For the past decade, Silicon Valley and its workers were big winners in a world of haves and have nots. But the economic shock caused by the coronavirus is accelerating a tech-industry shift from prioritizing growth to profitability, meaning rank-and-file workers will no longer be immune to the forces confronting so many workers throughout America. In short, there will be no V-shaped recovery for tech workers.
Tech workers made out so well in the 2010s for two main reasons: Not only were so many companies growing quickly, but investors were willing to tolerate bottom-line losses in the belief that in a winner-take-all era companies had to get big as quickly as possible to survive, let alone thrive.
But it was the latter dynamic that really yielded outsized compensation to tech workers. The aspirational model was a company like Amazon. Famously focused on growth over profitability, Amazon proved that investors were willing to be forgiving indefinitely as long as it continued to grow and innovate. The same was true of Netflix and Tesla, two other tech companies that have yet to show much in the way of profits. In all cases, the view is that someday down the road these companies will have dominant market shares and have pricing power and profits to justify years, even decades, of investment in the business.
Other startups and growth companies embraced this model. Maybe a company such as WeWork could have carved out a profitable niche by offering upscale co-working and flex office spaces in a handful of hot cities. But only by showing rapid growth and claiming the company would transform the way we live and work could it have fetched a $47 billion valuation. Uber and Lyft could have decided not to offer large incentives to both drivers and riders and chosen to grow slowly and profitably, but it was the dizzying growth and talk about what share of global vehicle-miles traveled they had captured that led to their eye-popping peak valuations.
All of that growth required companies to hire as quickly as possible. In cities such as San Francisco and Seattle, tight labor markets and limited housing and office space pushed up salaries, rents and home prices.
Last year, the growth-at-all-costs model started to unravel. Closely held companies that were founded after the Great Recession were trying to complete initial public offerings, and public market investors were starting to sour on profitless growth. Uber and Lyft completed their IPOs, but quickly saw their share prices drop. WeWork couldn’t complete its offering. It now was clear that investors wanted assurances from managers that there was a concrete plan to pivot to profitably.
What we saw last week is that this timetable has been accelerated. Lyft is laying off 1,000 workers, or nearly 17% of its staff. Uber is mulling a similar decision. Startups that thought they might be the next Uber or Lyft, such as scooter company Lime, probably won’t be given the same breathing room from investors and are doing layoffs now.
Even the profitable giants aren’t immune from the dynamic. Although Google and Facebook are in no danger of losing their dominant market positions, the decline in ad revenue since mid-March means that if they’re going to keep increasing profits and stock prices, they might have to get there through spending discipline rather than revenue growth. Google is slowing its hiring plans and looking for other areas to cut costs. Facebook mentioned on its earnings call last week that it planned to slow hiring and reduce capital expenditures this year by $3 billion. Meanwhile, Amazon said Thursday that its bottom-line was squeezed in the latest quarter, and the company is prioritizing coronavirus-related safety spending over profits in this quarter.
And this may be just the beginning. We are still in the acute phase of this crisis, and companies are just beginning to assess the damage and reevaluate their longer-term plans.
Coming out of this crisis, we could see the acceleration of three different trends pertaining to tech workers, all of which were underway even before COVID-19 spread to the U.S. The first is a sharp reduction in the number of startups and growth companies burning cash for years in the hopes of someday gaining dominant market share and a lofty valuation. Second, leading, profitable tech companies will begin to act like normal large companies, trying to increase profits, boost share prices, cost cuts and financial engineer rather than invest in continued revenue growth. And third, companies will seek to move employees from high-cost to lower-cost regions, whether in the U.S. or abroad. A large amount of remote work may figure in the mix.
This path for tech companies is not that different from the one Wall Street has gone down over the past generation. Yes, for certain key roles, such as engineers working on profitable cloud-computing services, the good times might roll on. But for rank-and-file tech workers the golden era might be over.
Conor Sen is a Bloomberg Opinion columnist. He is a portfolio manager for New River Investments in Atlanta and has been a contributor to the Atlantic and Business Insider.