3 Questions Facing the Tech Industry Right Now (And How to Answer Them)

Since the beginning of 2023, the tech industry has been facing turbulent times, from economic uncertainty to a surge in layoffs and lower valuations. In fact, the final total of tech layoffs for 2023 ended up being 262,735, a staggering 59% higher than 2022’s total. And what about venture capital (VC) dollars, private equity (PE) money, and, of course, generative AI? These are all contributing factors to ups and down waves in the industry.  

That said, there are ways to navigate these choppy waters by capitalizing on new solutions and leaning on previous lessons learned. For example, while the current disruption led by generative AI innovation is distinct from the dot-com boom/bust of the 1990s, lessons from that period can still be applied to the tech industry’s current situation. 

To navigate these challenges, companies must first strive to understand the factors motivating layoffs and the VC and PE’s cautious approach across the tech space. By doing so and engaging in strategic partnerships to help successfully navigate these hurdles, tech companies can successfully chart a path to a fruitful future filled with opportunities for growth and resilience. Let’s take a closer look at the three most pressing questions facing the sector today, and how to answer them. 

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1. What is causing the increase in tech layoffs? 

Layoffs per company in the tech industry increased greatly in 2023 with a continued, though slower, momentum, but they are still happening despite the fact that there are more expectations of increased hiring. Despite public perception, however, these increasing layoffs are not solely driven by economic necessity but instead are influenced by market expectations and the need to demonstrate cost discipline to shareholders. In fact, recent studies have shown that there has been a phenomenon called “the herding effect” where companies will lay off employees, even admit of cash, because it seems to be the practice in this environment. 

Unless tech startups can demonstrate efficient use of capital and that they are hitting milestones, they are often facing fundraising struggles at the same time, which results in decreased cash flow and therefore workforce reductions -- indicating a broader shift in the industry towards prioritizing the cost and time to achieve positive cash flow and profitability. 

The impacts go beyond revenue and bleed into employee morale as well. These 260,000+ layoffs in 2023 have impacted all levels of employees and the pressure to demonstrate cost efficiency in order to meet investor expectations has heightened job insecurity among even the most seasoned professionals. Despite a booming job market in other sectors, tech employees are feeling increasingly disillusioned, leading some to reconsider career paths as well.  

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Companies are concerned employees are looking for newer companies that have greater rewards or upside for future equity compensation. Companies whose valuations have decreased risk their employees' incentives (generally stock options) being underwater. High performers can leave and join newer companies and receive equity incentives that have a much higher likelihood of paying out.   

Companies should consider what they need to change in their current equity incentive plan, in order to retain and attract new talent.  In some cases, stock options may be hitting their 10-year life and expire, in other cases the options are so far underwater that there is no equity incentive and these need to be revisited.  

2. How can tech companies build a bridge over these troubled waters? 

The above challenges are plaguing the tech industry left and right, but the biggest question is -- what can companies do about it?   

Some of the most impactful solutions that companies can consider are leveraging partnerships to navigate the layoff and funding challenges while also taking advantage of the benefits that AI offers. 

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Leveraging strategic partnerships: Strategic partnerships can be instrumental in successfully navigating layoffs and financial uncertainties. By leveraging the expertise of seasoned partners, companies can better understand their financial position and explore viable options for sustainable growth. 

With the right partnerships in place, tech companies can be advised on how to best weather the hurdles that often accompany rapid growth and volatility with the help of tools such as cash flow modeling, fundraising assistance, use of debt and equity, creating new equity incentives, repricing existing stock options, using bonus plans, awarding restricted stock units and more -- these are just some ideas to consider to achieve a sustainable and successful future. 

3. How can tech companies capitalize on the benefits of AI? 

The emergence of generative AI presents tech companies with both opportunities and challenges. While AI-driven innovations can revolutionize industries and drive growth, they also require significant investments in infrastructure and talent. 

Many companies offering reliable, safe, and effective AI solutions are awash in funding and have the potential to solve staffing needs for a fraction of their current cost. Generative AI has the potential to automate work activities that absorb 60 to 70% of employees’ time today. As such, by implementing this technology, companies can reap significant savings in labor costs and time to market, allowing them to overcome workforce challenges.  

As the tech industry grapples with economic uncertainties, remaining adaptable and innovative is key to success. Despite the challenges facing companies today, there are solutions and plenty of opportunities, especially in emerging technologies like AI. By staying agile and proactive, tech companies can weather the storm and as a result, emerge even stronger.