It feels like layoffs in the technology sector make headlines every other day. In the past couple of weeks alone, companies ranging from Amazon to Meta and beyond have announced thousands in layoffs, with Accenture joining their ranks Thursday. The company announced it would let go of 2.5% of its workforce – 19,000 employees.
More than 140,000 tech workers were laid off in 2022, but 2023 seems determined to best that, with over 100,000 tech jobs cut to date. Experts believe this trend is likely to continue as companies recalibrate in the wake of the pandemic and brace themselves for a potential recession.
With the tech sector accounting for 10% of US GDP and 7.9% of total employment, these numbers may seem like a harbinger of tumultuous times ahead. A closer examination of the factors in play, however, paints a very different picture.
When you hear that hundreds of thousands of jobs are being cut at tech companies nationwide, it sounds like the industry might be floundering. After all, if things were going well, they wouldn’t need to let so many employees go, right?
It’s not that simple. Though it likely comes as no consolation to the individuals impacted by these tech layoffs, the number of jobs lost makes up a relatively small percentage of these companies’ total workforces. Among some of the biggest tech companies cutting jobs, they’re slashing, on average, about 9% of their workforce.
Data Sources: USA Today, TechCrunch
Meta, notably, is the exception in this comparison. But unlike other tech titans, Meta also took a major financial hit last year due to performance. In 2022 alone, the company’s bet on virtual reality and the Metaverse delivered a loss of $13.72 billion.
For most other tech CEOs, the reasoning behind their job cuts has more to do with bracing for broader consumer shockwaves in the coming months. To quote James Carville, “It’s the economy, stupid.”
Though bulls and bears continue to spar on TV, some expert estimates put the likelihood of a recession in the next year as high as 99%. Tech CEOs are keenly aware of this, frequently referring to the need to go “lean” in public and internal statements – just in case.
But it goes beyond the recession bogeyman. Interest rates, in particular, have taken a toll on tech company operations and valuations. The Federal Reserve’s aggressive rate hikes have forced them to discount their cash flow models, directly impacting their valuations. In turn, their access to the capital required for expansion is limited.
To improve the situation, companies attempt to shrink operational costs by cutting staff. This route is especially attractive in a world of still high inflation. With the cost of living high and the labor market tight, an understandable demand for higher wages has emerged. To this end, theoretically, layoffs deliver a larger impact to the bottom line than they might have. Tech companies can’t control what inflation does to some of their costs, but they can control spending on their workforce.
Sometimes, a company’s internal numbers have less to do with its decision-making than broader sector trends. That’s not fuzzy math. It’s rooted in psychology. As an article from Fast Company explains:
Tech companies were, in many cases, overstaffed by the middle of 2022. But there’s no easy algorithm to tell a company how much it’s overstaffed. So looking at what other companies in their industry were doing was a natural response. It’s an example of what social psychologists call “social proof”: when people are in ambiguous situations where the correct way to behave is not obvious, they will often look at what those around them are doing in order to decide what to do.
But don’t feel too bad for them just yet. Research from fintech firm Tipalti shows they’re still raking in obscene profits.
Source: Tipalti (Check out their clock. It will blow your mind.)
Put another way: none of this means that these companies are collapsing. Prompted by data or sentiment, they’re tightening the belt in order to hedge their bets on the economy and enable further growth.
Underneath the widespread tech layoffs, another perhaps more difficult challenge simmers: hiring.
The US is in the middle of a broad labor crunch at odds with the sprawling cuts making headlines. The numbers pointed out by the Harvard Business Review are eye-opening:
In a recent report, the National Federation of Independent Business showed that the hiring struggles of main street business owners are still very real. Of those hiring, 90% reported no to few qualified applicants for their open positions. And the BLS still reports 10.5 million unfilled jobs, 38 percent higher than the pre-pandemic record of 7.6 million.
So while the layoffs are disconcerting, they are not necessarily the biggest problem in front of employers today – tech or not. This is reflected in the fact that most employees laid off by tech companies in the past year were able to find new employment within a couple of months.
Such trends manifest in a stubbornly low unemployment rate. As of February, unemployment in the US came in at 3.6% – just over the 53-year low in January. Initial jobless claims data Thursday came in at a three-week low.
That might seem like good news, but with the Federal Reserve signaling that their rate hikes will persist until the job market cools off, it creates a situation where tech companies continue to feel the heat.
It’s great news for job seekers and companies outside of tech, though. As tech companies rushed to hire during the pandemic, flashy brand names and high salaries lured talent away from other sectors with similar needs. As CNBC explains:
[T]ech workers are moving into roles at companies in industries that are not traditionally “tech,” from food to fashion. The most competitive recruiters at these companies set up outreach events during industry conferences to find talent long before the need becomes acute.
“I think it’s better for tech talent because they are not confined to looking for a job at a ‘tech company,’” [interim head of talent at recruiting firm General Assembly Lupe Colangelo] said. “It means that every company is a tech company.”
While most laid off by tech companies find themselves favorably positioned in the job market, they aren’t always interested in working for someone else. As one article found, they increasingly decide to go into business for themselves:
A survey of 1,000 laid-off tech workers conducted by Clarify Capital LLC found 63% of the respondents started their own company after their layoff. And tech workers reported they made more money after starting a company.
Accelerator Y Combinator reported a jump in startup applications of 20% in 2022 and noted the number of applications filed in January 2023 was five times higher than the previous year. An increase in startups creates new jobs and presents an investment opportunity for venture capitalists and individual investors to capitalize on exciting new startup opportunities.
This information tells us a few things. First, the tech sector actually is expanding. Still profitable titans might not be experiencing astronomical growth, but the sector as a whole has grown wider. To some end, this underscores the hiring crunch tech companies are already facing.
It also highlights a significant opening for private equity and venture capital. Record levels of dry powder globally (or cash available for investing) means there’s plenty of money to spread around. With so many new startups to consider, there are a wide array of opportunities available to savvy investors.
That doesn’t mean a free-for-all. Market conditions continue to urge caution for all parties. Crunchbase reports:
Investors are likely to hold back in 2023, at least in the shorter term, as funding valuations trend down. Founders are becoming more disciplined around spending, which will impact growth. And limited partners who overextended in venture capital assets would prefer firms to come back to raise subsequent funds with wider time horizons.
All of these new conditions will make for a much more cautious funding environment next year.
That doesn’t mean the opportunities aren’t there, either – just that entrepreneurs and investors alike are being careful about how and when they’re seized.
While big tech brands continue with layoffs, one corner of the sector shines bright: green tech.
Green technology companies (sometimes referred to as “climate tech”) soared in 2022, attracting trillions of dollars in investment worldwide. There’s good reason for that. A confluence of climate change realities, shifting public sentiment, and government incentives have made the space more attractive by the day.
The promising startups dotting this landscape aren’t doing layoffs. While others seeking to hire tech workers are struggling to attract talent, green tech companies face an abundant, eager talent pool. As a recent New York Times article highlighted, entire organizations have sprung up to support the trend:
One effort, Climate Draft, aims to help climate start-ups find advisers, investors and employees from the tech industry. More than 3,000 recently laid-off tech workers have signed up to learn about jobs at climate companies, the company said. Another online community, Work on Climate, has ballooned to 16,000 members since it began in 2020. People use it to network and learn about jobs.
Diego Saez Gil, a founder of Pachama, a company that funds reforestation and sells carbon credits, said he had recently hired people from Meta, Google, Amazon, Airbnb and Tesla, with some even taking pay cuts to join. That’s a change from his past start-ups, where he found it tough to recruit people from big tech companies who would take pay cuts.
This is fantastic for green tech companies – not to mention a world in desperate need of their innovative solutions. It’s also an encouraging sign for investors interested in the space.
Though some are still smarting from the so-called “clean tech bust” just over a decade ago, this time looks and feels different. That go-round started with Al Gore’s An Inconvenient Truth, was bolstered by prominent investors sounding the alarm, and offered an outlet for those scalded by the dot com bust but still interested in new tech exposure.
The urgent message was the same. The world was dying and green tech was necessary. But insufficient public and governmental support combined with expensive solutions and unreliable operations to cut the run short. The collapse of Solyndra marked a turning point, with hundreds of millions swirling down the drain in its collapse.
Today is different. The tide of public opinion has turned. Natural disasters continue to increase in severity and frequency. Technology advances have improved effectiveness while bringing down costs. Governments from every corner of the world are taking steps to cut back their carbon footprint while empowering companies and individuals to do the same.
And thanks to these dramatic layoffs in the technology sector, green tech companies have access to the talent needed to make a difference.
To this end, green tech might end up capturing more of the dry powder floating around in private investment spaces. According to a report from McKinsey, that looks more than likely:
Climate-focused capital has been deployed rapidly. The global volume of climate-oriented equity transactions in private markets—equity investments, from pre-seed to buyout, in energy transition technologies and other climate solutions—increased more than 2.5 times, from about $75 billion in 2019 to about $196 billion in 2022, according to PitchBook, a database of private-market deals[.] That represents average annual growth of about 40 percent. In 2021, investment reached $183 billion, an increase of almost 90 percent from the previous year. From 2021 to 2022, the level of investments grew by nearly 7 percent. That kind of performance contrasts sharply with the overall private-market equity deal volume, which declined by roughly 24 percent from its 2021 levels.
All this to say that, whether you’re an entrepreneur or investor interested in tech, it looks like you’ve got a better chance of making green with green investments – no matter what tech layoff headlines want you to think.
Though we will likely see additional rounds of tech layoffs in the months ahead, take the doom-and-gloom prognostication about the tech sector with a grain of salt. The economy in general is set up for a stumble, but that doesn’t make tech (or equities) a bad long-term bet.
But as is the case with any bet in any space, there’s risk involved. By all means, keep your eye on headlines and data trends. Speaking with a professional, though, will help you keep your head on your shoulders and – hopefully – your money in your pocket.
Check out the upcoming Earning Green by Investing Green event on April 27, 2023. A one-day event featuring experts from across the green economy, this symposium on navigating the green economy seeks to provide investors, asset managers, advisors, and other professionals with the information and perspectives they need to make smart, ethical, and lucrative choices in their portfolios. Attend in person or stream the event live, but don’t miss out!
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