The Grim Reality

The past year has been a tumultuous time for the tech industry. There was a big crash in tech stocks in the first half of 2022, resulting in the holding of funding by VCs. Then, there were major layoffs making headlines across the globe, and they have even continued in 2023.

Tech firms from Silicon Valley to New York City have let go of thousands of employees. According to Layoffs.fyi, a site that tracks job states losses of around 160,000 employees in the tech industry in 2022. These layoffs have been surprising given that the tech sector was considered a beacon of growth and stability in 2021, with 25% annual growth.

The reasons behind these layoffs are complex and multifaceted. Some analysts point to the global economic slowdown as a major contributing factor, while others suggest that these companies overextended themselves in the years leading up to the layoffs.

Whatever the case, there is no denying that the tech industry is facing significant change and uncertainty.

Or is it?

In this article, we will explore the major layoffs that have taken place in the tech sector over the past year and examine the underlying reasons for these seismic shifts.

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The outlook is grim!

I hate that we’re still talking about this but, the Covid-19 pandemic and consequent lockdowns created an immense demand for technology services and products. This, coupled with low-interest rates and increased funding, led to massive investments and growth in the sector.

2021 saw a doubled Nasdaq Index, well-received IPOs, and a high valuation of tech startups. Many firms went on a hiring spree driven by the increased demand for their products and services.

However, the situation reversed in 2022. Due to its sheer focus on growth, the VC industry led to overvaluation and financial struggles for many startups. Rising inflation with sky-high interest rates resulted in the loss of easy capital. And with the impending recession, the situation is getting no better.

Facebook, Amazon, Google, and Apple collectively lost over $3 trillion in market value. While Google suffered a loss of $700 billion, and Meta lost $600 billion.

Companies across the sector are laying off employees, cutting costs, and freezing new hires. The best possible reason is tackling the economic pressure caused by recent events.

From the medium to the big tech powerhouses, almost all companies have shed their workforce. In 2022, there were over 140,000 job cuts from public and private companies, and the number has risen to 102,000 in 2023 so far, according to Crunchbase.

Microsoft laid off about 10,000 employees, and Google plans to cut down 6% of its global workforce, around 12,000. Meanwhile, Amazon let go of a whopping 18,000 in headcount.

Before that, Meta - which lost $700 billion in market value- announced over 11,000 job cuts. Salesforce also revealed its plan to let go 10% of its staff (8000 employees).

Plantir and Cerebral are the latest companies cutting off their workforce. The software company Plantir laid off 2% of its headcount, while Cerebral plans to reduce 15% of the workforce.

IBM also announced job cuts of over 3,900 employees, roughly around 1.5% of its workforce, in January of this year.

Microsft-owned IT management company, GitHub, announced cutting down about 10% of its workforce as part of a “budgetary realignment intended to preserve the health of the business.”

Zoom, which tripled its staff during the pandemic, announced its plans to shed 15% of its headcount in current economic uncertainty.

So as you can see, no one is having any fun here!

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But Why…

Several factors have played a role in the current tech layoffs, including the economic downturn, high inflation, increased interest rates, overhiring, and overvaluation.

Economic Downturn

The ongoing economic uncertainty has made it difficult for companies to plan for the future. It has led to layoffs in industries, including the tech sector. The U.S. Bureau of Economic Analysis data showed a shrinking economy in July 2022.

With the ongoing Russia-Ukrain war, disruption in the supply chain, debt ceiling, and high-interest rates, the companies are facing major challenges to survive. Major structural changes, including layoffs or rightsizing, have been done to overcome them.

Inflation

?With the hike in inflation up to 9.1%, the cost of living went up. Thus, businesses had to cut costs to make room for increased expenses. Tech companies like Meta, Google, and Snapchat also lost revenue when businesses cut back on advertising. All this led to employee layoff, usually the first method to cut costs.

Overhiring During Pandemic

The demand for technology rose during the pandemic due to remote working, online shopping, etc. to meet these high demands, companies went on a hiring frenzy to meet those demands.

Since the world is returning to pre-pandemic ways of life, the tech boom has subsided a little. And with the lower demand, new hiring does not make sense.

High Interest Rate

With the sky-high interest rate increasing the borrowing cost, investors are pulling back funding. It has resulted in companies cutting costs and laying off employees to manage the utilities better. Investors are pressuring companies to cut down on expenses amid low revenues.

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There is light…

While the economic downturn is mostly at the heart of recent layoffs, the outlook is not bad.

As per CNBC, the January job report has shown an increase of 517,000, and unemployment has hit a 53-year low.

Moreover, some companies laying off employees do not appear to be lacking money. Microsoft- which has announced 10,000 job cuts- has also announced an investment of more than $10 billion in OpenAI, the creator of ChatGPT.

Similarly, Google’s CEO, Sundar Pichai, stated that the move to lay off employees would direct their talent and capital to the company’s highest priorities.

There is plenty of comments out there stating that most of the recent tech layoffs were related to rightsizing, and the actual total headcounts of most of the companies are higher than they were in 2021.

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The startup kickstart

The talent let go by the big tech companies has all the potential to tap into their own passion. And many are looking to go down this path of building their own companies, even if it is a long shot.

According to Wired, the startup accelerator Y Combinator reported a surge in startup applications by 20%, reaching 38,000 in 2022, with a five-fold increase in early 2023.

Whilst I would personally love to see these startups taking a sizable market share from the big players there is a little more to consider than “have at ‘em”

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The reality…

The ground is not completely clear for the people planning to enter the market. Tech sector growth has slowed, and startup valuation has fallen and according to Crunchbase, venture capitalists are holding onto their money, with seed-stage funding slumped at 35% for startups.

“Certainly some folks will decide to pursue that route, but it is difficult to imagine a full-on surge in a high-interest rate environment,” LinkedIn’s Senior Economist Kort Kantenga commented.

The recent layoffs in the tech industry have been a topic of much speculation and discussion. While economic struggles and the impending recession have caused some layoffs, others have resulted from companies’ attempts to realign their structural goals.

As the industry adapts to changing market conditions, it is important to remember that the right sizing of the tech industry is essential for its continued growth and development. By embracing a more balanced and sustainable approach to growth, the tech industry can continue to drive innovation, job creation, and economic growth for years.