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The Market Minute: Why Are Tech Companies Being Hit So Hard By The Downturn?

The last couple months have been rough for both public and private tech companies.

More than 28,000 employees of U.S.-based tech companies have been laid off so far this year, with layoffs accelerating in June, the end of the second quarter. And while late-stage startups have been hit the hardest by layoffs, according to a Crunchbase News analysis, it seems like public tech companies are starting to ramp up layoffs as well.

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At least 13 public tech companies announced layoffs last month, many of which were newly public. In May, that figure was only eight, according to our tally.

So why tech?

We could be biased in our observation of layoffs, since here at Crunchbase News we cover primarily tech and tech-ish companies. But there’s a more concrete answer to why tech companies have been hit so hard by the market downturn: They’re growth stocks.

“What you’re seeing is a lot of companies, especially growth-oriented companies, tighten their belt, and be mindful of how they execute their business plan and growth trajectory because we have an uncertain future,” said Patrick Healey, founder and president of financial advisory firm  Caliber Financial Partners.

Many tech companies—especially newly public ones—are considered growth oriented and don’t have as much free cash flow as established tech companies such as Microsoft or Google (that being said, Microsoft let go of employees this week too).

Those companies are trying to be more cautious and conserve their liquidity until there’s a more favorable macroeconomic environment. Right now, heightened inflation and rising interest rates aren’t doing growth-oriented companies any favors.

“When you have a downturn in the economy and a recession, you’re going to see more reduced spending … that means demand for more growth-oriented companies will be more muted,” Healey said.

It can go both ways, according to Josef Schuster, founder of IPOX Schuster, which provides financial services related to new listings. Growth stocks can go up when interest rates are low. But in these times, “tech stocks are the highest risk, highest growth companies and highest uncertainty,” he said.

A closer look

Looking at the public tech companies that announced layoffs in June, many of them went public in the last year or two, including AppLovin, Unity and UiPath. Those companies took advantage of a favorable macroeconomic environment and went public, but now they face the challenge of fueling growth in a less favorable environment, Healey said.

Companies also tend to go on a hiring spree before an IPO to “look good on paper,” according to Schuster.

“You want to show that you’re a big operation and so forth, and even if you don’t need as many people, you still would hire,” Schuster said.

So the more than 50 VC-backed tech companies that went public through a traditional IPO last year may have a larger team than they perhaps need, especially in a tougher economic environment. Hence, the need for layoffs.

Not just tech

While tech companies are currently the poster children for layoffs and stock slumps, they’re not exactly alone in facing the risks of a high interest rate and high-inflation environment.

More niche sectors like electric vehicles and biotechnology, which include pre-revenue companies, face the same risks. More companies in those sectors could initiate layoffs as well to conserve capital and get to the production phase. Once there, they could tap into debt financing or other alternatives.

“The realities of the market makes a difference especially (compared to) a year ago,” Schuster said. “It also shows the flexibility of companies; they’re required to basically live up to the changing realities of the marketplace.”

Illustration: Dom Guzman

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