The 10-Minute Take: Layoffs rock the tech sector

Speaker 1 [00:00:03] Hey, it’s Theresa. In our season opener of Disruptors, we focused on the great resignation, or some call it the great reshuffle. And several months later, the landscape has changed, particularly in the tech sector. For years, tech has led the stock market with high profits and an ethos of growth at all costs, fueled by easy capital at a pandemic that moved much of the world online. That’s all changing now, with trillions in market value lost in a wave of tech layoffs in recent weeks. We may be seeing the job trend shifting from the great resignation, the great reshuffle, the great layoffs. Instead, nearly 17,000 workers from more than 70 tech startups around the world were laid off in May 2020 to a 350% increase from the previous month. This is according to layoffs.fi, a site that tracks layoffs in the tech sector. It’s a challenging time for leadership teams in tech firms and especially for those employed by the sector.

This is Disruptors, the ten minute take, where we dive into the latest innovation, tech and economic buzz. This week’s take is on the tech layoffs and what they signal about the broader sector. How should firms be rethinking their strategy and priorities? And what does this mean for tech workers? To offer some insights, we’re joined by Anthony Mouchantaf, director of venture capital at RBCx. Anthony, welcome to the ten minute take.

Speaker 2 [00:01:24] Thanks for having me, Theresa.

Speaker 1 [00:01:25] So let’s just start with what’s happening with the market downturn right now for those who may not be following closely. If we rewind to 2020, the sector saw widespread layoffs as a result of the pandemic, and then it saw to crazy highs and valuations. And now the broader market sell off driven layoffs and hiring freezes are making headlines again. So tell us what’s going on and which pockets of the sector the problems are most acute?

Speaker 2 [00:01:49] Essentially what’s happened at a very high level is that the macroeconomic environment has shifted decidedly from one that was historically catalytic for tech firms and venture capital to one that is now historically stifling. The underlying reason for that is that central bankers around the world essentially overcorrected for the pandemic. They saw an unprecedented global event. They saw widespread lockdowns. And they look to counter some of the economic pressures that would emanate from that. But in so doing, they overindexed on quantitative easing. Essentially what they did is they lowered interest rates and they purchased government bonds and in some cases, provincial, municipal, even corporate bonds on the open market. That drove down yields on government securities and it frankly perverted the incentives and private asset markets. They pushed investors towards equities and they pushed investors towards alternatives. And one of the primary beneficiaries of that were tech firms and venture capital funds. What’s now happened is that the market is equilibrium. If that’s what worked and is now entering a phase of countering some of the excesses of the preceding call it 18 to 24 months. So interest rates are coming back up and we’re likely to enter a period of quantitative tightening wherein the central bank will sell government bonds back on the open market. That’s going to introduce a lot of pressure on tech firms, and it’s going to produce a lot of pressure on VC funds. Valuations are going to come down. It’s going to be a more difficult fundraising environment for venture capitalists, and that’s going to percolate down to the startups. And so what you’re seeing with these tech layoffs is essentially an attempted, proactive or prophylactic response to these macro conditions. Tech firms understand that their valuations are likely to be dampened significantly and that they’re going to have a difficult time fundraising. So for these cash burning startups, they’re trying to preempt that, reduce their headcount, reduce their burn, and get to a better place where they can maintain cash and come out on the other side of this in one piece, so to speak.

Speaker 1 [00:03:48] You mentioned the proactive move or prophylactic move. Are you seeing this play out in certain subsectors or industries or functions?

Speaker 2 [00:03:57] We are. So we’re seeing that most potently in firms that have somewhat esoteric business models. So business models that aren’t necessarily recurring revenue source, that aren’t necessarily high margin and that aren’t necessarily capital efficient. And the reason there is that those firms understand that they’ll be disproportionately impacted by any recessionary pressures. And generally what happens in these environments is you have a flight to quality. So there’s going to be capital still looking for a home and capital that will be invested in fundamentally strong companies. And there’s record amounts of dry powder in the industry right now because there’s a long tail to venture capital fundraising. So a lot of the benefits that accrued to the ecosystem over the preceding 18 months are still there. So I would expect to see those businesses with those unusual business models over indexing on layoffs. And I would actually expect to see companies with unusually strong fundamentals. So high recurring revenue, high growth, high margin capital efficiency actually growing their teams and taking advantage of the. Influx of talent on the market right now.

Speaker 1 [00:05:01] So we were both at the collision conference in Toronto, and despite the flash and excitement of the event, you could sense the uncertainty hovering over the space and in conversations with attendees. It’s a bit of a scary time. People are worried about their jobs and their companies. And the point you mentioned about labor. What would you say to tech workers right now, those who may have just gotten laid off and those who are worried they might be next?

Speaker 2 [00:05:24] It’s a very difficult situation. Of course, if you’ve been laid off or you’re concerned about layoffs, the first thing I would say is that if you are currently in a role in a early stage startup, it’s very important to take off your employee to some extent and put on your operator entrepreneur hat, because as an employee in an early stage company, you’re also an entrepreneur and you also have a stake in the business. So I think employees across the tech ecosystem should do their homework and understand the fundamentals around the companies that they work for. Are they high growth businesses? Are they high margin? Are they capital efficient because that will determine the optimal mix of compensation. It will determine whether they should index towards stock options, whether they should index towards compensation, cash comp. There’s a lot of thinking that’s now going to go into this because there is a lot of variability in terms of the value of those stock options. So just thinking around compensation is is very important. I think more broadly, if you have been laid off or you’re concerned about being laid off, you happen to be in a very collaborative and relatively insular industry. Everyone talks to each other. All the VC’s know each other, all the companies know each other, and CEOs and investors are really doing their utmost to make sure that insofar as possible, folks who are exiting jobs for reasons completely out of their control have soft landings. So network with your peers at other companies, leverage human resources within your previous company or your existing company. And you will find very strong support network and folks who will be very proactive in helping you find your next gig.

Speaker 1 [00:07:02] That’s great advice. And I have seen the outpouring of support and empathy from the community, and that’s that’s really encouraging. What do you think these layoffs and hiring disruptions are doing? How are they affecting the talent pipeline for our overall tech ecosystem?

Speaker 2 [00:07:17] That one’s a difficult one to surmise. I think, you know, the overarching macroeconomic pressures are generally border agnostic. I think you’re seeing the same trends play out in the US, Canada, UK and Europe more broadly. Certainly the supply and demand of talent is likely to shift or appears to be shifting. There’s a excess supply of tech talent in the Canadian ecosystem. The demand side of that equation is not entirely clear. So I alluded to this earlier where I think some subset of companies are likely to effect layoffs and other subset of companies are likely to take advantage of the situation and add headcount and look to expand their teams. It’s not entirely clear where that balances out. So the optimistic view or the cautiously optimistic view is that we can continue on with a somewhat steady state with an effective recalibration of the talent pool. The pessimistic view, which we all hope doesn’t come to pass, is that you see somewhat downward pressure on wages and a more difficult job market for some employees. I think that latter scenario, though, is quite unlikely. I think we’re more likely to see just a reallocation of human resources across the ecosystem.

Speaker 1 [00:08:29] Every dark cloud has a silver lining. And many of my conversations with Canadian executives and entrepreneurs over the last year have been about how difficult it was to find talent. And yet just this past week, some that I spoke with have said that may not necessarily be the case any longer, as you alluded to. What do you see here are the opportunities that we should be keeping in mind? And how can Canadian companies capitalize on this moment, especially in terms of possibly attracting talent away from the U.S.?

Speaker 2 [00:08:56] By and large, I think this is a moment for fundamentally strong Canadian businesses to capitalize on an environment that’s actually quite significantly in their favor. So you do have an excess of talent, amazing talent across the ecosystem looking for new roles. I think there’s a question of how risk averse or how proactive some companies want to be in their hiring. My view is, if again, if you’re a high growth recurring revenue business with high margin, you will be relatively unaffected by this recession, I strongly believe. And so if you fall in that bucket, this is a time to be hyper aggressive and to build out a very strong team that can scale with the company well past. You know, whether you’re a series, a potentially hire for your B and C, take advantage of the situation because the valuation pressures and the fundraising pressures won’t be evenly distributed across all companies. Very important to figure out which bucket you fall in and your likelihood of impact from these. These recessionary pressures and the macroeconomic environment.

Speaker 1 [00:10:01] Anthony, thank you so much for these thoughtful insights and practical advice. Appreciate you taking the time to be on disruptors today.

Speaker 2 [00:10:07] Thanks so much for having me, Teresa. That that’s great.

Speaker 1 [00:10:11] As we heard from Anthony, it’s a challenging time for the tech sector as a whole right now, and there’s likely more impacts coming. But there are opportunities and lessons always for those savvy and lucky enough to find them. After all, this isn’t the first downturn we’ve witnessed, and it won’t be the last. That’s it for this week’s ten minute tech. Join us again next week for the reboot of our conversation with Hussein Faisal of Snap Commerce. Until then, I’m Theresa Doe. Talk to you soon.

Speaker 3 [00:10:39] Disruptors, The ten minute take is created by the RBC Thought Leadership Group and does not constitute a recommendation for any organization, product or service. It’s produced and recorded by Jar Audio. For more disruptors content, like or subscribe wherever you get your podcasts and visit RBC dot com slash disruptors.

This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.