TAIPEI – Thousands of layoffs across the tech sector could end up being a boon for startups that struggled to hire talent in the heady days of soaring valuations.
The big catch: They have to ensure their own survival only after venture capital investors pull back sharply in 2022.
The history of Silicon Valley is filled with stories of companies that were founded or gained traction in the ruins of the recession.
Amazon.com and Google, now known as Alphabet, are among the big winners from past economic downturns. Google rose from the ashes of the dot.com bust in 2000 after it picked up a slew of fired engineers elsewhere, University of Washington history professor Margaret O’Mara told Bloomberg’s Odd Lots podcast.
They are now the world’s fourth and fifth most valuable companies.
The caveat is that start-ups must already have money from previous funding rounds because the biggest source of funding, venture capitalists, are more cautious than ever.
Total funding fell 34 per cent in the third quarter from the previous period and 55 per cent from a year earlier to US$74.5 billion (S$100 billion), according to market intelligence provider CB Insights. This is the lowest level in nine quarters.
Funding from mega-rounds, where money invested in a start-up is at least $100 million, fell to just a third of the level a year earlier, the company found. A 42 percent drop in the value of new VC deals globally through the end of November puts that figure on track for the deepest dive in two decades.
Instead of driving valuations ever higher—creating unicorns with a market cap of more than $1 billion—investors are keeping their powder dry and focusing on the stakes they already have in young companies.
This has resulted in a reduction in the average deal size for investments in late start-up companies.
“VCs are prioritizing funds for existing portfolios that are fundamentally strong but may struggle to fund raises in a very tough environment to help extend their trajectory until the fundraising market improves,” said Ms Tina Cheng , managing partner at Cherubic Ventures in Taipei.
Even young companies with cash on hand remain cautious because they have no insight into when they might be able to raise money next, she added.
Many people who lost their jobs are also in no rush to find new work, thanks to generous severance packages and years of heavy workloads that left many burned out.
Elon Musk’s purchase of Twitter led to the loss of more than 3,700 jobs, making it the most famous of the technology layoffs. Many were offered three months’ salary as part of their severance package.
Cuts on Twitter are neither the first nor the largest. Meta Platforms, formerly called Facebook, cut 11,000 people, while Amazon let go about 10,000.
More than 142,000 jobs have been lost at 889 tech companies in 2022 alone, according to Layoffs.fyi, an open-source list of layoffs around the world created by San Francisco-based start-up founder Roger Lee.
Big job losses in technology are being offset by gains in other sectors, including leisure, hospitality, health care and construction, November data from the Bureau of Labor Statistics show.
With the eternal spring of money drying up, venture capitalists are advising their investees to learn to stand on their own.
“In a bear market, everyone has to get their money from the customers anyway. So go out, get your money from the customers and don’t look to the venture community,” said venture capitalist Tim Draper. He also recommends that those who may be facing a cash crunch be more careful about the number of employees.
“I recommend that companies like this cut their teams quickly and efficiently and move on,” he said. “The flip side is that you see these extraordinary companies come out of times like this. As a venture capitalist, I don’t want to miss that.”
The kind of Fomo—fear of missing out—that drives much of the Silicon Valley hype cycle is never far away. Although times are tough now, thousands of bright and recently laid-off minds will soon be tapping into the next big thing. And those with plenty of cash will be sure not to miss the ride. BLOOMBERG
