The Great Reset: A Tsunami of Tech Layoffs

The long-awaited economic downturn is finally here. We survived the pandemic, navigated our way through a supply chain crisis, and even held on tight as one former super-power invaded its smaller neighbor. But the ensuing inflationary tide, triggered by the rise in energy prices, proved too much to bear.

The tech industry seems to be looking at rough times. The days when money printed by the Fed found its way into Big Tech stocks are over. In May 2022, rumors surfaced that Meta was planning to freeze hiring for the rest of the year. The company's stock price had already been tumbling before those rumors started and kept going downhill throughout 2022, having lost half of its value in the last twelve months at the time of writing. Apparently, that hiring freeze did not produce the desired results, and Meta ended up firing 11,000 people, who made up 13 percent of its workforce.

All in all, over 150,000 employees lost their jobs in the tech industry last year. Judging by the figures in January 2023, the tide does not look like it will subside any time soon. Amazon fired 18,000 tech workers at the beginning of the year, followed by Salesforce, which decided to eliminate 8,000 roles. Alphabet, Google's parent company, parted ways with 12,000 of its employees, and most recently, Microsoft announced that it was purging 10,000 jobs. The extent of layoffs tells us we are looking at the symptoms of a systemic crisis in the tech industry.

The canary in the coal mine

Looking in hindsight, the economic downturn was the worst-kept secret in town. Everybody knew it was coming but kept pretending all was good. The signs were already there in spring 2022 when Softbank announced a loss of $27.7 billion on its investments making up its Vision Fund for the fiscal year ended March 31, 2022. 2022 saw startup valuations starting to fall after a long time. Something was wrong, and investors were quick to reach out to startup founders to draw their attention to changing conditions and give them a reality check.

Sequoia held a series of sessions where they discussed with founders different scenarios for the near future, and YC sent founders a letter titled "Economic Downturn" to prepare them for the worst. The message was to cut costs, prioritize profitability over growth, do whatever was necessary to extend their runway in the next 24 months, and buckle up for a hard landing. YC was particularly frank with its prediction:

"If you are post-Series A and pre-product market fit, don't expect another round to happen at all until you have obviously hit product market fit."

In other words, "stay away from vanity expenses, make sure that you stay afloat until this is over, and don't expect any money until you show some results first."

But why now?

It turns out the pandemic was not the historic watershed moment analysts made it out to be. The labor market is seeking a new equilibrium after the pandemic. The layoffs are part of the return to the previous normal. Let's take a closer look at this Great Reset and its causes.

E-commerce losing steam

The pandemic seemed to herald the advent of a new era in tech business: E-commerce exploded, which also drove up ad revenues for Google and Meta. Platforms like Amazon and Shopify were enjoying unprecedented growth. In those days, you would be forgiven for thinking this would be the new normal. Even Mark Zuckerberg thought so:

"At the start of Covid, the world rapidly moved online, and the surge of e-commerce led to outsized revenue growth… Many people predicted this would be a permanent acceleration that would continue even after the pandemic ended. I did too, so I made the decision to significantly increase our investments. Unfortunately, this did not play out the way I expected. Not only has online commerce returned to prior trends, but the macroeconomic downturn, increased competition, and ads signal loss have caused our revenue to be much lower than I'd expected. I got this wrong, and I take responsibility for that."

Additionally, companies experiencing supply chain problems strived to streamline processes through digital transformation. Labor shortages caused by Covid-19 restrictions and remote or hybrid work practices made firms increasingly rely on online collaboration software. With the demand for software shooting through the roof, software companies went on a hiring spree, recruiting anyone who knew how to code. Because, if they did not snatch up those people, a competitor certainly would. Among these decision-makers who overrecruited was Marc Benioff, the co-founder and CEO of Salesforce, and the godfather of SaaS platforms:

"As our revenue accelerated through the pandemic, we hired too many people leading into this economic downturn we're now facing, and I take responsibility for that."

All good things come to an end, and this one did, too. The problem is whether some of this turmoil could have been avoided had celebrity tech leaders shown a little more prudence.

Overinvestment in me-too industries

The favorable market conditions in the software industry were to come to an end sooner or later. Lately, there was too little authentic innovation and too many "me-too" projects that just copied another successful product. Investors, too, favored those proven ideas rather than backing moonshot projects that venture to solve a real problem. How many more project management, note-taking, or dating apps do we need? Most startups developing such software were not viable businesses, to begin with, but they still employed substantial numbers of developers, pulling away resources from the more productive segments of the economy.

2022 spelled the end for these companies, and the first signs of an economic downturn were enough to pull the rug out from under their feet. With software startups facing dire straits, layoffs were the natural outcome. The very real problems that surfaced in the last couple of years set the stage for the emergence of hard tech startups, which also attracted strong support from investors. It is safe to assume that startups operating in sectors like aerospace, defense, biotech, and agrotech will be hiring more developers in the near future as software companies try to reduce their payrolls.

Loss of ad revenue

Platforms like Google, Youtube, Facebook, and Instagram have relied on user data to bring hyper-personalized ads to people, which has become a major source of revenue for them. However, since the Cambridge Analytica scandal, people are not as comfortable sharing their private data with big tech firms as they were in the past. Data privacy is a primary concern among users, tech leaders, and policy-makers today, which threatens the corporate hold over the private data of people using these platforms.

The last blow to ad revenue came from Apple. The company launched an App Tracking Transparency feature in its mobile iOS operating system, allowing users to opt out of in-app tracking so that their data will not be shared with third parties. It is no wonder that Meta's ad revenue suffered after this development, experiencing a year-on-year decline of 4 percent in the third quarter of 2022. Additionally, Meta faces intensifying competition from TikTok and struggles to attract young people. Zuckerberg's push for the metaverse project can be interpreted as a move to reach out to this demographic in the long term, although it makes little sense for the short-term goals of the company.

The slump in ad revenue is bound to have a profound impact on how Meta and Alphabet operate. It is naive to expect them to go back to recruiting at the levels they used to before unless they increase their ad revenue.

Conclusion

The Great Resignation involved tech professionals quitting their jobs in droves throughout 2021. These people took some time to reflect on their lives and got more proactive about their lives, starting more meaningful endeavors during the pandemic. The Great Reset, on the other hand, refers to the layoffs corporate decision-makers are undertaking to correct the mistakes they made during the pandemic. It is a desperate attempt tol signal to shareholders that they are in control of the situation and doing whatever is necessary to correct the course.

It is the employees and their families who pay the price for the baseless optimism of corporate leaders. Thousands of people who previously changed jobs and made long-term commitments suddenly found themselves unemployed because can-do-no-wrong visionaries like Zuckerberg and Benioff dropped the ball this time. The hope is that they will learn from this and act more responsibly in their future decisions.