Tech Layoffs Continue
From Doug’s blog, The Deload:
The current inflationary environment has prompted tech to rightsize headcount with over 60,000 tech employees being laid off in the past year. While sad for the employees, it’s right for the long-term viability of companies and it’s responsible for investors.
Since June 30, Canoo laid off 58 employees, Niantic laid off 85 and Unity Games laid off 200. OpenSea laid off 20% of its employee base, Twitter laid off 30% of its recruiting team and Tesla just laid off another 229 workers from its AP team. Microsoft cut jobs to “realign business groups,” and Oracle is weighing a $1B cost-cutting strategy that would warrant thousands of layoffs, making it the company’s largest reorg in ten years.
Tech businesses are IP businesses
One of the biggest input costs is for labor to write code and build customer bases. In some ways, the overpayment of tech talent is like a more traditional, capital-intensive business building too many factories. That’s why we have capital market cycles. Under investment in capacity, build phase, over investment in capacity, reduction phase.
Tech shouldn’t be any different. It’s just that we’ve lived in the build/over investment phase for so long that it seems different.
The reality is this:
If we persistently invest in talent beyond reasonable incremental productivity for a business, then the business is never going to show meaningful tFCF to investors.
Extreme case in point: FTX is the third largest crypto trading platform in the world by volume, and they have less than 30 engineers. Coinbase is significantly smaller and probably has 30-40X more engineers, if not more.
At a Sohn interview with Patrick Collison, FTX founder Sam Bankman-Fried said that he believed most tech companies were structurally inefficient with hiring. He even thought that Facebook could be on the order of 5-300X smaller in headcount. That’s not a typo.
Whether his math is right or not, companies and investors all seem to be coming to the uncomfortable realization that tech is wildly overstaffed. While it’ll be messy and take time for companies to reduce headcount, such a trend is great for investors.
I hate to have to note this: I’m not celebrating job loss. I’m recognizing a structural reality that needs to change for healthy market function. The marginal software engineer or product manager is not worth $400-500K in total comp or more because he isn’t adding that amount of incremental value for investors.
Companies aren’t charities despite the emergence of stakeholder capitalism.
Time to raise prices
A vast swath of consumer tech was built on the idea of transforming old world services with the internet and using scale to deliver those services at lower costs to consumers. Many companies succeeded in modernizing necessary services on the internet, but often the lower prices were subsidized by easy money rather than benefits of structural scale.
Uber is a great service. I use it. It deserved to exist, but it’s been around for 13 years and never generated any true free cash flow. The dying traditional cab business has probably made more tFCF than Uber has over the past 13 years.
Imagine Uber were entirely private, bought out 100% by one individual. Now imagine there was no liquid market for the stock. Can’t sell it. How would that individual try to earn a return on his investment?
He’d probably lay off more than half of the company, raise prices to serve a smaller group of customers better, and try to pocket hundreds of millions in free cash flow per year into perpetuity. In the tight money, tFCF-focused world, excess staffing and compensation will be punished.