The tech industry is bracing for a historic slump

In January, buzzy B2B financial-services startup MainStreet flew its entire...
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'We're on the precipice': The tech industry is bracing for a historic slump amid VC pullback, looming layoffs, and plummeting share prices

By Rob Price, Samantha Stokes, and Diamond Naga Siu

  • It's about to get ugly for the tech industry.
  • Startups and public companies are readying for a wave of cost-cutting and layoffs amid rough market conditions.
  • Inflation is soaring, public market valuations are dropping, and venture funding is drying up.

A lot can change in a few months.

In January, buzzy B2B financial-services startup MainStreet flew its entire staff to Maui for a weeklong working vacation at a glitzy Hawaiian resort. It had raised $60 million in a Series A funding round in 2021, and was gearing up for a similarly hefty Series B in the coming months, company executives told employees.

But a month later, Russia rolled its tanks into Ukraine, exacerbating economic upheaval across the globe and feeding a growing pessimism about the economic stability of the tech sector. When MainStreet's Series B materialized it was significantly smaller than envisioned, and earlier this week the company laid off around 50 employees — roughly a third of its total staff, as Insider previously reported.

The American technology industry enjoyed an extraordinary boom during the pandemic, extending a multi-decade bull run. Giants like Amazon and Apple soared to record-breaking market caps, while private companies received vast cash injections from venture investment firms flush with capital and hedge funds hoping to get in early on the next Airbnb.

But now, amid rising interest rates, supply chain snares and rampant inflation, there's a growing sense among tech industry figures that the good times are rapidly coming to a close, and a once-in-a-generation down-cycle is here.

Ugly layoffs may be brewing across the board, some investors and industry watchers warn — from public tech giants to scrappy startups.

"This will be in the top three corrections of the last 20 years — joining the 2008/2009 Great Recession and the 2000 dot-com crash," said David Sacks, cofounder and partner at Craft Ventures.

The public market is hurting

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Some of the major players are already dialing back costs and hiring.

On Tuesday, Facebook informed employees of an extensive hiring freeze of engineers at the company, as Insider previously reported, with its CFO Dave Wehner warning that reduced hiring targets "will affect almost every team in the company." And at the end of April, Amazon's CFO Brian Olsavsky told reporters that "we quickly transitioned from being understaffed to being overstaffed" — an unusual shift from a company that for years has focused on hiring relentlessly to meet demand.

Amazon's founder Jeff Bezos has also issued warnings about the shifting market. "Most people dramatically underestimate the remarkableness of this bull run.," he tweeted on April 30. "Such things are unstoppable … until they aren't. Markets teach. The lessons can be painful."

It's an abrupt about-face for the industry. High-flying tech companies like Zoom , Okta, Block and Twilio more than doubled their workforces from 2019 to 2021, and their stock prices similarly increased twofold from the beginning of 2020 to November 2021. But since then, their stock prices have each lost about half their value.

Netflix also doubled its stock price from 2019 to 2021 but experienced a 70% drop since November, and the streaming provider has started cutting whole teams, including its newly created publication Tudum. Online trading app and fintech darling Robinhood, which went public in July 2021, has been even more aggressive, laying off 9% of its workforce — around 300 employees — in late April.

Some market-watchers view the ongoing sell-off as a return to more rational valuations after a pandemic-induced frenzy. "It's a course correction because that hype and the peak usage was unsustainable," said Nitish Mittal, a partner in the technology practice at research firm Everest Group. "A lot of this is dependent on the central premise that people are at home and using these services a lot of the time — that is just unsustainable as we recover from the pandemic."

Even before the pandemic, high valuations and cash-rich companies created an environment of high-demand for engineers and technical talent — prompting significant wage inflation in the sector. Keith Hwang, managing director of tech investment fund Selcouth Capital Management, questioned whether these some of high-paid engineers may now be at risk of job cuts.

"We are now reaching a point where I think we've become overstaffed on the programming side," he said. "In the '80s, it was more about everyone wanting to go into banking because banking, you can make $100K out of undergrad. And you saw what happened to that — banking essentially collapsed. And now you're seeing the same situation in software. Everyone and their mother wants to be a programmer now."

It's a bad time to be a high-burn startup in need of VC funding

In private markets, MainStreet isn't the only high-flying startup to feel the heat.

This week, celebrity video app Cameo laid off 87 employees — roughly a quarter of its staff. Thrasio, a startup that aggregates hot brands on Amazon and has raised more than $3 billion, let go off roughly a fifth of its workforce recently. And startup-support firm On Deck has laid off 25% of its staff, around 72 people.

The reason for much of this, industry insiders say, is a retrenchment of capital available for private funding rounds. Investment hasn't tried up entirely — multiple venture capitalists, who wished to remain anonymous, said they were actively working on closing deals — but there's a level of caution that wasn't there at the start of the year.

Venture money into startups totaled $47 billion in April 2022—the lowest amount invested in private companies in the past 12 months, according to a recent report from Crunchbase.

Startups can no longer rely on blockbuster funding rounds to keep the lights on, and need to reconsider their spend and find ways to make their existing cash piles last longer. For some, that will mean sweeping layoffs. For others, that means shutting down.

In April, one-click checkout startup Fast, which raised $120 million in venture capital, revealed to investors that it planned to lay off more than half of its staff, and look for an buyer. A few days later, the $11 billion startup shut down entirely. Although CEO Dom Holland admitted to hiring too fast, insiders said the startup overspent on marketing and lavish executive retreats.

Gossip about further planned layoffs among private startups are already percolating. "The next 6-8 weeks is going to be a bloodbath," tweeted JD Ross, cofounder of music investment platform Royal. "I'm hearing rumors about a ton of companies preparing to lay off 20-40% of their team." Delian Asparouhov, a principal at Founders Fund, wrote: "sign of the times i now hear about layoffs more often than new rounds."

"The closer investors are to the public market, the more dispirited they are because the public market correction in growth stocks has been severe," said Sacks, PayPal's founding chief operating officer who also co-founded startup Yammer and sold it to Microsoft in 2012.

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"The people who are most depressed are the crossover investors, like hedge funds and so forth, because they're actually in the public markets and they're getting marked down every day," Sacks added. "If you talk to venture investors, the growth investors are most nervous and the earlier stage investors are more insulated. Seed investing is probably the most insulated. The public market correction has been trickling down into the private markets since the beginning of the year."

His predictions are already being realized in the funding environment for startups. Seed startups raised $3 billion in April 2022, according to Crunchbase, a 14% increase year over year. However, the amount of money invested in late stage startups was down by 19% year over year.

A number of veteran investors and entrepreneurs like Sacks have taken to Twitter in recent days to dispense wisdom. "An entire generation of entrepreneurs & tech investors built their entire perspectives on valuation during the second half of a 13-year amazing bull market run," wrote Benchmark investor Bill Gurley. "The 'unlearning' process could be painful, surprising, & unsettling to many. I anticipate denial."

'We're on the precipice'

Some investors are already drawing parallels to previous crashes in 2000 and 2007, issuing warnings reminiscent of Sequoia Capital's infamous 2008 doomsday warning, "RIP Good Times." In the midst of the financial crisis of 2008, investment titan Sequoia Capital cautioned founders to cut costs, and "spend every dollar as if it was your last." The firm delivered a similar message to startups as the bubble burst in 2000.

"This is exactly what happened at the dot-com bust, where all these startups basically just couldn't get funding because there was no funding. Everything dried up," Hwang said.

"We saw a big implosion. It started with layoffs, and then it cascaded down into the economy … and that's what it feels like right now, that we're on the precipice of that."

Others are cautioning against excessive alarmism.

"Big Tech taking a bit of a breather after a massive ramp up in terms of personnel over the past couple of years is a healthy step," said Dan Morgan, senior portfolio manager at Synovus Trust Company. "I would be concerned if the large Silicon Valley tech companies started announcing massive layoffs like in 2001-2002. But, we are not anywhere close to that."

Some expect this downturn to spark new innovations down the road. Mark Peter Davis, managing partner at VC firm Interplay, said that as employees at mature companies see their stock options go underwater as valuations drop — or they're outright fired — he expects a "major uptick" in people setting out on their own.

"You're likely to have a lot of great companies started in the next 12 months," he said, adding that while layoffs are really difficult for individuals, "shaking lots of great talent out of the tree" will create opportunities for skilled workers to become entrepreneurs themselves.

"This will be one of those potential silver linings within all of this contraction," he added. "There's a real medium- to long-term optimism that comes out of this situation."

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