The massive layoffs of the big US technology companies mark the end of the golden age of the digital sector. The cuts that Microsoft, Meta, Alphabet and Amazon have announced in recent weeks have marked the end of the years of unbridled growth and the beginning of a stage marked by greater containment.
The trend began in the middle of last year, when large startups in the United States and Europe began to announce workforce cuts of the order of 5, 10 or 25%. The most prominent cases were those of Klarna, Cazoo, Gorillas, Cazoo, Caravana, Snap, Shopify, Peloton, Groupon, Bird... The list is very long.
According to the Layoffs.fyi portal, which collects data on layoffs announced on Bloomberg and other platforms, a total of 1,040 technology companies in the world laid off more than 159,000 workers in the whole of 2022. In just the first month of this year, already there are more than 68,000 layoffs perpetrated by 219 companies.
The reasons behind these cuts are well known. The adverse macroeconomic situation has fully affected a sector that during the pandemic was one of the few that seemed invincible due to the growth of the online world during confinement.
“Two big factors have affected the digital sector. The first, the brake on consumption and the second, the reduction in liquidity of venture capital funds that invest in startups”, summarizes the investor Carlos Blanco, founder of Encomenda.
In effect, hyperinflation – which during 2022 reached levels above 10% in Europe and 8% in the United States – has reduced the purchasing power of consumers. Moderate GDP growth in most developed economies, as well as prospects for a slowdown in 2023, suggest that the situation could continue. And that scares investment funds, which finance the growth and continuity of startups and large technology groups listed on the stock exchange.
“After the war broke out in Ukraine and seeing energy costs escalate, investors began to demand more caution from invested companies. And, when in the middle of the year the regulators began to raise interest rates in the United States and the European Union, access to credit, and therefore to money, became more difficult and the demands on investee companies were already much higher. older," he recalls.
It was shared these days by Sam Abuelsamid, an analyst at the Guidehouse Insights consultancy, in The New York Times: “The entire technology industry of the last 15 years has been built with cheap money. Now the sector is being hit by a new reality and it will pay the price”, he maintained.
Throughout the last decade of cheap money, venture capital funds have fueled the growth of technology businesses, hoping to always get a higher return on their investment.
The phenomenon peaked during the pandemic, when there was a bubble with "clear overvaluations of digital businesses," says Blanco. The most paradigmatic case was that of Hopin, of online video calls, or also that of Cazoo, an internet car sales company, which in just one year of life became unicorns by reaching a valuation of 1,000 million dollars.
Given the change in the landscape in 2022, investors no longer trust that the valuations of startups will continue to rise -and even less considering that they were already through the roof- and for this reason, they have begun to demand that their companies prioritize profitability to growth. This way they will have more guarantees of obtaining a return on their investment.
To respond to their demand, they have been forced to cut labor costs, which are always the highest on the income statement. "In startups that develop services for companies, they account for 80% of spending, while in the case of companies that provide services to consumers, they account for around 30%," calculates Blanco.
In the case of the four big technology companies that have announced cuts, the reasons behind the layoffs are also pressure from investors in the stock market due to the overly optimistic forecasts they made during the pandemic. Mark Zuckerberg, CEO of Meta (Facebook) summed it up well: “Many people predicted that the acceleration of e-commerce would continue after the pandemic, I did too, and that's why I increased investments. Unfortunately, expectations were not met, online commerce returned to pre-pandemic levels and the macroeconomic situation made it more difficult.
A similar situation has been experienced by the electronic commerce giant, Amazon, which has been forced to stop new openings in addition to applying massive layoffs at its corporate headquarters. In the case of Alphabet, Google's parent company, the CEO, Sundar Pichai, excused himself with a similar argument. "We have grown dramatically in the last two years with very different economic prospects than today." At Microsoft, the reasons were repeated, adding the company's recent commitment to invest in artificial intelligence technology with Chat-GPT.
In all four cases, the decision has been received with open arms by the markets. In the last month, the prices of technology companies have risen: 5% in the case of Microsoft, 15% in the case of Alphabet, 24% in Amazon and 31% in Meta.
It is clear that the sector is going through a change of stage but in no case compared to the dot-com bubble of the early 2000s. On this occasion, says Blanco, the businesses are much more consolidated.
