Remember the dot-com bubble burst?
When the internet was starting to take off from around 1995 to about 2001, everyone wanted a piece of this shiny new thing. Internet-related tech companies attracted massive amounts of attention from venture capitalists and traditional investors, and this influx of money saw explosive growth alongside the internet quickly climbing in valuation. Thanks to low-interest rates in the late 90s, debt financing was easier to acquire, which fueled the dot-com’s unchecked growth. Then the early 2000s rolled in, and these streams of easy money dried up, causing the industry to implode, and tech stocks eventually dropped nearly 80%.
So, have we found ourselves in the same position? The overall market is down 23% this year, and tech shares are down about 33% (effective 9/4/22).
Despite all the economic conditions and unpredictability, because we’ve seen this movie before, we can look ahead and plan for what we are sure is coming. At the very least, we know that deals and investments are not at a standstill, founders are still growing their companies, and businesses are bouncing back, so the real question is: how can we prevent poor planning through this all?
The big picture everyone is looking at right now shows employees being laid off in bold strokes. From Shopify to Microsoft, Netflix to Twitter, more than 39,000 workers in the U.S. tech sector have been laid off in mass job cuts so far in 2022.
While mass layoffs can appear extreme on the surface, it’s often a small percentage of the overall company. For example, consider Shopify which laid off 1,000 of its employees, equating to 10% of its workforce. Their case mirrors what many organizations have been experiencing: the pandemic forced everything to go online, so the tech sector boomed, then things cooled off, growth slowed down, and companies have had to reevaluate their expenses.
When early-stage companies and startups are worried about revenue, they must be thoughtful about spending on things that are not critical. Realistically, most organizations have 10% of people who shouldn’t be there even in the best of times. With that in mind, because of the panicked hiring frenzies for the tech sector to meet demand during Covid, it made sense to scale back that 10% of the workforce that wasn’t productive or contributing as things have levelled out.
All the money is in the people, so don’t let anybody go that you really need, but take a hard look at people who may not meet the level of talent your team needs and won’t be conducive to future growth.
What this really means is that VCs are still doing lots of deals for the right reasons. When companies have a clear and solid plan, a strong team, and a good idea, they capture investor attention. Every good company is still getting funded in these times.
But when things are tough, the press and media only highlight the bad news. Despite the negativity around the tech bubble bursting, the upside is that VCs are not running and hiding. While no IPOs have been happening and there are fewer merger opportunities, private equity has been actively helping people, purchasing other firms, and making them bigger. Things likely will not recover for a long time, but that hasn't caused deals to slow down. As I said, the difference now is that investors expect startups and tech companies to demonstrate greater financial transparency all the time.
A lot of money is going to established companies and the ones that have an accurate snapshot and understanding of their expenses, revenue, and people. The companies that are already struggling will continue to have trouble getting what they need for big-time growth unless they have the resources to expand, so now is the time for them to take advantage of this dip.
When things slow down, everyone thinks they’re not rich. That's not to say people should be spending left and right—bear in mind, we just mentioned companies cutting expenses—but this contraction in the tech sector was a necessary reset to bring company valuations back in line with the economy. Rather than giving in to these slower times, get on top of them. When there’s a slowdown, you’ll thank yourself later for identifying opportunities to make money and finding the support to grow how you need to grow.
Sequoia Capital, one of the most well-known—and in my opinion, very best—VC firms around, hosted a series of sessions called ‘Adapting to Endure’ to help founders navigate the current market conditions. This powerhouse group shared their expertise to write these guides that provide insight into how investors and big companies handle unprecedented times.
All these presentations are publicly available, and I highly recommend diving deeper into them. Here are some high-level themes from their guides:
So, here we are: in a situation that feels all too familiar.
As unpredictable as the tech bubble burst might be, the silver lining to it is that it’s not going to stay terrible. We know that things will ramp back up eventually, and it’s all about how we ride the wave when it will inevitably sink and then pick back up. What we can be certain about is that there’s no slowing down whether we're up or down, so let's lean on the resources available to help us prepare for whatever could be coming next.
