Tech Downturn: Why Silicon Valley Is Dealing with a Slew of Layoffs

Why Silicon Valley Is Dealing with a Slew of Layoffs

The tech sector is reeling as the COVID pandemic dies down. Here’s what tech workers need to know about the current employment market.

The end of the pandemic is proving to be a difficult time for the tech sector, with the tech-heavy Nasdaq composite down by 4% since April—the worst-performing month since the 2008 financial crisis. This is not a short-term fall, when you consider that Nasdaq has fallen by 28% since the start of the year. 

The crashing of the stock market is not only bad for investors who have poured their hard-earned money into tech, but it is also equally alarming for those working in the tech space. Many companies, including video-sharing website Cameo, financial company OnDeck and financial services company Robinhood, have all been laying off employees since May. As of late July, more than 30,000 workers in the tech industry in the U.S. had lost their jobs. Others, like the social media companies Meta and Twitter, have both temporarily stopped hiring new employees. 

The big question here is—Why? Let’s take a look at the reasons behind these layoffs, the crash in tech stocks and what this means for tech workers. 

Causes of tech layoffs

Shifts in consumer behavior 

The most prominent reason tech company founders are going with massive layoffs is a shift in the market. The “shift” refers to people not being as dependent on technology as they were in the heyday of the pandemic. Back when COVID first broke out, people had to use tech for absolutely everything, and that helped the tech industry grow. 

With that no longer being the case, growth in the tech sector has slumped, affecting tech employees. One of the companies that has seen a massive slump is the at-home fitness company, Peloton. Some companies, like Samsung and Wayfair, had begun providing their employees with Peloton’s corporate wellness program in 2021. However, as the need for home fitness reduced, the company lost 90% of its value, going from US$47 billion in 2021 to US$4 billion as of May. In February 2022, the company laid off 2,800 employees, who commented that the whole layoff process felt “cold and scripted”. 

Rising inflation and high-interest rates 

Another factor that has adversely affected tech companies is the increase in interest rates since March this year. In 2021, companies found funding easy to come by due to low interest rates. Thus, they were able to continue growing and expanding without thinking of a backup plan to handle a slower fundraising pace. However, since the U.S. is dealing with high inflation rates of 8-9% this year, increasing interest rates is the way to get out of an inflationary cycle. 

On June 15, the U.S. Federal Reserve raised interest rates by 0.75%—the largest hike since 1994—taking them from 1.00% in May to 1.75%. This rate is only expected to rise further, with forecasts predicting that it would reach 2.50% by the end of July. This has caused investors to reconsider whether companies that thrived under lower interest rates would be able to stay afloat. It is because tech companies have a track record of performing badly when interest rates are higher and borrowing is more expensive. 

When interest rates are high, fundraising becomes more difficult for companies. An example of this is OnDeck, which laid off 25% of its staff in May. According to Tech Crunch, the company was allegedly attempting to raise a fund between US$100 and US$150 million but was only able to land US$40 million, forcing the company to scale back operations to cut costs. 

What does this mean for techies? 

What all of this tells us is that tech companies did not factor in how their businesses would change post-COVID for the decisions they made in the past two years. Companies overestimated their growth trajectories and hiring capacity. And now, the expanded workforce that led to this growth has to bear the consequences of the slowdown in fundraising. 

Yet, this doesn’t mean that tech workers should start getting concerned about their job options. Even though tech companies are laying off employees and slowing down hiring, the broader market is still accepting talented tech recruits with open arms. Particularly in an environment where there is a shortage of talent due to various factors, like lack of experience. Moreover, some bigger tech companies, like Microsoft, Google’s parent company Alphabet and Amazon, have all announced that they will be raising salaries to remain competitive in a tightening labor market.  

The one thing that tech workers do need to think about is shifting back to the office. Many managers believe that remote workers are less productive than those that work in-office and thus, are more likely to lay off remote workers than their office counterparts. Ultimately, if you are good at your job, you will be retained irrespective of where you choose to work from. However, to stay safe amid the tough circumstances, experts suggest that employees should stick to their current jobs right now to avoid entering the already tight labor market. 

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Header image courtesy of Freepik

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