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Why are tech startups now firing people?

by Ana Lopez
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Many tech startups (but not only them) are laying off people as part of their preparation for a “winter is coming” season in fundraising.

Last year, more than 107,000 jobs were cut at public and private technology companies in the US, and in January layoffs at major tech companies reached about 60,000 workers who lost their jobs, with Google
Goldman Sachs and Salesforce are cutting thousands of employees.

Some of these redundancies are related to the potential recession and difficulties in raising capital in the next two years, which is realistic. But there is another important reason for this and it has to do with the growth hunger of 2020-2021 and the belief that recruitment is a sign of that. This while users, usage, retention, ARR and revenue should be the right indicators for this, and recruitment a tool to serve them.

The obvious reason for the layoffs is the bearish market. Investors are now more conservative and do not want to invest in risky companies. In addition, the primary market has dropped significantly, almost back to the level it was three years ago, and obviously fewer IPOs are expected in the near future.

In this case, privately backed companies need a longer term before they can go public, which can happen in one of two ways: raising additional money or lowering costs.

Raising additional funds is difficult because investors are reluctant to invest more and the result is lower valuations, making it even harder to raise big money. If you want to raise $50 million, then at $500 million you’re going to be diluted about 10%. If the valuation is only $100 million, you will be diluted by a third.

The hunger for growth brought that about

But there is another very important reason for the layoffs, which is that some startups have done it to themselves, or the recent investors have pushed them to do it.

During the 2020-2021 bullish market, many startups raised a lot of money at very high (sometimes too high) valuations, and with a promise of growth, the investors forced them to expand. This includes hiring large numbers of employees to show growth, justify current valuations and drive the next round even higher.

Now growth must be estimated on the basis of real figures. Users, usage, retention, ARR and revenue are the leading indicators for it. In many cases, it will be to hire people who enable growth. Essentially, it is viewed as investing in future growth.

As a result, when the focus was on growth, many companies were quick to hire for two reasons:

  • Invest to cultivate growth
  • Satisfy the desire of the recent investors who only cared about growth.

Today, with valuations lower and IPOs further down the road, priorities are changing and most startups have a new priority: profitability, even at the cost of lower growth.

The result has been layoffs for two reasons: when companies were in a growth phase and hiring was the leading indicator to show the Board of Directors or recent investors that ‘we are doing the right thing’, some of those hires were not suitable for the organization. So this is a perfect time to take care of that. In my opinion, the right time is to fire someone who doesn’t fit within the first month of hiring, unrelated to overall growth or layoffs in the organization.

The second reason is obvious. While growth is the top priority, we needed so many people to invest in it, but once priorities changed and profitability was paramount, in many cases these features are no longer needed.

Unfortunately, the result is the same, firing people.

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