Jitters

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The following is from a training we did with CJM Search recruiters and was as joint effort between CJM Search and Silicon Sal, friend of the blog. Anything that sounds wrong or bad is Sal’s; smart stuff’s ours.

Another day and another round of layoffs from tech companies. It’s pretty clear that the tech bull run of the last couple years is slowing down. So what’s actually happening? Not really sure! But let’s stick with what we do know, and then maybe we can branch off and speculate from there:

  • Macroeconomic events are driving uncertainty 

    • The war in Ukraine has caused a massive amount of geopolitical risk that previously didn't exist

    • Related to the war in Ukraine, energy costs are rising and supply chains are disrupted, which have driven up cost of doing business across industries

    • COVID is still impacting businesses and workforces, causing labor shortages and other talent disruptions

    • Inflation has been rising rapidly, which also increases the cost of doing business (through higher cost of inputs, labor, etc) - the Fed has also taken unprecedented steps to curb inflation by raising interest rates dramatically in a short period of time

  • Financial markets react negatively to that uncertainty

    • Financial markets hate uncertainty, because it drives difficulty in projecting how a business will perform (and thus its fundamental underlying value)

    • The stock market has suffered because of this uncertainty, with technology stocks being hit particularly hard (e.g., Nasdaq down ~25% YTD)

    • Due to the market uncertainty and stock market drop, the fundraising environment for private companies has slowed considerably

      • The rise in interest rates also means the "cost of capital" has increased; for the past ~10 years, interest rates have been very low making investing in venture capital a much more attractive investment than say investing in bonds, or steadier, low growth equities - this is no longer the case in today's market

      • Why is that? High interest rates mean that a dollar today is worth a lot more than a dollar 5 years from now. Let’s do that math, just for fun. Where interest rates are 10%, the value of a dollar in five years is $1*(1.10^5) = $1.61. Where interest rates are 1%, the value of a dollar in 5 years is $1*(1.01^5) = $1.05. In a low interest rate world, a tech company's future profits are worth today almost what they will actually be in the future.

  • What does this mean for the companies that we work with?

    • Over the past ~10 years (in the frothy, low interest rate times mentioned before), tech companies were evaluated (both in public and private markets) primarily on top-line revenue growth and their ability to gain market share 

    • With the recent market shifts, companies are now being evaluated more heavily on their ability to drive profits and free cash flow in their bottom line (and not just singularly growth)

    • Because of this, companies likely will shift their hiring strategies towards roles that will drive profitable growth

  • How long do we think this period will last?

    • No one knows, but it is unlikely to end quickly - most companies are developing plans to "weather the storm" of the next couple years, but the environment could shift again rapidly