“It’s a rough day,” read the subject line of the email Shelly Little received from her bosses at Carvana, an online used car store.
The note signaled that Little was one of nearly 2,500 employees laid off by the US-based company this week, in an atmosphere described by another employee as “mass hysteria”. Since the start of the year, shares of the company, famous for selling cars from towering, multi-story “automatic machines”, have dropped 84%.
“As I weigh the ramifications of this, all I can think is ‘wow,'” Little wrote on LinkedIn, informing her friends and co-workers that she was one of the 12% who were let go of Carvana.
His experience reflects the sudden sobriety that has descended on the US tech sector, prompted by a deep and wide sell-off in equities as investors worry about rising interest rates and slowing economic growth.
Privately held companies are being forced to readjust expectations about valuations, access to finance and risk appetite among venture capitalists, who may be putting more value on caution.
“I think it’s certainly humiliating for a lot of people in tech who thought things would never be different, or didn’t plan for a rainy day, or were being a little bombastic,” said Semil Shah, founder and general partner at Haystack, a venture capital firm. venture headquartered in San Francisco.
“If you were actually counting the chickens before they hatch, or were thinking about all the riches to come, it’s going to take a while.”
In open markets, Carvana was one of the hardest hit, but not the only one. DoorDash, the US market leader in restaurant food delivery, is down 49% year-to-date. Affirm, one of the biggest in the once highly hyped “buy now, pay later” industry, is down 75%. Shopify, the e-commerce operator regularly considered the most serious threat to Amazon’s dominance, is down 67%. The picture had been even bleaker until a general increase during trading on Friday (13).
Even the big tech companies, some of the safest growth stocks in the last decade, have suffered big drops. Apple, Amazon, Alphabet and Meta collectively had $2.1 trillion wiped out of their market capitalizations. In Apple’s case, the $600 billion drop was enough to see it dethroned this week by Saudi Aramco as the world’s most valuable publicly traded company.
The fact that an energy giant takes its place is illustrative of the shift in investor confidence from companies with strong revenue growth but shakier results to safer bets, said Brent Thill, an analyst at Jefferies.
“It’s a full-scale, full-scale technology vomit, a true eject button,” he said. “Less than a year has passed and all the high-growth software companies are now evil, nonprofits. I think there’s a total shift from technology to defensive sectors, energy and utilities.”
Tech companies are responding by tackling the basics — cutting costs, reducing cash burn and focusing on fundamentals.
“I’ve been talking about free cash flow more than I’ve thought since I took my first accounting class, it’s kind of crazy,” said one person at a large technology company.
Similarly, at Uber, with shares down 45% this year, chief executive Dara Khosrowshahi told staff in a memo last weekend: “The beacons have changed. Now it’s about free cash flow.”
“In times of uncertainty, investors seek security,” he added in the note, released by CNBC and verified by the Financial Times. “They recognize that we’re leaders in scale in our categories, but they don’t know what that’s worth. Taking advantage of Jerry Maguire, we need to show them the money.”
After drastically renaming and reorienting his company last year, Meta Chief Executive Mark Zuckerberg’s eagerness for the metaverse has paved the way for greater enthusiasm for big investments. The social media company last month pledged to reduce its spending forecasts by several billion dollars over the course of this year.
To that end, Meta pulled the handbrake on the strong growth in the number of employees. According to an internal memo from the company’s chief financial officer, David Wehner, obtained by the FT, it recruited more employees in the first quarter of this year than in the entirety of 2021 — but that’s ended.
“We need to take another look at our priorities and make some tough decisions about which projects to take on in the short to medium term to achieve the expense-reducing guidance that we committed to in the earnings report,” he wrote, adding, “This will affect nearly every company teams”.
A note from another Meta executive said that job interviews scheduled for prospective junior and mid-level engineering employees will be “sensibly cancelled.”
Twitter, potentially on the cusp of Elon Musk’s takeover, said on Thursday that it had not reached its own “intermediate milestones” of growth, so it is “reducing non-labor costs to ensure we are being responsible and efficient.”
Companies across the tech industry are looking closely at headcount as an immediate way to cut costs. Layoffs.fyi, which tracks layoffs among publicly traded and privately held tech startups, has seen an increase from February, though levels are still far below the early stages of the coronavirus pandemic. Food delivery startup Reef, celebrity platform Cameo and diet and wellness app Noom are among the private companies that have laid off employees.
It is only beginning to feel how the tech liquidation is impacting the private sector and the financing ecosystem that underpins it.
According to a report published by analyst group PitchBook this week, companies closest to migrating to open markets and trying to raise larger sums were the first to face headwinds, experiencing “very different investor sentiment” compared to high ratings in 2021.
According to CB Insights, global venture capital funding in Q1 2022 was down 19% from the previous quarter, the biggest percentage drop since Q3 2012. with Spacs– dropped 45%.
Haystack’s Shah said startup money has already become harder to come by for companies without a firmly established business model.
“People are still writing checks,” he said. “But if you’re raising 500,000, 5 million or 50 million, you have to fight for them a lot more than you would have had to fight a year ago.”
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