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Is it a tech bubble? Stock prices and start-up layoffs rock Silicon Valley

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Tech companies were the darlings of the pandemic economy.

Today, with soaring inflation, rising interest rates, a war in Europe and uncertainty in China, the biggest tech giants are driving the stock market, while startups up in Silicon Valley are laying off employees — a dramatic downturn for an industry seen as a barometer for the global economy.

The collapse affected even the most reliable ramparts. Apple, despite record revenues, fell from $3 trillion in January to $2.5 trillion on Monday. Microsoft, Amazon, Tesla and Alphabet have all lost more than 20% of their value this year. Netflix lost 70%.

Facebook, which is down 40% this year, recently announced to its employees that it will freeze hiring, which in the tech sector will almost certainly lead to a drop in the total number of employees. Private start-ups, sheltered from the stock market, have also felt the hit, with 29 companies laying off employees since early April, according to Layoffs.fyi, which tracks layoffs in the tech industry.

This includes Robinhood, the financial services company; Cameo, the app that lets users pay for personalized videos of their favorite celebrities; and On Deck, a Silicon Valley darling that helps tech talent start businesses, secure funding or find jobs.

This is a major turning point for the tech industry, which for more than a decade has defied gravity, continuing to grow beyond what even the industry’s biggest fans thought possible. Now, with an economy stretched by the global pandemic and jostled by war, the once largely immune tech industry may have found its match.

“There are a lot of factors, a lot of headwinds that people are worried about,” said Greg Martin, co-founder of Rainmaker Securities, which facilitates trading in stocks of private technology companies. “I’ve been doing this since the late 90s. I’ve seen models like this. It looks very different.

Andrea Beasley, a spokesperson for Meta-owned Facebook, said it was throttling its talent pool based on its business needs. The other companies did not immediately respond to a request for comment.

In the dot-com bust of 2000, Silicon Valley’s high-flying companies, backed by hyped stocks, disintegrated overnight. The impact was so immediate and dramatic that traffic in the Bay Area cleared up and it was easier to find parking.

In 2004, the industry regained its place. Companies such as Facebook moved in and the industry quickly exploded. Despite a global financial crisis and speculation of another burst of the bubble, the trajectories of companies such as Facebook and Google have remained on track. Then came Uber, Airbnb and Twitter, all of which were skeptical of their lofty valuations before going public. For more than a decade, some investors wondered if a crash reminiscent of 2000 was coming. But that failed to materialize, even as the coronavirus shut down the world.

Wall Street, dragged lower by tech stocks, racks up heavier losses

So far, that’s largely because today’s tech industry is different than it was in 2000.

It’s more global, with large companies spread across the US, Europe, and Asia. Investors now include not only legendary venture capital firms such as Sequoia and Benchmark Capital, but also major financial market players, such as Tiger Global, which earlier this year committed $1 billion to tech start-ups. in startup.

Companies like Uber and WeWork have been funded in part with money from the Kingdom of Saudi Arabia through Japanese firm SoftBank. According to the National Venture Capital Association, 2021 alone attracted 17,000 venture capital deals, worth a record $330 billion.

And while investors may think the stock prices of incredibly valuable companies, including Apple, Amazon, Facebook and Google, might be overvalued, they’ve built sprawling, profitable businesses. This differs from those who went bankrupt after 2000.

This year, part of what has changed is the all-important corporate earnings. Amazon, for the first time in years, reported a loss and said it was overstaffed in its warehouses.

Shareholder demand to see profitability — and distrust of the business model of the once-bullish ridesharing industry — was the theme of Uber CEO Dara Khosrowshahi’s recent email to employees.

“The average Uber employee is just over 30, which means you’ve spent your career in an unprecedented long bull run. This next period will be different,” he wroteaccording to the media.

Facebook’s face on Wall Street may just be the start of some tech stocks

Yet the downturn affecting the tech industry today shows no signs of becoming catastrophic just yet.

“I had a conversation today with a startup investor and none of us had any data yet showing that there are fewer companies being created because of this,” said Beezer Clarkson, a partner of Sapphire Partners which invests in early-stage venture capital companies. . “It would be a very worrying sign if people chose not to innovate or build businesses, so that’s something we continue to watch closely,” she said.

Venture capitalists, some of whom spoke to The Washington Post on condition of anonymity due to the sensitivity of their investments, said the downturn was not affecting their investment strategies.

But they said start-ups need to be careful about their “burn rate”, Silicon Valley jargon for the amount of investment capital they spend, because it can become more difficult to raise more rounds. of financing. Since most early-stage startups lose money, the amount they “burn” determines how long they can survive between funding rounds, known as “track”.

Rather than giving up on investing in start-ups, Clarkson said, investors tell us they’re looking at companies more critically, asking them to use their funding more effectively. “You can make the argument which isn’t necessarily terrible. Looking at metrics shouldn’t be negative.

A slowdown in big tech companies can also benefit the next wave of start-ups. When companies like Facebook and Netflix stop hiring or firing employees, some of those employees often find or join start-ups, which can seem risky compared to the security of a large company.

Employees of publicly traded tech companies often receive a significant portion, if not the majority, of their salary in the form of stock. As stock prices fall, the salaries offered by big tech companies look less and less attractive compared to smaller startups.

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Private tech companies are not publicly traded, so their true value is often difficult to calculate. But some employees sell their shares on private markets reserved for informed investors. The prices of these “secondary stocks” can give an idea of ​​whether a company’s value is rising or falling.

Martin, who facilitates secondary market transactions at Rainmaker Securities, said shares of some private companies are trading at a steep discount. But he said some start-ups have started to crack down, preventing shareholders from trading shares to avoid the perception that the company is less valuable.

A down market can create problems for start-up employees that go beyond layoffs. Employees of start-ups are often compensated with stock options which they are allowed to buy at prices below what outside investors are willing to pay. Employees must wait to sell these shares until the company goes public or is acquired, or they are allowed to sell in secondary markets. But employees must pay taxes on stock options before selling them. If the company goes bankrupt, the employee will have paid taxes for nothing.

Some Silicon Valley entrepreneurs and investors doubt that the bubble really burst.

“Hiring has gotten really out of control and work hasn’t really changed significantly during covid, so I’m wondering to what extent big companies are using macro-softness to clean house,” said Sarah Kunst, founder of the venture capital firm Cleo Capital. .

On ZipRecruiter, a job board, the number of active job postings in the technology industry increased between January and April for all available jobs, including project management and software development, said the company’s chief economist, Sinem Buber.

“Because technical skills are highly desirable in every industry, from online retail to fintech, skilled workers currently have many options in the job market,” Buber said.

Yet fears over layoffs are ricocheting off Blind, the anonymous messaging app popular with tech workers, where thousands of users voted in a poll asking which tech company would cut jobs next.

Facebook’s parent company Meta has frozen the hiring of mid- and junior-level engineers, a current employee who spoke on condition of anonymity to discuss sensitive issues told The Post. And internal communication shared with the newspaper indicated that, as fewer recruiters would be needed, some upcoming recruiter engagements were being cancelled.

“The entrepreneurs affected were immediately informed and offered a financial transition package” from their employers of record, according to an article seen by The Post. He warned readers not to talk to the media or discuss the layoffs online.

The post stressed that employees were not affected. He also noted that Meta would be hiring fewer people than originally planned for 2022.

Board member Marc Andreessen wrote that staffing needed to be cut after years of rampant spending.

“Good big companies are overstaffed by 2x. Bad big companies are overstaffed by 4 times or more,” he posted on Twitter.

Elon Musk, who said he planned to buy Twitter for about $44 billion, suggested hiring 3,600 employees, after cutting hundreds of jobs, according to a pitch deck seen by The New York Times.

Musk, who is CEO of electric car company Tesla and rocket company SpaceX, is dealing with concerns from employees and investors that he may be stretching too thin. He put a lot of his personal wealth to fund the acquisition – which is expected to be a big part of his stake in Tesla.

Tesla shares are down 20% since Musk made his takeover bid for Twitter.

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