June 10, 2023

Economic forces hit the tech market – causing contractions

Image: – © AFP Charly TRIBALLEAU

Workers are dumping their stock, companies are cutting costs, and layoffs abound as troubling economic forces hit tech start-ups.

U.S. employers added more jobs than expected in April amid a tight labor market, the Friday Bureau of Labor Statistics. But the tech sector, which boomed during the pandemic, is showing signs of contraction.

Start-up companies started the year off with great expectations of a successful year ahead, but then the stock market tanked, Russia invaded Ukraine, inflation ballooned, and interest rates rose. 

According to Tech Crunch, the past week has seen many layoffs, from big names like Cameo, On Deck, and Robinhood, to B2B platforms like Workrise and Thrasio. 

There appears to be a common thread in most of the layoffs – with most founders pointing to a shift in the market that requires a serious pivot in business. However, the ones to be hurt the most are the employees.

Facebook parent company Meta is pausing hiring and scaling down some recruitment plans, Business Insider reported last week based on an internal memo it had viewed.

“We regularly re-evaluate our talent pipeline according to our business needs and in light of the expense guidance given for this earnings period, we are slowing its growth accordingly,” a spokesperson confirmed to CNBC.

Start-up, Cameo recently announced a round of layoffs amounting to about a quarter of its staff, The Information reported.

And according to the New York Times, the number of people and groups trying to unload their start-up shares doubled in the first three months of the year from late last year.

According to Phil Haslett, a founder of EquityZen, which helps private companies and their employees sell their stock, share prices of some billion-dollar start-ups, known as “unicorns,” have plunged by 22 percent to 44 percent in recent months.

“It’s the first sustained pullback in the market that people have seen in legitimately 10 years,” he said.

Besides Cameo last week, On Deck, a career-services company; and MainStreet, a financial technology start-up, all shed at least 20 percent of their employees. Fast, a payments start-up, and Halcyon Health, an online health care provider, abruptly shut down in the last month. 

Most surprising is that Instacart, one of the most highly valued start-ups of its generation, slashed its valuation to $24 billion in March from $40 billion last year.

“Everything that has been true in the last two years is suddenly not true,” said Mathias Schilling, a venture capitalist at Headline. “Growth at any price is just not enough anymore.”

What’s happening now is a lot different than in the past, when companies, including start-ups, were able to weather moments of fear and panic by roaring back from the precipice and setting new records.

The difference is that now there is a collision of troubling economic forces combined with the sense that the start-up world’s frenzied behavior of the last few years is due for a reckoning. And again, the war in Ukraine, global inflation, and nations still recovering from two years of a pandemic seem to be a guiding force.

“Of all the times we said it feels like a bubble, I do think this time is a little different,” said Albert Wenger, an investor at Union Square Ventures.