The Insider Guide to Careers
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The current economic climate is not great for tech sector employees. The year began with tough news about layoffs in many tech companies. Historically, big tech companies have a give-and-take relationship with startup companies. Firstly, the bigger companies have outsourced much of their R&D work to startups. It is generally not easy to estimate the success of any novel or innovative project in the early phases. It is much easier to invest more resources in projects where the risk is minimal. Startups absorb much of the initial risk during the prototype process, making it easier for bigger companies to gobble up these companies as they keep expanding, overcoming the initial systemic risk.
The second reason why tech companies love startups is that they find a way to get talented people into the company through acquisitions. Most acquisitions are not a success. There are innumerable clashes when smaller companies become a part of a bigger company. The acquiring company has a big brother attitude and expects smaller companies to streamline their operational process according to the byzantine structure of the bigger company. The smaller company chafes at the new restrictions and gripes at the lack of freedom, as startups used flexibility and freedom as levers to recruit good talent. The only reason the founders of startups stay silent is because they want to cash out, and the vesting period for acquisitions is spread over a couple of years. The acquired company founder gets their payout only when they stick around for 1-4 years. The big companies typically want to keep good talent outside the hands of competitors, and they also would prefer that top talent not create competitors in the marketplace. Most big tech companies have legacy products making billions of dollars a year, and they want the legacy products to continue without being disrupted in the unforeseen future. Acquisitions are, therefore, a way to prevent competitors. One rarely sees acquired companies do well.
This mutually beneficial relationship has been upset recently. Because of increasing bank interest rates across the world, investors are seeing good returns of 5-7% in treasury bills and government bonds. When the returns were 0%, getting any positive returns from startups, irrespective of risk, made sense. Of course, these calculations are way more complicated, as most investments in a portfolio are expected to be duds, and 1 or 2 companies in the portfolio are expected to be the superstars that compensate for the failure of all other companies. Because of the increased focus on company viability and cash flow rates, there is a much higher bar for any further investments.
This change in expectations has upset the calculations of companies burning up cash as if there was no tomorrow. A company like Byju has fallen in valuation from 22 billion to 1% of its value to approximately 220 million dollars. A company, Hopin, was sold for 15 million dollars after being valued at more than 7 billion dollars recently. Another company, 23 and me, has fallen from 6 billion dollars to almost zero. All these companies had a lot of potential, but the macroeconomic environment changed rapidly. Most of the company founders were amateurs who were hyped by no end by the media. However, when the business environment is not good, seasoned industry veterans who can leverage their experience and nurse the company back to health need to be present. Surprisingly, many of these hot young startups invested in young talent rather than hiring more experienced folks, who were looked on as staid and old-fashioned.
A lot of the blame for misguiding young and impressionable CEOs also goes to startup investors, who want to capture the market at any cost. Elizabeth Holmes of Theranos was given a lot of bad advice, including the “fake it till you make it” strategy. Hopefully, more common sense will return to the startup community and early investors. Once investors stop chasing irrational and grandiose projections, the extraordinary greed in the markets will come down. Employees will also realize there is no easy way to become a millionaire or billionaire. One must pay their dues by working and learning before jumping into startups.
For people looking to join startups, the current times are not great. Most startups are going slow when it comes to hiring. Having a job is a big deal; nobody is talking about high compensation. Just like how good ties never last, bad times will also come to an end sometime. Once the economy picks up, irrational exuberance will pick up some time, even though it seems a couple of years away.
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