These days, the high tech industry is receiving blow after blow to its wings. We hear news about significant cutbacks, layoffs, and even startups closing almost every week. At first glance, I assume many people don’t really understand why this is happening, and why this should even concern them, in case they have nothing to do with this sector. That said, I truly believe the tech industry’s current status is a thing we should all be worried about. So, why is this even happening? What does the near future entail for this sector?
My name is Ofir Bar, an investor with about a quarter of a century of experience in worldwide markets, and a special interest in entrepreneurship and innovation. I admit I’m a little biased: The tech sector is, naturally, close to my heart. It’s not easy for me to see inspiring startups shut down. I believe high tech is crucial for any country that wishes to thrive. Therefore, I dedicate this post to the deadlock it’s in.
A hoard of tax money and innovation
The tech sector is investment-based, and I’m talking about immense sums of money. Millions over millions. This is a rather new industry, but it evolves FAST, much quicker than many other sectors. The investment money flow into it has been growing exponentially. Well, at least until recently. The governments of the countries which have a dominant tech industry have enjoyed a huge tax boost. This means, of course, more capital to further develop governmental services in favor of the population.
As importantly, high tech constantly brings a flow of innovation into the world. Can you imagine your life these days without Waze? Whatsapp? How about Netflix? Yes, these three (and many more) started as small entrepreneurial endeavors. Now, they are an inseparable part of our lives. The current economic atmosphere might terminate many pioneer initiatives that have the potential to improve our lives in many aspects.
High tech’s Long COVID
As a matter of fact, the current situation in the tech industry is, in many aspects, a side effect of the COVID implications. Yes, I know, the pandemic is not setting the agenda these days. That said, the collateral damage it caused did not end when restrictions were withdrawn. Back in 2020-2021, we performed most of our daily activities from home. Those who could, tech people included, worked from home. Since remote work is a great challenge for many companies, tech companies decided to hire more employees to live up to their goals.
However, when COVID eased and people went back to work from the office, inflation surged, and so did interest rates. We started seeing signs of recession. Many high tech companies saw no logic in spending as much as they did during COVID restrictions – making cutbacks only a matter of time. Also, let’s not forget that rising interest rates are a government’s way of telling people: ‘Don’t spend too much money’ – and that worked. Many investors started scaling back their expenses and investments, preparing themselves for a rainy day.
Sadly, many high tech startups are not very profitable on their own, even if their product is a success. Some of them actually spend more money than they earn. They survive (or thrive) mainly thanks to investors’ money. So, when the flow of investment money dwindles, this is a sword to the neck for many startups.
Predictions for the near future
Sadly, interest rates are set to remain high in the next months, possibly even increasing. Most economists agree this surge will continue at least till May 2023. So, startups will have to buckle up till the storm passes. Especially the small ones. You know how it works: The little fish are always the most vulnerable, while the big companies have way more breathing room to withstand the stormy economic waters.
Naturally, recessions start with investors panicking and withdrawing their money without thinking too much. That said, I see that these days, although the recession is still here, many of them feel more comfortable investing again and keeping their money rolling. It just took some time. The sharp ones see the current situation as an opportunity to buy now, as the prices are low. Another good idea is to invest in ventures that promote multiple products, even if this comes at the expense of the quality of each of them, to some extent. Investing and saving money at the same time – this is the name of the game till the recession subsidies.
