Layoffs in the so-called “big techs” make room for more rationality in the sector

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Mass shutdowns impact the market as a whole and point to new times in the industry.

By Cesar Paz, Business Partner da Pipeline Capital.
Entrepreneur, founder of Ecosys, partner at On2 and Pipeline Capital

The increase in layoffs in the technology market in 2022 was 649% compared to 2021. The shutdowns, which continue in 2023, include big techs such as Google, Microsoft, Salesforce, Meta and Amazon. The data are from the Layoffs website (layoffs.fyi), which monitors information on spending cuts in the sector – a move that made headlines in the press last month. The scenario, however, is not completely unpredictable. Nor irreversible.

It is clear that the expressive numbers generate concern in the professionals of the segment. But we need to understand the background of these layoffs in order to analyze the area’s expectations going forward, from the perspective of developments and investments. And the pandemic still directly impacts the technology market. We spent two whole years indoors: we changed our ways and entered a phase of digital transformation that benefited the IT business. Projects that were predicted to take place in 10 years became reality in a few weeks, such as the accelerated advancement of telemedicine, distance learning and e-commerce – according to the United Nations Organization for Trade and Development (Unctad), the volume of consumers who shopped online skyrocketed from 53% in 2019 to 60% after the start of the pandemic in 66 countries.

Naturally, capital migrated primarily to technology companies, which experienced an overvaluation of their assets due to new habits. We live in a period of smaller circulation of atoms and greater circulation of bytes. To cope with the demand, there was a record number of hires and an increase in projections for growth and profitability. Until the imminent danger of the virus attenuated, with the offer of vaccines and other sanitary measures, and people went back to living together in society, without depending (almost) exclusively on the digitized universe. As a result, large companies lost users and revenue, especially from media (ad spending), and had to adjust their businesses: the leveraged investment was not confirmed because the estimates were very sensitive to the context of the pandemic.

Now, in a post-pandemic world, what presents itself is a fragile economy and the prospect of global inflation – a perfect storm for technology companies to review their budgets, curb their appetite for risk and guarantee some profitability by taking advantage of the rise in interest rates. Without the ability to attract more investments due to low liquidity, and trying to save part of what was previously projected, the “easiest way” is to make cuts in the areas of development, research and technology, where wages are also higher due to the high degree of prominence that these professionals received throughout the pandemic.

In the US, one of the countries most affected by layoffs, it is already possible to identify the search for greater stability and security. These are the forces of the economy at work: project-oriented capital and risky bets give rise to new expectations in more traditional businesses. Or, in this case, the old economy. Many employees who left the big techs must migrate to industry and retail companies favored by the conjuncture and the recovery of consumption habits from the pre-covid-19 era. Although the layoffs are frightening due to their size, therefore, there is still a shortage of skilled labor in the IT areas estimated at 1 million professionals in the North American market alone. It is no coincidence that, according to the Layoffs website, 40% of those fired in big techs manage to find a new position immediately.

IT layoffs thus represent a momentary wave. It’s impossible to predict that there won’t be a deepening of the tech crisis, but I think we experienced the apex in the first quarter of 2023 (when companies make their decision-making for the rest of the year). The picture is one of loss of value of assets and jobs in the area, and not of a disruption of the “tech economy”. Anyone who lived through the internet bubble at the turn of the millennium, the financial crisis sustained by speculation and which broke thousands of “dot.com” companies at the time, sees the current moment with great tranquility. The trend is towards greater rationality in IT applications, something that seems natural after the biggest health crisis of our generation – and after two years of passive investments and overvaluation of assets in this sector.

By Cesar Paz, Business Partner da Pipeline Capital.
Article published by GZH.

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