Investors would pressure for payback now!

That’s exactly why the market is not crashing. Capital is not abandoning the Tech industry, on the contrary! It’s expecting change. The market is realizing that they threw away moderation through the window, and they are literally going back a few steps to take it back. Profitability is back on the menu.

People solve issues and make money for the company, but they also represent a cost. For the inflated Tech Industry, a HUGE cost. Engineers, Product Managers, Designers; we are receiving up to 100% more compared to other roles with the same seniority. If business have to address profitability, they have to be very sure on whom to keep and at which positions to avoid money waste.

What the future holds

Honestly, anything I say from here on is pure speculation. As I did my research for this piece, a lot of great articles came up. Some of them are mentioned as sources, some are not (like this and this). What seems to be the common ground is that we are going through a stage of adjustment that may or may not last for long.

The amount of big companies laying off huge chunks of their workforce seems to be small. If you think about Netflix, although firing 100 people makes for great headlines, it’s just 1% of their total amount of workers. The biggest out there seem to be leaning towards not hiring anymore instead of firing.

Smaller startups past the seeding stage look like the ones to be hit the hardest. Without proper structure or product maturity to generate enough profit, many will die.

Layoffs tend to continue for some time and I believe it will even get to more famous names such as Meta or Amazon. I don’t see any relevant name on the industry breaking like they did during the .com crisis, but for sure the market will shrink considerably.

If you are currently employed, think twice before moving out and where to.
If you’ve just been fired, hurry up, there are still a lot of opportunities.
If you were thinking about joining any tech career, wait until the dust settles.
If you are thinking of opening your startup, you have my respect. Good luck.

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Antonio Neto

Antonio Neto

Product Manager dealing with backend SaaS products since 2018