Oct 3, 2022 - Economy & Business

This year's venture-fueled layoffs

Illustration collage of a box packed with office desk items in front of one hundred dollar bills

Illustration: Annelise Capossela/Axios

A (second) round of layoffs last month at buy now, pay later company Klarna is the latest in a seemingly endless string of tech sector pink slips issued this year. But while companies have blamed the market and potential recession talk, this narrative obscures that many zealously overhired during the pandemic’s boom, without regard for the consequences.

Why it matters: After nearly two years of enjoying the upper hand of a booming jobs market, tech workers are now losing their jobs. The employment environment is worsening — even for big tech companies as they, too, rein in headcount.

The big picture: Late last year, within a few months of the stock market beginning to turn, startups began to make cuts to their workforces.

  • At least 60,000 workers have been laid off in 2022 just from privately held tech startups in the U.S., based on data collected by Layoffs.fyi (which is likely undercounting, as not all companies publicly disclose exact job cuts).

Zooming in: Several ingredients went into baking this cake, which is now crumbling.

  • Capital overflow: 2021 was a record year for venture deals, reaching $330 billion invested just in the U.S. Capital was also cheap and easily available.
  • Pandemic boom: The 2020-21 period saw consumers and businesses spending on a variety of goods and services at surprisingly high levels — and fueled startups’ revenues. Many assumed this level of demand was the new normal.
  • "Blitzscaling:" The pandemic became a ripe environment for using the tactic, which entails spending tons of capital inefficiently to win a market during times of uncertainty. As blitzscaling champion and Greylock partner Reid Hoffman tells Axios in a statement: "Risk is an integral part of blitzscaling.... Unfortunately, taking risks can lead to negative consequences ... including undertaking a painful round of layoffs."
  • Not predicting a downturn: While some have been paranoid about an impending downturn for years (and managed their companies accordingly), many believed that pandemic-era trends would outlast COVID-19.

Between the lines: To FTX CEO Sam Bankman-Fried, many VCs conflate headcount growth with business growth, often pushing companies to increase the former as a manifestation of the latter.

  • "We had ~200 employees, [VCs] were expecting ~2,000," he tweeted in June, speaking about his conversations with investors last year. "We told them additional employees added too quickly were net negative, and they could take it or leave it."

What they’re saying: "For management teams, when they see their competitors add with reckless abandon … it’s hard not to as well," CapitalG general partner Gene Frantz tells Axios, addressing the last couple of years.

  • And at the same time, "a lot of board members tend to be less thoughtful cheerleaders as opposed to a counterbalance to management," he adds.

Yes, but: Some VCs argue that the real goal is getting to big exits with the smallest headcount and capital.

  • "The dream is not get billion-dollar companies; the dream is get really successful with a very small number of people," says Felicis Ventures managing partner Aydin Senkut.
  • "It was never our aim for people to have tons of capital so they can go and hire more people, or worse, spend it on Google or Facebook ads," he adds.

The bottom line: Some of startupland’s worst instincts created this mess.

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