Source: Unsplash/Laura Davidson.
If there’s a single phrase that investors, businesses and tech workers should live by above all else it’s this: everything always reverts to the mean.
We’re seeing that play out primarily in technology equity valuations. Unsurprisingly, the last few years of insanity are fast resembling 1998-99 (and 2022 is starting to look a lot like 2001). The reckoning, inspired by a slight normalisation in interest rates, started in the public markets, where even brilliant businesses like Shopify (down 80%), Atlassian (down 65%) and Zoom (down 83%) have been hard hit.
Netflix has seen its market value plummet from US$300 billion ($423 billion) to only $80 billion ($112 billion), while even Apple, Google and Microsoft haven’t been immune. The more dubious sectors of the market, like the financially challenged buy now, pay later sector have been justifiably hit even harder.
The reversion to the mean has already cascaded through grotesquely overpriced public businesses into the private equity markets.
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Last month, Instacart, a shopping delivery platform ‘voluntarily’ reduced its valuation from US$39 billion ($55 billion) to US$24 billion ($33 billion), while Swedish buy now, pay later giant Klarna is desperately trying to close a down-round at a US$30 billion ($42 billion) valuation, well below its recent US$46 billion ($64 billion) Softbank-funded round. Venture capitalist Eze Vidra tweeted that private company valuations are down by between 20-60% depending on their stage.
From a fellow VC in London:
In summary, over the past 3-6 months:
Pre-seed: 0 to -20%
Seed: -20% to -30%
Series A: -30% to -40%
Series B: -40% to -50%
Series C / IPOs: -50% to -60%Most affected: SaaS (multiples down from 25x to 8-10x), Fintech, Consumer…
Do you agree?
— Eze Vidra (@ediggs) May 20, 2022
In short, the era of cheap money buttressed by historically low (negative) interest rates is over.
The tip of the iceberg
This is very quickly spilling over into the tech job market, which alongside investors, was one of the big winners from the EZY money era.
Businesses were told to grow revenue regardless of the costs, which inevitably meant hiring lots of people.
When lots of companies hire lots of people at the same time, it’s really easy to find a job and wages ratchet skywards.
We would hear stories of junior developers with only a couple of years’ experience seeing their wages double.
But like valuations, the labour market quickly reverts to the mean, and we’re seeing the first stages of that happen almost within weeks of the market’s meltdown.
In the last two months, Layoffs.fyi reports that 73 large tech businesses have laid off workers. In all of 2021 only 39 companies laid off workers.
Bear in mind this is just the start of the great reversion. That’s a 1200% increase in companies cutting staff.
And it’s not a bunch of bankrupt, zero-revenue businesses who are quickly firing workers, the list is a who’s who of tech high flyers. On Tuesday, European delivery company Gorillas announced it was sacking half of its 600 head office employees. This is a business that raised US$1 billion ($1.4 billion) only seven months ago.
Down rounding Klarna, which is the largest startup in Europe, is firing 700 people (10% of its workforce) while Paypal fired 83 people in the US and will reportedly cut another 307 jobs across its operations in Ireland. Netflix sacked 150 workers, Carvana is terminating 2500 team members, and the sociopaths at Robinhood are ending the employment of 340 employees.
Last week, Y Combinator luminary Paul Graham sent a chilling memo to founders, warning that “the safe move is to plan for the worst [and] if the current situation is as bad as the last two economic downturns, the best way to prepare is to cut costs and extend your runway within the next 30 days. Your goal should be to get to Default Alive.”
This is the tip of the iceberg. Everyone from tech giants to well-funded, unprofitable startups are almost instantaneously flipping from rapid hiring to rapid firing. This is the greatest reversal to hit the tech employment market since 2000 (the GFC had a lesser impact on tech than the finance sector).
There is a small silver lining though. Smart founders and executives with solid businesses will be able to attract and retain outstanding talent without having to bid against irrational actors, and a swathe of incredible businesses will emerge from the carnage.
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