- US tech start-ups are facing challenging times.
- A challenging economic environment occasioned by roaring inflation is forcing them to cut their staff.
- In Q2 2022, the number of tech start-ups that laid off their staff rose eight times from Q1.
The tech startup space in the United States has been on a downward trend. According to a Moneyzine data analysis, the number of layoffs by tech startups increased eightfold in Q2 2022 from Q1. The site has presented data showing that 170 startups and tech-oriented companies laid off employees between April and July. In contrast, only 20 did so in the previous quarter.
"In the face of rising inflation and a potential recession, many startups are finding that they need to reduce their workforce to stay afloat," explains Moneyzine CEO, Luke Eales. He adds, "Startups are particularly vulnerable to the current economic conditions because they often have high overhead costs and thin profit margins."
Moreover, Eales has linked the startups' woes to the pandemic's impact. He suggests that although the economy is recovering from the epidemic's effects, startup funding hasn't kept pace. According to him, venture capitalists are investing less money in early-stage companies as they have become more risk-averse post-Corona crisis.
Layoffs Peaked in June
While referring to Crunchbase News’ Tech Layoffs tracker, Moneyzine asserts that at least 35 tech companies cut their staff in May. But that figure would more than double in June to stand at 74 companies. Those job cuts affected startups in various industries, from food delivery to travel booking to fitness tracking.
Many attribute June's uptick in layoffs to the month being the second quarter's end. Consequently, firms were rushing to ensure that their financial books were in good order. They also focused on straightening their priorities before Q3, and H2 2022 took off. That's why the affected companies ramped up their layoffs toward June's tail end.
Moreover, June was a turbulent time for public markets. The Fed further compounded that situation by instituting the largest interest rate hike in four decades. That heightened fears of a potential recession leading firms to take cost-cutting measures, including job cuts.
What Does the Future Hold?
While the number of layoffs in the tech startup space is concerning, it is important to note that this is not indicative of the entire industry. There are still many successful startups out there, and the overall health of the tech sector remains strong.
Those focusing on consumer-oriented products and services continue to do well, thanks to solid demand from consumers and investors. But even they are starting to feel the pinch as investors become more selective about where they put their money.
The anticipated slowdown in the tech sector will likely have a ripple effect throughout the economy. As venture capitalists pull back on their investments, they will also be less likely to invest in other sectors, such as healthcare and biotech. This could lead to a slowdown in those industries as well.
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