In January, nearly 90,000 tech workers were laid off. By September, that number had dipped to under 5,000, suggesting that perhaps massive layoffs were mercifully over, and we could look ahead to a brighter 2024 with improving economic conditions. Then came October with a fresh wave of layoffs from companies large and small.
At first blush, it feels perplexing. Some of the economic factors that were putting pressure on companies late last year and into this year felt like they were easing, and that would suggest a turnaround at some point, even if it took a while. Many economists have been saying recently that we will actually avoid a recession, which would seem like a reason for optimism. Yet tech companies keep cutting their workforces.
Data visualization by Miranda Halpern, created with Flourish
Sure, Nokia, after a terrible quarter in which it saw profits drop an astounding 69%, announced last week it was laying off 14,000 employees. The business reasons seem crystal clear here, even while that huge number kicks up the overall numbers for October by a fair bit. But it didn’t happen in isolation. In fact, it comes on the heels of Qualcomm announcing it was laying off over 1,200 people, Qualtrics 780 and LinkedIn 668. It was no better at startups; Flexport laid off 600, Stitch Fix 558, Hopper 250, and on and on it went. And October isn’t even over yet.
But as we dig into the reasons why we are seeing a new wave of tech layoffs, let’s not forget that this is more than an academic exploration; it involves real people losing their jobs, and perhaps it’s useful to understand why these people are having their lives blown up: because the businesses they were working for couldn’t meet their revenue numbers.
The economic/buyer conundrum
If the economy is indeed improving, it’s been a frustratingly slow process. Just last week, Federal Reserve chair Jerome Powell indicated that there would be no additional rate hike in November but said the Fed would continue watching the economic signals, while not ruling out additional hikes in the future.
“The consensus among economists seems to be that the U.S. will avoid a recession at this point. However, no one is expecting a rapid bounce back either,” said Atta Tarki, founder and chairman of executive search and staffing firm ECA Partners and author of the book “Evidence-Based Recruiting.” Yet his forecast for next year and beyond doesn’t feel terribly promising, either.
“The more likely scenario is that 2024 and the first half of 2025 will be sluggish,” he said. “Many companies were trying to avoid overreacting and then facing a situation like in Covid, where they first had massive layoffs and furloughs, followed a few months later by massive worker shortages when demand bounced back. Now that they think it will be a longer recovery, they are opting for going into hibernation mode, preparing for a longer winter.”
And that could account for the additional job cuts we are seeing now.
But he also points out that there are always layoffs, regardless of the conditions, and we shouldn’t overreact to individual announcements. “The overall number of layoffs are still not abnormally high compared to historical standards. But since everyone is on edge about the economy, and people have been expecting massive layoffs for a long time now, any high-profile company announcing layoffs sets off alarm bells for folks,” he said.
From growth to efficiency
In fact, the whole investor mindset seemed to pivot from growth to efficiency in a New York minute during 2022. Efficiency in business terms often means cutting costs, and that’s when we started seeing massive layoffs from big enterprises like Meta, Amazon, Google, Salesforce and Microsoft, as well as from much smaller startups.
As conditions changed in 2021, we know that there were a number of factors at play, including a suddenly high cost of capital related to higher interest rates, higher inflation and currency headwinds due to a strong dollar, some of which have eased since then.
Scott Raney, who has been a partner at Redpoint Ventures for over 20 years, and whose investments include companies like HashiCorp, Heroku, Stripe and LaunchDarkly, thinks the startup funding system was fundamentally skewed between 2019 and 2021, and companies have had to completely rethink their value.
“So 2021 happened where there’s a total reset in terms of valuations and changing the monetary policy in this country, which actually changed how these companies were valued and the access to capital, but for enterprises, it also changed their calculus internally, and the cost of capital,” Raney told TechCrunch+.
That resulted in the round of layoffs that began at the end of the last year as enterprise buyers began to slow their purchasing. Today, those conditions aren’t improving enough, and startups and larger companies are both taking additional steps to reduce worker headcount in the face of these changing enterprise buying habits.
“The realization is dawning on so many different companies now that, ‘hey, things aren’t going to get better. We’re going to have to operate under this mindset with this reality [for some time],” he said. “And so you’re seeing a whole set of companies out there that are making meaningful layoffs because they’re having to adjust to that new reality, and that’s happening now.”
Tim Herbert, chief research officer at CompTIA, points out that in spite of the layoffs we’ve been seeing, tech unemployment remains at just 2.2% — but it’s important to note that this number is looking strictly at roles like IT, engineering and programming, and certainly the layoffs include nontechnical roles as well.
But he agrees with Raney, that tighter buying budgets could be leading to more job cuts. “The tightening of return on technology investment decisions that started last year continues with many companies prioritizing quantifiable business value over digital transformation that may be viewed through a higher risk/reward lens. This likely has a ripple effect across hiring in some areas, especially in the emerging and tech startup space,” he told TechCrunch+.
And the negative buying signals we are seeing now could leak into 2024. “While there are positive signals across the economy and we are likely to avoid an ‘official’ recession, as a tech sector, we’ve still experienced a significant reset in expectations and tolerance in a way I think is long-term very healthy,” said Lily Lyman, general partner at Underscore.
As companies plan for 2024, she says they need to continue to preach efficiency and operate with the expectation that current market conditions are probably not going to change in any meaningful way.
“We are likely to see companies struggle next year to hit targets across efficiency and growth. Sales cycles are slower. Budgets are tighter. Risk tolerance is lower. We will remain in an environment of “do more with less,” and those who can, will get to survive and perhaps be rewarded for it,” she said.
In the meantime, until that changes, we are probably going to continue to see companies cutting workers, and perhaps even startups shuttering, as these stubborn market conditions persist.