Tech groups cut jobs and risk in a new market-beating reality

“It’s a tough day,” read the email subject line to Little Shelly from Boss at Carvana, an online used car retailer.

The memo noted Little was one of about 2,500 employees laid off from the US-based company this week, in a mood that another employee described as “mass hysteria.” Since the beginning of the year, inventory at the company famous for its high-rise, multi-storey “car vending machines” is down 87 percent.

“Since the repercussions of those kicks are in all I can think of is–awesome,” Little wrote on LinkedIn, telling her friends and co-workers that she was one of the 12 per cent in the Caravana who was shown the door.

Its experience reflects the sudden sobriety that has descended upon the US tech sector, spurred by a deep and widespread sell-off in stocks as investors fear rising interest rates and slowing economic growth.

Privately owned companies are forced to readjust expectations about valuations, access to financing, and risk appetite among venture capitalists who may not throw caution to the wind.

said Simil Shah, founder and general partner at San Francisco-based venture capital firm Haystack.

“If you really count your chickens before they hatch, or you think about all the fortunes that will come your way, it will take some time.”

In the public markets, Carvana has been one of the hardest hit, but it is by no means alone. DoorDash, the US market leader in restaurant food delivery, is down 60 percent so far. Affirm, one of the largest in the once-popular buy-now-pay-later segment, crashed 85 percent. Shopify, the e-commerce operator regularly described as the most serious threat to Amazon’s e-commerce dominance, is down 77 percent.

DoorDash, the US market leader for restaurant delivery, is down 60 percent since the beginning of the year. © Michael Nagle / Bloomberg

Even the big tech companies, considered some of the fastest growing stocks over the past decade, have suffered major declines. Apple, Amazon, Alphabet, and Meta have collectively seen $2.1 trillion wiped off their market capital. In the case of Apple, its $600 billion decline was enough to see Saudi Aramco dump it this week as the world’s most-traded company by value.

Brent Till, an analyst at Jefferies, said the energy giant’s take on the role illustrates the shift in investor confidence from companies with solid earnings growth, but whose bottom line earnings are more shaky to those that are sure bets.

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“It’s massive, full-tech vomiting, complete ejection button,” he said. “It’s been less than a year and all the high-growth software companies are now a no-profit villain. I think it’s a sweeping shift from technology to the defense, energy and utilities sectors.”

Tech companies react by addressing the essentials – cutting costs, reducing cash burn, and focusing on the essentials.

“I’ve been talking about free cash flow more than I think since I took my first accounting class, it’s kind of crazy,” said one of the people at a major public tech company.

Similarly, at Uber, where its stock is down 49 percent this year, CEO Dara Khosrowshahi told employees in a note last weekend: “Goal rules have changed. Now it’s about free cash flow.”

“In times of uncertainty, investors look for safety,” he added in the note, first reported by CNBC and verified by the Financial Times. “They know we’re the tiered leader in our categories, but they don’t know the value of that. Guiding Jerry Maguire, we need to show them the money.”

After a major rebranding and reorientation of his company last year, Meta CEO Mark Zuckerberg’s enthusiasm has given way to more fickle enthusiasm for big investment. The social media company pledged last month to cut its spending forecast by several billion dollars this year.

The vertical graph of Leave-to-Employees from start-up companies shows layoffs being collected

To achieve this, Meta pulled the handbrake on the aggressive growth of the number of employees. According to an internal memo from Meta CFO David Wehner obtained by the Financial Times, it recruited more employees in the first quarter of this year than in all of 2021 — but that’s over.

“We need to take another look at our priorities and make some tough decisions about which projects to take in the short and medium term to achieve the lower expense guidance we have committed to through earnings,” he wrote, adding, “This will affect nearly every team in the company.”

Another executive note in Meta stated that scheduled job interviews for what would have been potential junior and mid-level engineering employees would be “sensitively cancelled.”

Twitter, which is likely to be on the verge of being acquired by Elon Musk, said Thursday that it has not achieved its “average milestones” for growth, so it is “stepping back on non-labor costs to ensure we are responsible and efficient.”

Companies across the tech sector are taking a closer look at headcount as an immediate way to cut costs. Layoffs.fyi, which tracks layoffs between public and private tech startups, recorded an increase at the beginning of February, although levels are still well below the early stages of the coronavirus pandemic. Among the private companies laying off the staff are Reef, celebrity promotion platform Cameo, and diet and wellness app Noom.

How the sale of technology is starting to affect the private sector, and the ecosystem of finance that supports it, is just beginning to be felt.

According to a report published by analytics group PitchBook this week, companies closest to moving into public markets and seeking to raise larger rounds were the first to encounter headwinds, experiencing “a much different feeling from investors” compared to the valuation surge in 2021.

According to CB Insights, global venture capital funding in the first quarter of 2022 was down 19 percent from the previous quarter, the largest percentage drop since the third quarter of 2012. The number of public exits — whether via an initial public offering or a merger Spac – down 45 percent.

Shah Hastak said that money for start-ups is already becoming more difficult to obtain from companies that do not have a well-established business model.

“People still write checks,” he said. “But if you’re amassing 500,000, or 5 million or 50 million, you have to fight for it — a lot more than you would have been fighting for a year ago.”

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