The perfect storm of a pandemic, war, and a global economic slowdown is knocking on the door of tech companies everywhere. While the news is full of reports about layoffs, the reality of the current hiring market is one of contradiction and opportunity.
The Macro Environment
Since the pandemic began, there have been two overarching developments for tech companies when it comes to hiring talent. First, there was a shift to fully remote work and management, an approach that was completely new for almost everyone. Second, there was the absolute breakneck speed of hiring for some companies. For example, Google went from 127K people in June 2020 to 174K in June 2022, and Meta went from 53K in June 2020 to 84K in June 2022. Considering the timing, almost all of that hiring and onboarding was done remotely.
Now, with the pandemic mostly behind us, companies are facing a new reality: a period of great economic uncertainty. Inflation is at a 40-year high, an aggressive federal reserve is trying to rein in inflation, and there is the risk of a recession from monetary tightening. The S&P is down 30% from its high, its worst first half in more than 50 years, with technology growth stocks down even more.
Against this backdrop, many technology companies have announced some sort of hiring slowdown, pause, or even layoffs. Those hit hardest by the recent rapid shifts in consumer demand have borne the brunt of those layoffs, but other companies have also used the downturn as cover to cut low performers and clean house. In the current climate, these moves are seen as responsible, whereas just a year or so ago they would have reflected poorly on the company’s brand. We spoke with the Founder of a recruiting firm, who said that there is definitely a sense of ‘groupthink’ regarding layoffs. He also said hiring is slower and more difficult than it was before, with candidates more reluctant to move and less likely to make risky decisions, and companies being far more particular, leading to an inevitable slowdown in headcount growth.
While the talk of layoffs has been getting a lot of coverage in the press, it is important to recognize that actual layoff numbers are a tiny percentage of the overall technology workforce. The following chart shows that while the summer months were certainly characterized by a significant reduction in force, the overall numbers are not as bad as one may think from skimming the news reports.
With hiring slowing down, it’s unsurprising that recruiting agencies have significantly more bandwidth. A few months ago, most firms had wait times from weeks to several months before they could take on a new search. While most firms are still busy, we are getting a large number of cold reach-outs from our agency contacts as they adjust from prioritizing incoming requests to outbound business development. We are hearing that most firms have immediate bandwidth for both executive search as well as embedded recruiting assistance. Companies in our portfolio have also reported that some agencies are going as far as to cut fees for contingent search placements and hourly recruiting support.
While the workforce has obviously been affected, the macro environment doesn’t appear to have had a major impact on salaries. Over the past year, we’ve seen that salaries seem to have plateaued a bit, and currently, we are not seeing any downward pressure there. Salaries are the stickiest component of compensation, competition for talent is still strong, and salaries are also difficult to cut. What we are likely to see this year at big companies are smaller bonuses, lower stock offerings to new employees, and smaller refresh grants for existing employees. That said, we are also privately and publicly hearing that companies like Apple and Google, and even Meta, are still showering their key top performers in Engineering and Product roles with extra stock, as the competition for these types of employees remains intense.
Perhaps the most interesting aspect of the layoffs/slowdown trend is a palpable shift in power away from employees. Gone are the hiring explosions and talent migrations of just a few months ago. Now, many employees who resigned in search of greener pastures are regretting their decision, and high-profile CEOs are publicly chastising and challenging their own employees. Tesla’s Elon Musk told his staff to stop “phoning it in” and “everyone must be in the office for a minimum (and I mean minimum) of 40 hours per week or depart Tesla”, according to Bloomberg News. Mark Zuckerberg infamously said that the company was facing one of the “worst downturns that we’ve seen in recent history” and “I think some of you might decide that this place isn’t for you, and that self-selection is OK with me.” He further stated, “realistically, there are probably a bunch of people at the company who shouldn’t be here.” This marks a dramatic shift from employees setting the guidelines to CEOs now freely announcing reductions in benefits, adding additional responsibilities to current employees, and layoffs. This has been a wake-up call for tech employees everywhere who have been more or less calling the shots on work and culture. This is especially true for the significant number of younger technology workers who haven’t experienced a downturn in their careers.
Finally, there are diverging opinions on the future of remote work. While originally a necessity of the pandemic, remote work in some form is likely here to stay. Yet there is no doubt that remote work presents a number of challenges: learning curves are steep, abrupt adjustments are hard, and remote meetings change interactions and dynamics. This may lead to discord between a company and its individual employees, which (despite what we described above) could result in some additional employee migration.
What Our Portfolio Companies Are Experiencing
Within A.Capital’s portfolio, we haven’t seen any reductions in benefits or perks, and Founders have maintained their original post-Covid philosophies on working locations. Companies like Styra, Cyral, Unit21, and Armorblox learned they could operate successfully remotely (and per the Founders, even more productively), and have remained that way. Others, like Notion, have created a hybrid system for return to work where employees have two “anchor” days when they are regularly in one of the company’s main locations (they now have offices in San Francisco, New York, Tokyo, Dublin, London, and Hyderabad). For the other three days employees are encouraged to come in, but it remains optional. Most remote-first companies still have some constraints on geography, such as Replit, which requires employees to be within a four-hour time zone of the bay area, or like CodeSignal, whose remote positions are either US-based or with their engineering team in Armenia.
Regarding hiring, our portfolio companies are seeing little change on the technical hiring front, with sourcing and hiring remaining as difficult as it was six months ago. Candidates routinely still have multiple competing offers, although things have eased up a bit on the non-technical side with candidates somewhat easier to find and close. That said, it is taking more selling to get candidates to come to a startup, requiring our companies to be very upfront about cash on hand, runway, and stock option valuation. This ties into the “flight to safety” that we are seeing as employees head towards larger and highly profitable companies with business models not as likely to be impacted by the current macro environment. Our source at one large technology company said that their offer acceptance rate for product and engineering has gone from 80% a couple of months ago to 97% today, which is an enormous change at that scale.
From a workforce perspective, within our portfolio there have been a few companies that had small and highly targeted layoffs. We would consider these to be healthy, strategic adjustments, especially for companies at their stage. In fact, these companies are continuing to hire for critical roles, which is true for most of the companies in our portfolio. Notion has even gone on offense during this time, acquiring two companies, doing an advertising blitz, and moving even faster than before on hiring, taking full advantage of what could be a brief pause in what has otherwise been a fierce battle for top talent.
Turning Chaos into Opportunity
As we continue to analyze the current macro environment, this moment reminds us of the early days at Google. After the .com crash, Google seemed to be the only company aggressively hiring in Silicon Valley, and they managed to get some of the best talent in the industry. We see a similar opportunity today. Where appropriate, we’ve been advising Founders to target quality talent (or small teams) at larger companies whose approaches to return to work differ from theirs. We’ve also discussed how to hone their hiring process and recruiting pitch to address candidate concerns regarding cash on hand and runway. In addition, given how stock-heavy some offers are for software engineers, startups can now play up the fact that big company compensation can actually drop dramatically depending on the markets (Meta, Netflix, Paypal, Affirm, Doordash, and Shopify being prime examples), so the perceived “flight to safety” may not actually be so safe.
The past two and a half years in the talent industry can be best described as a rollercoaster of chaos, from Covid, to geopolitical unrest and now a potential economic downturn. If you’re a company with a non-essential product that will be greatly affected by consumer spending (Netflix, Peloton), or that over hired during a brief pandemic-related boom (Robinhood), your fortunes are not looking so rosy, and your employees are likely starting to look elsewhere. If you are a company that is well-funded, profitable or both, then this is a prime opportunity to continue to grow and take advantage of the developing recruiting market.
