Crunchbase: The Market Minute: Why Are Tech Companies Being Hit So Hard By The Downturn?
by Sophia Kunthara, July 14, 2022
Click here to read the complete article at Crunchbase.com
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.
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.
