On Thursday, fashion tech company Stitch Fix said it was cutting about 15% of salaried positions, or a total of 330 positions, sending its stock price plummeting. People who were losing their jobs were notified that morning, Chief Executive Elizabeth Spaulding wrote in a memo to employees.
“In light of our recent business momentum and an uncertain macro environment, we have taken a fresh look at our business and what is needed to build our future,” Spaulding wrote.
The general industry slump deepened on Friday, when the tech-heavy Nasdaq index fell 3.5%. It is now down 28% for the year.
The sudden change is giving many players in the industry a boost. Uncertainty has settled over Silicon Valley as venture capitalists, tech founders and regular employees debate whether the pessimism is overblown or if tech really is the canary in the coal mine, already suggesting a broader slowdown in the US economy.
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Tech startups serve as a “leading indicator” for the economy, said Till von Wachter, a UCLA economics professor. Higher interest rates can mean it’s harder to raise money to fund new businesses, which usually take a while to show a profit.
“They are one of the most sensitive sectors to changes in interest rates,” von Wachter said. “They are very dependent on what we believe to be the future.”
Technology has benefited enormously from the roaring bull market of the past decade, with soaring valuations enriching not only owners and investors, but also hundreds of thousands of employees who have been paid in shares on top of their regular salaries. The pension plans and 401(k)s of millions of Americans have benefited as companies like Apple, Amazon, Google and Microsoft have crossed the trillion dollar mark and become as valuable as the annual production of whole economies like Italy or Brazil.
Year after year, rising valuations have created a pervasive sense that there is nowhere to go but up. An entire generation of tech workers and founders has never worked in an industry without long lists of open jobs, new projects approved easily, and employers offering them a flood of perks like free meals and unlimited vacations.
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Money has also flowed into smaller tech companies as investors, including traditional venture capitalists to government-run sovereign wealth funds, have looked for ways to participate in the tech boom that never seemed to end. Stop.
Technology has faced tough times in the recent past. At the start of the coronavirus pandemic, millions of Americans lost their jobs and tech stocks, along with the rest of the market, fell rapidly. But it rebounded almost immediately, and many got even stronger during the pandemic as government spending boosted the economy and people spent more of their money on e-commerce and digital services.
For some top tech luminaries, this moment feels different.
“We don’t believe this is going to be another steep correction followed by an equally rapid V-shaped recovery as we saw early in the pandemic,” venture capital firm executives wrote. top Silicon Valley Sequoia Capital in a May presentation to its portfolio companies that was published by technology news organization The Information. “We expect the market downturn to impact consumer behavior, labor markets, supply chains and more.”
It follows warning signs, including pandemic darlings feeling the pressure: Shares of exercise company Peloton have crashed and celebrity video app Cameo has laid off staff. Amazon also said it had expanded its warehouse space and Uber CEO Dara Khosrowshahi warned of tougher times ahead. Microsoft, Amazon, Apple, Tesla and Google have all lost at least 20% of their market value since the start of the year.
Even Twitter, which is in talks to be acquired by Musk, has been pulled below the price it’s willing to pay by a market pessimistic about the deal’s success, as well as the company’s business prospects. .
A new wave of economic uncertainty has swept the world as Russia’s war on Ukraine continues, China’s economy reels from new pandemic restrictions and the US Federal Reserve raises interest rates to attempt to control inflation. This uncertainty hit Silicon Valley early, with stock prices beginning a steep decline in January.
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Lack of investor confidence quickly spread to start-ups as well.
For years, investors poured money into start-ups hoping they could go public and get a big return, but that route no longer seems so reliable and profitable. Venture capitalists whose money is tied up in not-yet-profitable tech companies are telling them to cut spending and prepare to last longer without so much money.
These companies, in turn, are beginning to respond to the market downturn with layoffs and hiring freezes.
And many companies pay close attention to costs. Bird, the e-scooter and e-bike company, said this week it had to lay off around 23% of its employees as it cut costs.
“While the need for and access to transporting micro-electric vehicles has never been greater, macroeconomic trends affecting everyone have accelerated our path to profitability,” said the communications director. Rebecca Hahn in a statement.
Global venture capital funding fell to $39 billion in May, its lowest level since November 2020, according to Crunchbase, which noted that later rounds were hit harder than seed funding.
“We’re just seeing more caution from investors because of what’s happened in public markets,” said Gené Teare, data editor for Crunchbase News.
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Seattle-based investor Greg Gottesman said he and other investors advise companies to be cautious, but he noted that many tech start-ups still succeed during economic downturns.
“The focus is more on smart growth,” said Gottesman, chief executive of Pioneer Square Labs. “Put the right number of people in the right places and try to grow smartly rather than aggressively.”
The broader economic concerns are real, but cutting investment and spending across the board can create new problems, said Antoine Nivard, co-founder and general partner of Blank Ventures. Many start-ups sell software to other tech companies, which makes them particularly vulnerable when the industry in general slows its pace of spending.
“There is also a self-fulfilling prophecy there. The first demand that evaporates are start-ups selling to each other,” Nivard said. “I wish there was a little less panic and a little more thought about nuance.”
Whether the slowdown means a broader recession affects other sectors remains open. Not everyone sees technology as an indicator for the whole economy. Instead, the tech industry could have more downside than other sectors simply because it received more funding, driving valuations to levels the companies didn’t deserve.
“People come back and realize, ‘Maybe we shouldn’t have priced the amounts we were making,'” said Jake Hare, founder of start-up incubator Launchpeer.
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A pullback in investment in start-ups is an example of the kind of thing the Federal Reserve is trying to trigger as it works to cool the economy and reduce inflation, said James Wilcox, professor of economics at the University of California at Berkeley. It does not mean a recession.
“This party is over,” Wilcox said. “It’s not necessarily that there will be a terrible hangover.”
The pessimism of senior venture capitalists may also be part of an effort to educate the younger generation and encourage them to cut spending in the face of a downturn.
“If you’re funding 28-year-olds, they don’t know roller coasters, all they know is a rocket ship,” Wilcox said. “They haven’t seen what a financial winter looks like. They haven’t even seen a cold spring.