What triggered layoffs ?
Being an investor in equity markets, i was aware of the fact that US market will crash as the free money by fed draws back. I obviously was not able to link this up with the funding dry-ness. I still expect a founder to be aware of these economic events. I am curious how could the management decide to go for hiring employees only to lay them off a year later. If you are a founder, would be happy to know the other side of the story.
Let me explain in detail.
There are two parts to it and can be broken down basis PnL
1. Revenues : Sudden jump in tech( social media, e-commerce, ad tech, fintech, etc) plus supporting industries (chipmakers, laptop / device manufacturer) and the general economy with QE money
This impacted forecasts as most firms forecast AOPs basis historically trend (which clearly was an abberation) - this lead to higher HC estimates and rampant and quick hiring
Variable costs: CAC, customer support, sales incentive all spiked up as 1. Everyone was putting money (inc bidding price for key words) and 2. Huge customer inflow due to covid (edtech, e-commerce) that required support
Fixed costs: While office space / rents remained steady or dropped as % of revenue. This was offseted by fixed tech (software, hardware, people) costs and other costs like (legal, HR, Business, Marketing, supply chain, etc.) the talent was expensive to source plus their need was instant as you already had customer to be served
All of this lead to rampant hiring, inflated CTC, rosy forecasts, etc.
everyone had turned a blind eye to inflation implications (as for the past 30 Y no one saw a shooting inflation - hence the key decisions makers had now experience & idea about it) - till Dec’21 even FED said inflation is transatory.
It was the Ukraine invasion that opened people eyes. Oil went up, food prices went up, UK Europe saw an energy crisis etc
This made all the rosy forecast mentioned above duller as 1. Demand was expected to reduce due to higher cost of living 2. Capital became scarce as funding drired 3. Cost of capital (WACC) became expensive as hurdle rate climbed (which is rate of return for bond)
Management and investor panicked as they have limited partners (LP) to answer and quess who are these (big pension funds) so people’s pension money had come into startups which were not showing signs of exit for investors.
All in all - it is a pain we all have to bare for being exuberant in 2021-2022:
Brilliantly put. But I think some hope is on the corner. Once the Russia-Ukraine war stops or ceasefire happens, economic should start to pickup again.
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Am founder didn’t layoff. Started with a small team of 5 people increased the headcount to 7.
The reality in many startups is they’re run by people who are doing it for fun. VC funding meant they can increase headcount but it didn’t help them in growth.
Most of the lockdown hiring came coz of bull market. Layoffs were correction. Most of the places I saw management taking this decision even if the startup was healthy it was to cut people who weren’t adding any value to the company
The way i see it is, to monetize, startups need to experiment. To speed up the execution they need the headcount. Unless there is really a product market fit most of these experiments fail. Hence the value creation by employees may not be visible but was it really that.
Second thing is, i believe with the funding crunch their is a resource constraint. Resource constraint automatically drives people to go optimal. Precisely put less items will make it to the p0.
The conjecture to all this is, will one really able to monetize without enough experimentation. Hence the headcount.
Founder here, haven't had a need to layoff yet. Considering all my clients are US based, my revenue has only grown. The layoffs are mostly restructuring the businesses and blaming the economy is the easy way out.
Funding hasn't stopped either, my clients are getting VC funded.
Act 1 - high hopes
Pandemic caused people to shift towards e-commerce and companies to shift towards e services. These changes were expected to happen over the 10-15 year horizon, but pandemic accelerated the adaption, and decision makers started estimating much faster adaptation, and hence profitability. This led to sky high valuations, tremendous influx of funding and off the charts hiring and hikes. People expected 15 years worth of growth in 3 years and hence behaved accordingly.
Act 2- the prognosis
Post pandemic the rate of tech adoption dropped like a lead ball, and people started to realise that they over estimated growth. The growth was definitely accelerated by the pandemic but instead of accelerating the 15 year adoption to 3 years, it merely squeezed it to 10 years. There was pressure on companies to justify their bloated valuations and startups started launching products like 10 min delivery and 5 min delivery to show they can justify it.
Act 3- the fat man and the little boy.
The fed slowed their printers and this resulted in tighter liquidity, venture capital slowed or froze. Companies with unviable products, or unviable economics decided to ride out the slowdown while fed managed the "transitionary inflation" and managed a "soft landing". But all their hopes were lost when Ukraine war ensured that stagflation had come. (Indicator of drawn our battle.) Once they realised that the free buffet of investor money had ended many startups reduce their size to survive the winter, and tech giants who had overestimated their growth potential also right-sized. I personally believe, synchronized latoffs were also used in order to push down wage expectations which had frankly become, hillariously unreasonable.
Act4- the future of intelligence.
Money will eventually come back to tech, for this is, where the future is at. But how the money will affect the market will be different atleast because of 2 reasons-
1. Most opportunities are already overvalued.
Contd.
2. Change in labour market. With AI and great autopilot programs, the demand for mediocore or poor programmers is gonna drop. Also, there will be a huge influx of people into tech in coming few years, as every civil /mech/ mining engineer tries to become a data scientist and all IITians irrespective of their stream jump into tech. (Money for nothing and chicks for free mentality)
Thus tech has a bright future and so do the bright minds (innovators, problem identifiers and solvers) of tech. But the middle and bottom rung that flourished in the "pandemic boom", not so much.
MrPandu
Stealth
a year ago
Elon is one factor too. The fact that Twitter is still running after laying off 60% of the employees tells you the story.
Very agree with you. The layoffs were happening very slowly until Elon took the command in his hand, there it tsunami of layoffs thereafter!
sassy_tomato
Stealth
a year ago
Not a founder but from what I’ve read them situation is that a lot of tech overestimated in their projections and over hired during the pandemic. Now, recently banks have increased interests so the cash in market has dried up which has led to a cash crunch resulting in layoffs.
MuddyInk34
Stealth
a year ago
Bitcoin crash, chatgpt, elon twitter acquisition mass layoff, metaverse failures, slowdown in growth post corona...everything had cascade effect.
The increase in interest rates has led to a significant surge in liquidity costs. To illustrate, consider the scenario where your monthly installment for a long-term mortgage during the pandemic was $1,200; today, at the current interest rate, that same installment would be approximately $1,900. When multiplied by the size of a software company's team, the financial implications make it more cost-effective to consider downsizing.
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