Axios Pro Rata
September 24, 2022
How is it almost the end of September? In any case, this week we're talking about layoffs — a topic I haven't been able to stop thinking about, given the sheer predictability of the unfortunate situation we're watching unfold.
- 👋 Reminder: Feel free to send me tips or comments by replying to this email or on Twitter @imkialikethecar.
Today’s Smart Brevity™ count is 981 words, a 4-minute read.
1 big thing: Venture-fueled layoffs
A (second) round of layoffs this week 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 U.S. privately held tech startups, 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.
2. Quiet layoffs
Companies needing to cut payroll tend to do so without much fanfare. They select jobs to be slashed, fill out the paperwork and notify employees.
- But some take another route, and these policies have the eventual effect of slimming down the ranks in a more voluntary manner.
Driving the news: Meta, Facebook’s parent company, is reportedly eyeing cost cuts of 10%. It has slashed teams and projects, and told affected employees they have 30 days to find a new gig within the company — or else they’re out, per a new WSJ report.
- While the practice is very normal when a project is wound down or a team reorganized, this time around employees appear to be having a tougher time finding a new fit.
- Google is also using the same tactic.
Zooming out: Another approach that’s emerging among some tech companies is forcing employees back to the office full-time. Eventually, some are bound to leave because it’s just not the setup they want.
- And voila! Suddenly, there’s no need for the company to make cuts.
Between the lines: Layoffs are not a good look for any company, and for publicly traded ones it can directly affect their image and the outlook for the sector.
- That can hit their stock prices (which have already been suffering this year).
- So it’s no surprise to see a number of larger companies do whatever they can do avoid having to say the "L-word."
3. Yes, but: It's not all doom and gloom
While a number of companies are cutting headcount, others are still hiring because their businesses remain healthy and growing.
What's more: As we saw at the onset of the pandemic, many in startupland are encouraging those who've lost their jobs to give entrepreneurship a shot.
- Just the other day, an email in my inbox touted the Barclays-sponsored Rise Start-Up Academy refocusing its upcoming program on folks newly laid off by fintech companies.
📚 Due Diligence
In lieu of a trivia question this week, here's a short satirical video by comedian (and astute tech industry observer) Alexis Gay on layoffs.
🧮 Final Numbers
🙏 Thanks for reading! And to Javier E. David for editing and Amy Stern for copy editing. See you on Monday for Pro Rata's weekday programming, and please ask your friends, colleagues and hiring managers to sign up.