The past few weeks have been rough for tech executives and founders in the startup scene. The market has been in freefall with share prices falling to historic lows, companies folding and more relevantly, managers axing significant portions of their workforces in a wave of layoffs that has hit hundreds of tech companies across the globe.
According to data collected by layoffs.fyi since January, more than 50 companies have announced serious cuts to their staff numbers in massive cost-cutting measures as investor purses keep tightening.
Among them are companies such as Robinhood and On Deck which have cut 9% and 25% of their staff respectively. Netflix’s editorial arm Tudum had to lay off 25 people in the wake of subscription loss in the last few months. Even Amazon, one of the largest employers in America had to send some of its aggregator -Thrasio workers home with even the CEO not making the cut, replacing him with former president of Airbnb Greg Greeley.
Over at Cameo the CEO took to Twitter to express his “painful decision to let go of 87 beloved members of the Cameo Fameo.” Could have at least spared your poor employees from corporate nicknaming in your farewell tweet.
And, the carnage doesn’t end here. Over the next few months, more startups and established tech companies are expected to follow suit in what could be one of the worst periods for tech companies in the past decade. The tech scene is quickly starting to look like the aftermath of a battlefield with hundreds if not thousands of unemployed workers ‘slain’ on the battleground.
For the next few weeks at least, the startup market is expected to get messier as companies struggle for survival. Executives are going to face a lot of challenges; key among them is determining the cause/s of this crisis and when, if ever, things go back to ‘normal.’
Pandemic Induced Layoffs
Startup market downturns are however not a new phenomenon, at least not in the last few years. During the pandemic, late in 2020, we saw a similar market crumble in what felt like days. That crisis was like nothing most of the current crop of gen z and millennial founders and investors had ever experienced. So much so that tech layoff tracker layoffs.fyi was built to keep a beat on the carnage. At its height, there were more than 60,000 job cuts counted up in the second quarter of 2020. This is a lot more than what we are seeing even today.
Fortunately, the crisis did not last forever. Startups and their investors realized shortly after, that most companies would remain strong during and after the pandemic. This slowed the rate of layoffs, at least temporarily. Software companies were back up, enjoying record demand thus fueling a sort of 2021 SaaS bubble.
Regrettably, nothing lasts forever and the bubble has finally burst. The bad times are back, with a bang. Only this time we don’t have the pandemic to blame.
Bursting the Bubble
For many founders, the current crisis is just a blip in what has been one of the most bullish startup markets in recent history, at least as far as they are concerned. For them, startups are hot property and always will be, the amount of money they attract is a reflection of this ‘obvious’ fact.
And who can blame them, over the last two years “venture capitalists passed around multimillion-dollar deals like canapés at a cocktail party.” Huge investment firms like Tiger Global have been closing deals worth billions of dollars over the last few months. In India, for instance, the firm has been really aggressive with its investments closing more than 25 deals by April this year. These were massive deals that averagely ranged from $10 million to $100 million. Tiger is also an investor in over 20 of 47 Indian unicorns.
More worryingly some of the deals were reported to be concluded via Zoom calls, most within two to three weeks after the first call from the investment firm.
Deals like these raise overall investor confidence which is a good thing. However, this sometimes leads to the creation of somewhat of a startup bubble if there are no proper products to justify these investments. This bubble would sooner or later burst. What we are seeing today, in my opinion, is just the first wave of the fallout, many more layoffs and ‘restructuring’ are going to be announced in the coming months.
What’s more, VCs are going to be more stringent and cautious with their cash from now on. This will further weaken the startup market which wholly depends on investor confidence. It is going to be a lot worse before it gets better for startups.
The best we can do for now is to learn from our mistakes. To do that we will first have to find out why VCs like Tiger Global had been so generous in the few weeks preceding the crisis. It is not good for the startup market in the long term and one would think that an established investment firm like Tiger Global would know that by now.
Disadvantages of Long-Term Optimism in the Startup Market
The current tech startup market is unique in that capital has been incredibly cheap, available and patient compared to previous markets. While this is laudable, as these are the conditions every startup needs to succeed, it can lead to mistakes and billions of dollars of losses.
Following the successes of companies like Apple and Amazon, many VCs take the long term, laissez-faire approach to investing. They are willing to avail boatloads of cash to a wide variety of startups in the hope that at least one will prove to be successful. This is how we ended up with cases like Theranos and WeWork which secured $1.1 billion and $20.6 billion respectively off products that either did not work well or were completely non-existent. Moreover, these unscrupulous founders did not dupe unsuspecting, naïve, average investors; they got funding from top-notch firms such as Goldman Sachs and Fortress Investment Group.
Legendary VC and founder Marc Andreesen advise investors to follow Berkshire Hathaway CEO Buffett’s advice to “Keep all your eggs in one basket, but watch that basket closely.” Speaking to Bloomberg’s David Rubenstein in a recent interview he said this was the best advice he got from the ‘Oracle of Omaha.’ “Really know what you’re doing,” he said. “Really deeply understand the nature of what you’re investing in.”
Unfortunately, tech ‘modern’ tech VCs really like portfolio diversification and have an almost delusional belief in the immortality of tech startups. They are the main reason behind the mess we are in today. Too much money coming in too fast, without due diligence.
The post-pandemic economy has only revealed what a few cautious investors knew from the very start: most tech startups are overvalued. The current market downturn, for them, is just a market correction for past mistakes made by over-optimistic VCs.
The good news is that the crisis will filter off the worst startups; the ones that did not deserve funding in the first place. Like in the jungle, the forces of natural selection are in full force; only the strong and the most resilient will survive.
When the dust settles, only stable, financially astute startups whose products are truly valuable will remain standing. This is what they should have been from the very beginning.
Tech investor, founder and executive of MicroAcquire summarized this well in a tweet saying: Good Startups thrive in bull markets. Great startups thrive in bear markets. The best startups thrive in any market.