Breaking the Unicorn Myth: Understanding the Tech Sector's Downward Spiral

I think it’s time for those of us in the tech sector to call 🦄🐂💩 on the vicious cycle most have been caught-up in.

I think it’s time for those of us in the tech sector to call 🦄🐂💩 on the vicious cycle most have been caught-up in.

The mega layoffs we’re seeing right now are hard backdrafts from tech stocks all but crashing and VCs pulling back on easy money and forcing startups into lockdown mode the last 6 months.

And unfortunately, we haven’t seen bottom yet.

From Q3 2020 - Q2 2022, VCs pumped unprecedented money into startups (to the tune of about a trillion dollars). Remember when becoming a unicorn was the ultimate goal? This, coupled with sky high tech valuations in the public markets, drove massive and excess spending on 4 primary things:

• People - The hiring spree of the last two years was insanity and drove up salaries to bubblisuous levels previously unseen. From startups to large tech players, headcount grew exponentially.
  
  These people, now making more than their parents, in turn used cheap money to buy Pelotons, Netflix, Teslas and houses - thus inflating home prices in already bubbly markets like Austin and Miami

• Customer Acquisition to accelerate growth (to satisfy their VCs) - in the form of big advertising spends on Google Ads, Twitter and Meta Platforms (Facebook and Instagram)

• Infrastructure - AWS, GCP, Twilio, Apple (where do all those MacBooks go now?)

• SaaS stuff from other startups and tech types - Zoom, Zendesk, Salesforce, payment platforms, HR, etc. (also spending their cash on the aforementioned).
  
  When VCs said “get profitable or else”, it kicked off a chain reaction of spending reductions across the board and sparked the initial layoffs.
  
  Additionally, that reduction of spending on growth and SaaS is now manifest in Meta, Google, AWS, Twilio, etc, quarterly earnings…
  
  Queue the big the layoffs.
  
  And now here’s what happens next.
  
  Startups that were used to raising money instead of making it are going to starve. With salaries now coming back to earth, it won’t be long before companies realize they’re over paying for people they hired at the peak, then more layoffs.
  
  And since the M&A market will be dry for the foreseeable future, troves of startups will die. That means poor fund performance for all those B rate VCs - thus equating to fewer follow-on funds to pump money back into the market.
  
  And the cycle repeats itself until we hit bottom. Which my best guess is the second half of next year.