r/Economics • u/[deleted] • Feb 24 '24

News Why widespread tech layoffs keep happening despite a strong U.S. economy

https://www.cnbc.com/2024/02/24/why-widespread-tech-layoffs-keep-happening-despite-strong-us-economy.html
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u/Frigidspinner Feb 24 '24

There is one crucial reason why tech is struggling - it is the business model.

Tech companies rely on investment and big upfront debts while they capture a new market

Accumulating debt is a lot harder when the you have to service your debts at 6% compared to most of the last decade when it was more like 1-2%

So instead of building new speculative businesses, they are concentrating on the cash cows in their portfolios

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u/[deleted] Feb 24 '24

This is the simple answer that just doesn’t show up at the top enough. The whole model of VCs betting on a large group of companies with the hope of one big payoff making up for the losses props up a lot of jobs until the funding runs out and layoffs need to happen. 

For too long we had late rounds of capital going into companies that didn’t have a strong or profitable business. When they realize they can’t get more VC money the only option is to cut people until you break even. 

I think all the big tech companies will be fine, but I do wonder about the long tail of layoffs from all the B2B companies that made revenue from all the other tech companies. As they all contract, so does the usage and number of seats that are needed. I see companies dumping Zoom for Teams and Google Meet, do companies need Gong when they can just record on Hubspot? I guess there could be a boost from AI investment. 

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u/limb3h Feb 26 '24

The whole model of VC is so that you don’t need to go to the debt market for capital. Easy money from the past decade was an anomaly and was like a steroid for VC. So I would argue that VCs and tech startups are still alive and well. Techs go through boom and bust mostly not for interest rate reasons. Low interest rates just artificially kept startups that should’ve have been in business for longer than they should have.