The high-tech industry works according to trends and fashions: If last year it featured offerings, SPAC mergers, scandalous rounds and unicorns, then the prominent trends of mid-2022 are freezes of recruitment, lower salaries and layoffs – many of them. This is no longer a marginal phenomenon, affecting companies with a particularly high risk threshold, but a trend that penetrates deep into the core of unicorns, the successful companies that until recently became known as growth speeds and IPO candidates, including giants such as Verbit, Leitrix, Ituro and Bizabo. The trends are set for them, of course, by the investors (venture capital funds and private equity) who have dictated a sharp change in policy since March and April: an emphasis on growth – profitability, cash flow and efficiency. High-tech companies, even the largest ones, depend on the grace of investors for the most part, in order to continue to grow, and hence, the layoff trend is probably just beginning.
1. Why now? “Date indicative of control”
This week, 400 workers in four unicorns were fired in two days. And the timing of the accumulation of these layoffs and cuts is not accidental. The beginning of July is not only the beginning of a quarter, but also a new median, and there is nothing like a symbolic date to execute a significant move. As Tom Livneh, CEO of Verbit, who on Tuesday conducted a process of layoffs and organizational change: “This is a date that indicates control, preparation in advance, not pulling out of the waist.” Towards a new future of the quarter that includes an emphasis on cash flow and striving for profitability, compared to previous quarters that are considered wild and wasteful.
2. “Nobody Wants to Finish Like Hippo”
“I talked to at least ten analysts and mostly heard from them that I should not end up like Kaltura and Hippo,” says one of those involved in the recent cuts. The horror of comparison to those technology companies that went public with negative cash flow and chronic loss is a warning sign of low pricing by investors. For entrepreneurs, who may have forgotten about an IPO in the immediate term, but still want to look good in the “beauty pageant” with investors, to be perceived as a lean and efficient company, a positive cash flow is the hallmark of profitability. WIX “made a career” positive (annual) cash flow, although for most of the year it is running at a loss. Most of the new mushrooms were stamped on a performance like that of Weeks, though even in today’s climate it’s still not enough.
3. These are (still) not distress dismissals
First a few words of proportion. The current wave of layoffs in high-tech is still smaller than the cuts of early Corona. According to the website Layoff.fyi, which follows the layoffs in the global high-tech industry, in May and June about 33,000 workers were laid off in the industry compared to 52,000 in April-May 2020. overnight. Now the situation is different. Most companies that lay off today are not in existential distress. Companies like Trax or Verbit only completed huge fundraising of hundreds of millions last year. But now the companies are not sure when they will be able to raise funding again, and when they will be able to raise at current value. Therefore, they are working to extend their runway (the runway in high-tech language), the time when they can continue to function without injecting more money, so that they do not have to raise at a declining value, which is not good for anyone – neither entrepreneurs, investors nor employees. The quickest way to extend a route is to simply cut back on manpower.
In addition, when everyone is fired, and there is no longer a negative stigma on the subject, there are companies that just take advantage of the situation to cut back on lower-performing employees.
4. The connection between dismissals and cancellations of issues
The dismissal of 100 employees from Ituro, along with the official announcement of the cancellation of the SPAC merger that was originally planned at a value of $ 11 billion, does not contribute to the reputation of the Israeli trading platform. “We have made a difficult decision to reduce our workforce by about 6%, to ensure long-term sustainable growth,” the company said. Why did they wait in Ituro until the IPO was canceled in order to release such a large number of employees? Why did they not carry out the dismissal move even before the IPO was canceled, in order to maximize the chances of its success? Is it possible to conclude from this that Ituru tried to sell an inflated company to the public?
“Companies have raised capital because it is possible – not because they needed it,” the CEO of the giant Atlantic Fund, Globe, recently announced shortly after announcing a new investment regime. Scandal rounds – a deal in which investors also inject capital into early investors, senior employees and entrepreneurs and not just the company’s coffers. It is easy to guess what the financial situation of the companies would have been if this money had flowed into their coffers, instead of into the pockets of senior employees, entrepreneurs and angels.
5. The wave is advancing at an exponential rate
In high-tech people like to talk about exponential growth and exponential growth. While it is nice to use these terms to describe a projected increase in revenue, but less to describe a wave of cuts. According to the “Startup” website, which collects and updates in real time all the announcements about layoffs in Israeli high-tech companies, during the first five days of July 580 employees were fired, while in June as a whole the number reached only 810 employees. If the current pace continues, we are moving towards more than 2,000 laid off this month and that is already significant. Although not all of these dismissals take place in Israel, a large percentage of them do. It seems that at the moment there is no industry in high-tech that is protected from layoffs and even in the cyber field, which is considered more crisis-resistant, one can find a number of companies that have been laid off such as Scenic, Transmission Securities and Cyberizen.
6. Those who do not fire, reduce open jobs
The transverse cut-off moves do attract most of the attention, but equally important processes take place quietly. A Globes survey of 20 unicorns, which have not yet announced layoffs, found that 18 of them have reduced the number of jobs they post on LinkedIn in the past three months. The average job reduction rate was 38%, with start-ups such as Gong (minus 71%), Fabrik (minus 76%), Hibov (minus 65%) and Big Panda (minus 57%) being among the leaders in the list of cuts in publications. The jobs on LinkedIn. In contrast, unicorns Armis (plus 18%) and Hanibuk (plus 5%) were the minority that increased the number of jobs on LinkedIn. The dramatic and painful implication of this figure is that those laid off who are now losing their jobs will find fewer new job options than in the past. A survey conducted by Globes last month found that developers and technology professionals, who suffer from chronic deficiencies, find it easier to find work than those in shell positions in industry, the worlds of marketing, service and logistics.
Is the era of great indulgences over?
For the past two years, it seems that high-tech has managed to eat the cake and still leave it intact. On the one hand the wages of the workers in the industry only went up and on the other hand the flexibility given to them in the conditions was maximum. Working from home, or hybrid, has become the norm, and some companies have gone a step further – offering employees unlimited freedom or four working days a week, just to come. It was fun to believe that this experiment could succeed, but there is a chance that we will soon find that we have witnessed here the privileges of days of abundance. The average wage in the high-tech industry has fallen by almost 8% since February, at least according to CBS data, and probably some of the indulgences will disappear when companies make efficiency a priority.
8. The big question: What happens to demand?
It is already clear that the dream values that start-ups received last year will not return so quickly. This in itself creates significant problems for companies, but the big question is whether in addition to a change in pricing, start-ups will also have to deal with a decline in demand and revenue. In previous quarters, listed companies that recorded a slowdown in growth often explained it in a required correction after the great acceleration in everything digital in the days of the Corona. But continued declines in demand will signal that we are in a period of recession, one in which both organizations and individuals are buying less. It will be a completely different film. We will receive important answers to this when the technology companies on Wall Street begin to report in the coming weeks on their results for the quarter ended June.
9. Opportunity for a new business strategy
The layoffs are sometimes just a facade, the result of a longer-term and more calculated move aimed at not only shedding fat but also changing the way the company operates, whether it’s the business model, or its structure. Verbit, for example, is not satisfied with laying off 60 employees – the company already employs over 500 employees has divided its organizational structure into profit and loss units, each of which is in charge of a professional vertical: translations for the entertainment market, translations for the technical market, etc. Each is measured on performance and profitability; Bizabo has cut back on future and high-risk projects such as territorial expansion to China and other countries in the East; And a survey company, which laid off 30 employees, which is 18% of the company, is changing the company’s structure to focus on customers – along with the various stages of product development and customer support.
10. The magic number: 16% of the company
The average share of layoffs in the company, according to the layoff count of the “startup” website, is a little over 16%, or about one-sixth of all the company’s employees. Behind this number there is logic. This is a number that is not too small, and yet also not large enough to materially harm society. “5% layoffs are about what a healthy, self-respecting company should do every year,” says one anonymous entrepreneur who has made a layoff move in the past two days. “Beyond that, numbers that reach 10% or 15% are actually the risk component that was in the company – future or high-risk projects that could have been given up in exchange for increasing profitability.”
“This is a cut rate that still allows for the company’s day-to-day operations without hurting output,” Moroccan Revital Shir-Morocco, a recruitment and D-Enter director who specializes in recruiting senior executives for high-tech companies, told Globes. “It should be remembered that all this time, these companies are still recruiting – and even more so in the cyber field. The need for quality developers is still at its peak and there is good demand. We are seeing laid-off workers upgrading their salaries by 10% or 20% in new jobs.”