The tech recession isn’t a tragedy, it is a necessary correction for future growth
The pandemic may have brought many businesses to their knees, but for the tech sector, it was a boon. It accelerated changes to the way we use technology in our work and personal lives, and this, plus a low-interest rate environment, drove higher levels of expectations, investment, and valuations. The world’s biggest tech companies even enjoyed combined revenues in excess of $1.4tn in 2021.
But it wasn’t to last. When it became clear that increased adoption of tech tools was partly just demand pulled forward by the pandemic rather than an overall structural shift, long-term expectations for interest rates corrected (to name two potential causes) purse strings tightened and valuations started to fall.
Now that post-pandemic reality is setting in, the bubble has burst. The tech-dominated Nasdaq Composite Index just recorded its worst first half of any year, ever. One venture capitalist Tomasz Tungus has estimated tech startups should prepare for a 21 per cent slowdown this year. There will be more lay-offs, investors will get burned, and good businesses will fail – particularly those that were scaling rapidly and deploying significant capital to maximise revenue growth with the expectation (reasonable at the time) that more would be available.
But as painful as this downturn will be, it does at least present us, as an industry, with an opportunity to return to good sense. The supply side pressures of significant investor cash plus historically high valuations created market conditions that allowed for sloppiness and complacency.
A correction gives us the chance to refocus on the fundamentals of building profitable, sustainable businesses. The dot com bust of the early 2000s is an instructive comparison; it delivered a painful shakeout and reset that laid the foundations for the surging growth in tech that followed.
Corrections also create opportunities for agile innovators who can find new ways to add value to the ecosystem in the face of budget cuts, stagnating software subscriptions, and dwindling profits. Vendors that can help drive up revenues, reduce costs, or eliminate risk will have a great value proposition in this environment. Tech companies that can support the broader pandemic recovery will also do well, for example, those who can help deliver resilient supply chains of the future.
Overall, we’ll inevitably see a flight to quality and a resetting of expectations for investors, founders, and employees. As businesses fail, talent and capital will return to the pool with a renewed outlook, and industry participants will be more likely to do the right things for the right reasons.
We will also see more businesses embrace positive pandemic-related changes that create opportunities to build healthy, happy places to work, with a particular focus on the revolution in remote working. The benefits of this approach are already apparent. Spotify, for example, boasted a 15 per cent reduction in attrition rates against pre-pandemic levels after implementing its ‘work from anywhere’ initiative last year.
While the current situation is grim in the short term, we should be hopeful for the future. The fundamentals are still there, and software is still eating the world. There will, unfortunately, be casualties but, ultimately this is a process of rebirth and renewal that will see the tech ecosystem emerge stronger than ever.