Tech groups are cutting jobs and taking risks in the new reality of market rout

Tech groups are cutting jobs and taking risks in the new reality of market rout

“It’s a tough day,” read the subject line of the email to Shelly Little from her bosses at Carvana, an online used-car retailer.

The memo said Little was among approximately 2,500 employees laid off from the US-based company this week, in a mood described by another employee as “mass hysteria”. Year-to-date, shares of the company famous for its towering multi-storey car “vending machines” have fallen 87%.

“As the ramifications of this come into play, all I can think of is – wow,” Little wrote on LinkedIn, telling friends and colleagues that she was among the 12% of Carvana who were shown the door. .

His experience mirrors the sudden sobriety that has gripped the U.S. tech sector, prompted by a massive, deep sell-off in stocks as investors fret about rising interest rates and slowing economic growth.

Private companies are forced to readjust expectations about valuations, access to finance and appetite for risk taking among venture capitalists who can no longer throw caution to the wind.

“I think that’s certainly humbling for a lot of people in tech who thought things would never go any other way, or didn’t plan for a rainy day, or were a unpompous,” said Semil Shah, founder and general partner of San Francisco-based venture capital firm Haystack.

“If you really counted your chickens before they hatched, or thought about all the riches that lay ahead of you, it’s going to take a while.”

In public markets, Carvana has been one of the hardest hit, but it is by no means the only one. DoorDash, the U.S. restaurant food delivery market leader, is down 60% year-to-date. Affirm, one of the largest in the once-popular buy-it-now-pay-later sector, has collapsed 85%. Shopify, the e-commerce operator regularly touted as the most serious threat to Amazon’s dominance in e-commerce, is down 77%.

DoorDash, the US restaurant delivery market leader, is down 60% year-to-date © Michael Nagle/Bloomberg

Even Big Tech companies, among the safest growth stocks of the past decade, have suffered steep declines. Apple, Amazon, Alphabet and Meta collectively saw $2.1 billion wiped out of their market capitalizations. In Apple’s case, its $600 billion drop was enough to see it dethroned this week by Saudi Aramco as the world’s most valuable publicly traded company.

Jefferies analyst Brent Thill says the fact that an energy giant has to pick up the slack illustrates the shift in investor confidence from companies with strong revenue growth but weaker results to those that are safer bets.

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“It’s a complete, large-scale tech vomit, a full-fledged eject button,” he said. “Less than a year has passed and all the high growth software companies are now evil and not making any profit. energy and utilities.

Tech companies are responding by getting to the bottom line – cutting costs, reducing cash burn, and focusing on the fundamentals.

“I’ve talked about free cash flow more than I realize since I took my first accounting course, it’s kind of crazy,” said one person at a large public tech company.

Similarly, at Uber, whose shares have fallen 49% this year, chief executive Dara Khosrowshahi told staff in a memo last weekend: “The goalposts have changed. Now it’s about free cash flow.

“In times of uncertainty, investors seek safety,” he added in the note, first reported by CNBC and verified by the Financial Times. “They recognize that we’re the scale leader in our categories, but they don’t know how much it’s worth. Channeling Jerry Maguire, we have to show them the money.

After radically renaming and reorienting his company last year, Meta CEO Mark Zuckerberg’s enthusiasm for the Metaverse has given way to a more limited enthusiasm for big investments. The social media company pledged last month to cut its spending forecast by billions of dollars this year.

Column chart of employees let go by start-ups showing recovery in layoffs

To achieve this, Meta has pulled the brakes on aggressive membership growth. According to an internal memo from Meta’s chief financial officer, David Wehner, obtained by the FT, it recruited more staff in the first quarter of this year than in the whole of 2021 – but that has come to an end.

“We need to review our priorities and make tough decisions about what projects we pursue in the short and medium term to meet the lower spending projections we committed to during the results,” he wrote, adding: “ This will affect almost every team in the company.

Another Meta executive’s memo said scheduled job interviews for what would have been potential junior and mid-level engineers will be “significantly cancelled.”

Twitter, potentially on the verge of being taken over by Elon Musk, said on Thursday that it hadn’t reached its own “intermediate stages” of growth, so it was “cutting non-salary costs to make sure we’re accountable and effective”.

Tech companies are looking closely at headcount as an immediate way to cut costs. Layoffs.fyi, a site that tracks layoffs among public and private tech start-ups, saw an increase from February, although levels were still well below the early stages of the coronavirus pandemic. Delivery ‘ghost’ cooking start-up Reef, celebrity shoutout platform Cameo and diet and wellness app Noom are among the private companies laying off staff.

The impact of selling the technology on the private sector and the funding ecosystem that supports it is only beginning to be felt.

According to a report by analyst group PitchBook this week, companies closest to moving to the public markets and looking to raise bigger rounds were the first to experience a headwind, experiencing a “very different feeling investors” from the valuation peaks in 2021.

According to CB Insights, global venture capital funding in the first quarter of 2022 was down 19% from the previous quarter, the largest percentage decline since the third quarter of 2012. The number of public exits – whether by IPO stock market or Spac merger – was down 45 percent.

Shah of Haystack said money for start-ups has already become harder to come by for companies without a solid business model.

“People are still writing checks,” he said. “But if you’re taking 500k, or 5mins or 50mins, you have to fight for it – way more than you should have fought for a year ago.”

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