On Thursday, fashion tech company Stitch Fix said it was cutting about 15 percent of salaried positions, or a total of 330 positions, sending its share price sinking. People were told that morning they lost their jobs, CEO Elizabeth Spaulding wrote in a memo to employees.
“In light of our recent business momentum and an uncertain macroeconomic environment, we have reviewed our business and what is required to build our future,” Spaulding wrote.
The broader industry slump worsened on Friday, when the tech-heavy Nasdaq index fell 3.5 percent. It is now down 28 percent for the year.
The sudden change is whipping many in the industry. Uncertainty has gripped Silicon Valley as venture capitalists, tech founders and regular employees debate whether pessimism is overdone or if tech really is the canary in the coal mine, already hinting at a broader recession. in the US economy
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Tech startups serve as a “leading indicator” for the economy, said Till von Wachter, a professor of economics at UCLA. Higher interest rates can mean it’s harder to raise money to fund new ventures, which typically take a while to turn 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 think the future will be.”
Technology has benefited greatly from the roaring bull market of the past decade, with skyrocketing valuations enriching not just owners and investors, but hundreds of thousands of employees who were paid in stock on top of their regular salaries. The pension plans and 401(k)s of millions of Americans have benefited from companies like Apple, Amazon, Google and Microsoft surpassing the trillion dollar mark and becoming as valuable as the annual output of entire economies like Italy or Brazil.
Year after year, rising valuations have created a widespread feeling that there is nowhere else 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 that are easily approved, and employers offering them a host of perks like free meals and unlimited vacations.
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Money has also been pouring 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.
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 bounced back almost immediately, and many have gotten even stronger during the pandemic as government spending boosted the economy and people spent more money on e-commerce and digital services.
For some prominent tech luminaries, this moment feels different.
“We do not believe this is going to be another sharp correction followed by an equally rapid V-shaped recovery as we saw at the start of the pandemic,” the leaders of Silicon Valley venture capital firm Sequoia Capital wrote in an email. a statement. May presentation to its portfolio companies that was published by technology news organization The Information. “We expect the market downturn to affect consumer behavior, labor markets, supply chains and more.”
That follows early warning signs, including pandemic darlings feeling the squeeze: Fitness company Peloton’s stock has plummeted and celebrity video app Cameo has laid off staff. Amazon also said it had overextended its warehouse space, and Uber CEO Dara Khosrowshahi warned that tougher times are ahead. Microsoft, Amazon, Apple, Tesla and Google have lost at least 20 percent of their market value since the beginning of the year.
Even Twitter, which is in talks to be bought by Musk, has fallen below the price it is willing to pay for a market that is pessimistic about whether the deal will go through, as well as the company’s business prospects.
A new wave of economic uncertainty has gripped the world as Russia’s war on Ukraine continues, China’s economy falters due to new pandemic restrictions, and the US Federal Reserve raises interest rates to deal with to control inflation. That uncertainty hit Silicon Valley early, and stock prices began a sharp decline in January.
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The lack of investor confidence has also spread rapidly to emerging companies.
For years, investors had been pouring money into startups hoping they could go public and reap a big return, but that path no longer seems so reliably profitable. Venture capitalists whose money is tied up in tech companies that aren’t yet profitable are telling them to cut their spending and prepare to go even longer without that much money.
Those companies, in turn, are beginning to react to the market downturn with layoffs and hiring freezes.
And many companies are paying special attention to costs. Bird, the electric bike and scooter company, said this week that it had to lay off about 23 percent of employees to cut costs.
“While the need for and access to microelectric vehicle transportation has never been greater, macroeconomic trends that affect everyone have resulted in an acceleration of our path to profitability,” director of communications Rebecca Hahn said 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-stage rounds were hit harder than early-stage startup funding. .
“We’re seeing a lot more caution from investors because of what’s happened in the public markets,” said Gené Teare, senior data editor at Crunchbase News.
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Seattle-based investor Greg Gottesman said he and other investors are advising companies to be careful, but noted that many tech startups still succeed during economic downturns.
“There’s more of a focus on smart growth,” said Gottesman, CEO of Pioneer Square Labs. “Putting the right number of people in the right places and trying to grow smart instead of just aggressively.”
The broader economic concerns are real, but cutting investment and spending in general can create new problems, said Antoine Nivard, co-founder and general partner of Blank Ventures. Many startups sell software to other technology companies, making them especially vulnerable when the industry at large slows spending.
“There is also a self-fulfilling prophecy there. The first demand to evaporate is from startups 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 is looming for other industries remains an open question. Not everyone sees technology as a benchmark for the entire economy. Instead, the tech industry may have to fall further than other sectors simply because it received more funding, boosting valuations to levels the companies didn’t deserve.
“People are stepping back and realizing, ‘Maybe we shouldn’t have priced the amounts we were quoting,’” said Jake Hare, founder of startup incubator Launchpeer.
A pullback in investment in startups 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, an economics professor at the University of California, Berkeley. That does not mean a recession.
“That party is over,” Wilcox said. “It’s not necessarily that there’s going to 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 event of a recession.
“If you’re funding 28-year-olds, they don’t know a roller coaster, all they know is a rocket,” Wilcox said. “They haven’t seen what a financial winter looks like. They haven’t even seen a cold fountain.