There is a growing fear that an economic recession is looming in the U.S. The recent meltdown of banks, coupled with the recent decline in Powell’s curve and other economic indicators, has succeeded in giving such fear legitimacy.
What Is a Recession?
In economic terms, a recession is a persistent decline in economic activity in a particular region (usually a country). This decline is usually so significant that it reflects itself in the value of the gross domestic product (GDP).
Gross domestic product refers to the market value of the goods produced as well as the services rendered within a particular country over a given period. Two consecutive quarters of regression in GDP growth are strong indicators of a recession. Other indicators of recession include industrial production, retail sales, and nonfarm payrolls.
The importance of knowing about recession is that it helps us recognize its effects. It is a no-brainer that a recession comes with economic consequences. These consequences can have a tremendous negative impact on various businesses and industries, including those in the venture capital ecosystem. Understanding the effects of a recession can help companies navigate through those negative periods and come out unscathed.
Venture Capital Ecosystem
Venture capital (VC) is a type of private equity system in which investors provide capital to startup companies as well as to small businesses. These investors can be individuals, companies, or financial institutions. Although it is usually financial, the capital provided may also come in the form of technical skills, management skills, or access. The companies that usually receive venture capital are the ones that have a high potential for growth and success. This is what makes them attractive to investors.
Venture capital differs from other types of private equity in its laser focus on emerging companies that are usually seeking substantial funding for the first time. It is usually given in the early stages of the business but can also be provided in the later stages. In exchange for funding, the investors are given a stake in the ownership of the startup. So, although it is risky, the potential rewards from venture capital make it very attractive to investors.
The term “venture capital ecosystem” is an emerging term in the financial landscape. It refers to a network of investors and startups. Other members of this network can include the government and other governing bodies. Just like a biological ecosystem, a venture capital ecosystem is designed to create an environment that is conducive to venture capital. It encourages the symbiotic relationship between startups and investors while promoting innovation and the growth of all parties involved. A notable example of where this system is practiced is in Silicon Valley.
The VC ecosystem, as it is commonly called, has helped several startups and their investors experience great success in recent years. A chart depicted by Tom Stafford at the 2022 Bloomberg Tech Summit in London showed that between 2018 and 2021, there was an increase of over 70% in the number of private companies valued at over $1 billion. The majority of these companies are in tech, and they can attribute their success to the support they have received from the VC ecosystem.
Bloomberg – VC Says Thousands of Companies Will Go Bankrupt
Recession-Proofing and Tech Industry Layoffs
The success of the tech industry has been unprecedented, as glowing statistics show. The value of the tech industry in the United States reached a staggering $1.8 trillion in 2022 while accounting for 10% of the nation’s entire GDP. This industry has hundreds of thousands of companies that are in full operation. The reason behind this is not far-fetched: Our economy and society are technology driven. The demand for technology has reached heightened levels, and this was further heightened against the backdrop of the COVID-19 pandemic. It’s little wonder that the tech industry is projected to have grown by 5.4% in 2023.
However, it is currently not all rosy — the tech industry is not recession-proof. Over the past few months, major companies like Tesla and Meta have experienced drops in the value of their shares. The demand for semiconductors in the U.S. is also expected to decline in 2023.
The major victims of a recession in the tech industry are the workers. Laying off workers is a textbook move for companies during a recession. In 2022, up to 150,000 employees across 750 tech companies lost their jobs. Amazon alone accounted for 18,000 employment terminations between November 2022 and January 2023.
This year has not been easier. Mark Zuckerberg, CEO of Meta, recently informed staff of the plan to trim down the number of jobs in the company before the end of the year. Alphabet, Tesla, and Snap Inc. also recently made announcements of potential cutbacks in employee strength and future recruitment. All these portend a period of uncertainty for the over 12 million employees working in the tech industry.
The Tech Industry and Unicorns
Tom Stafford of DST Global predicted at the Bloomberg Tech Summit that thousands of tech companies will go bankrupt by 2024. Although many will consider this outcome a result of the looming economic recession, Tom Stafford doesn’t think so. He asserted, “A company is real when it has a viable technology that nobody else and/or has or viable profit that is defensible — that nobody else has.” According to Stafford, many of the emerging tech companies in the VC ecosystem are “unicorns” and, as such, not real or lacking in substance. This, he says, will be a significant determinant of which company will survive the year and not just the recession.
Tom Stafford of DST Global disagrees with those who may consider this dire. He states, “This is perfectly normal. Not every company should make it; there is no problem with that. We should embrace failure; it’s not a bad thing. Failure means we tried, we recognized that it didn’t work, and we moved on to the next thing. I think that hasn’t happened yet.”
