Tech companies struggle to downsize as the rest of the economy warms

A sign is placed in front of a Google office on April 26, 2022 in San Francisco, California. Justin Sullivan / Getty Images

There has never been a better time for Americans to find work. Job opportunities recently reached a record high, while the unemployment rate fell to a historical low before the pandemic. It’s an entirely different story in the tech sector, which accounts for a relatively small percentage of the US job market but offers some of the highest paying jobs.

A wave of layoffs has hit tech companies big and small in recent months. Their CEOs cite reasons such as rising labor costs, due in part to inflation, as well as slowing business and a lack of money in both private and public markets. Even industry giants, including Meta and Google, have frozen hiring for some engineering positions for the rest of the year.

Since the start of 2022, 54 tech startups have laid off thousands of employees, more than twice the number of companies that laid off during the same period last year, according to Layoffs, a crowd-sourcing playlist of companies that cut jobs since the start of 2022. That moment. The epidemic began. The biggest cuts this year were seen at, the online mortgage provider best known for its Zoom shooting spree in December 2021, and Peloton, whose home fitness equipment gained popularity during the Covid lockdowns but is losing its appeal as the ebb the epidemic. fired 3,000 additional employees, or 33 percent of its total workforce, in March. Peloton left 2,800 corporate workers, or 20 percent, in February, citing a continuing decline in the company’s business.

For many companies, layoffs are a course correction after very rapid growth for too long. CEO Stephen Galanis said the number of employees at Cameo, which sells videos dedicated to celebrities, “has risen from 100 to 400 during the pandemic. The company laid off 87 workers last week.” Robinhood CEO Vlad Tenev wrote in a blog that the investment app Robinhood , which cut 9 percent of its staff in April, has grown from 700 to nearly 3,800 between 2019 and 2021.

“Technology has been on fire for a long time. As a result, valuations, in certain cases in both public and private markets, are becoming unrelatable and irrationally abundant,” said Anand Sanwal, CEO of CB Insights, a research firm specializing in private market firms. .

Technology is too late to correct

Between March 2020 and the end of 2021, the Nasdaq Composite Index, where the so-called “growth stocks” are concentrated, rose by more than 100 percent, far outpacing the Dow Jones and Standard & Poor’s 500 indexes. During the same period, Peloton’s share price rose 700 percent. Cameo’s stock price has nearly tripled.

But that is no longer the case in 2022. The Nasdaq is down nearly 25 percent, and the Dow is down more than 11 percent.

“We are seeing the market correct these imbalances now to bring a little bit of rationality back to the technology,” Sanwal said. While the tech sector is too late to correct, it is not isolated from the broader economy. “If the technology slowdown continues and layoffs accelerate, you can expect that some industries that rely heavily on technology spending, such as marketing agencies and recruitment firms, will eventually also be affected,” he said.

Fear of an economic slowdown has shifted to the private market, prompting venture capital investors to make fewer and smaller deals. In the first quarter of 2022, venture investment in the United States shrank to just over $70 billion, down from $95 billion in the previous quarter and 10 percent less than a year ago, according to PitchBook, a provider of private capital market data. .

“We expect more layoffs at VC-backed companies. A lot of these companies just need to reposition their businesses to make sure they don’t need to raise money in the next six months,” said Kyle Stanford, senior venture capital analyst at PitchBook.

Most venture-backed tech companies are not yet profitable and rely on investor money to keep their employees on the payroll. Therefore, when the new capital dries up, they quickly find themselves running out of cash.

On Deck, a platform that connects founders to startups that fired 25 percent of its employees earlier this month, was planning to raise between $100 and $150 million in project funding, but ended up with less than $40 million, according to TechCrunch. , leaving the company with only enough cash to operate for nine months.

Economists don’t see the stock market changing direction anytime soon. With bond yields rising and the Federal Reserve confirming its intention to continue raising interest rates, investors are increasingly turning away from stocks to bond assets. “Growth stocks are doing well in a world of chronic recession, low rates, low inflation, low growth. The immediate environment we live in is nothing like this,” said Megan Green, an economist at Harvard Kennedy School. “So, investors have been switching from growth stocks, including In that technology.”

Tech companies seek to shrink as the rest of the economy warms

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