Another Perspective on the Tech Current Climate and Layoffs
Every day I see new headlines, seeing another tech company laying off a percentage of their workforce. I know everyone is talking about it but why not contribute more to this discussion. Layoffs. Tech. And VC. Indeed, everyone is talking about the mass layoffs in the tech ecosystem in 2022, but how will this affect VC? Here’s my take on it:
In the context of this year’s evolution regarding layoffs, people have lost trust in systems that involve distributing capital. People are assuming the risk is higher than ever. People fearing to buy property is a perfect example of this. People are weaning away from placing capital in a place that is somewhat risky.
2021 was certainly a significant year in history for investing in start-ups. Thousands of start-ups were given the ability to scale rapidly and grow globally. The excessive amount of capital poured into start-ups with a lacking pitch deck and false valuations also made it a monumental and memorable year. But, for the worse.
Some people perceive this market as actually ‘normal’, rather than a market that is in a ‘crisis’, like the world is deeming it as. They explain that 2021 was indeed an extreme representation of a bullish market. It was toxic, far-fetched, and frankly just unrealistic. As a result, start-ups had a far too high burn rate, which led to the need to reduce costs, and finally resulting in layoffs.
How will VCs adapt to this new climate?
This ‘crisis’ is going to affect all players in this game, like all economic crises usually do. So, the VCs themselves are now experiencing the effects. VC’s will have no choice but to adapt to the new, difficult climate. A significant part of a VC’s role when digging deep into the tech ecosystem is conducting a thorough assessment of companies, called due diligence, to ensure they are investing in the right start-up. VC’s will have to modify their due diligence process massively. In other words, they will have to lessen the risk and ensure the capital invested will be returned more intensely than they ever had to do before.
Another player affected in this game is the limited partners investing in a VC fund. LP’s face a feeling of uncertainty; the antithesis to the types of approaches to investing in 2021. Now, investing in a reliable tech company that has a definitive business model sounds much more attractive. The desire to even distribute money in a VC fund will decrease, leading to less capital and less money for start-ups.
So, what does this mean for VC, start-ups and the entire ecosystem?
To put it simply, I am not sure what the future holds. With credible, disruptive technology that simplifies our lives such as ChatGPT on the rise, investment will be necessary. But will this sense of uncertainty result in a range of potentially ground-breaking start-ups to be dismissed? Maybe.
In support of the notion that this climate is ‘normal’, a VC being more particular and selective about which company they are pouring millions of dollars into is probably a good thing. A lot of start-ups as a result of the erratic investment approach in 2021 have ended up with companies running out of capital in a matter of three to five years, giving them no choice but to lay-off.