Understanding Tech Layoffs and the Economy’s Impact on Open Source
March 13, 2023
This article was originally posted onHackernoon
The year 2022 saw over 15 million layoffs across more than 1,200 companies. That number shows no signs of slowing down with 441 companies having already laid off employees in 2023. Many of these companies have raised billions of dollars with cash still in reserve and initial hiring plans unfulfilled, yet one after another has axed a percentage of their workforce in what seems to be a spreading pattern.
Avi Press (Founder and CEO, Scarf) and I have been talking about this extensively on our podcast. In fact, we have several recorded discussions on The Hacking Open Source Business Podcast channel talking about what layoffs, changes in the tech space, and the overall state of the economy mean particularly for the open source software (OSS) industry.
Why all the tech layoffs?
It’s a question even for the experts, who can’t seem to agree about how to address the economic slump. Confusion about the solution only reflects confusion about the underlying problems, though in reality a variety of factors likely account for the mass layoffs. Below are a few that seem most probable.
First and foremost, the declining economy has caused companies to clean house of dying projects and tidy up teams where bloating has gradually taken shape. For certain companies, the bloating has indeed gotten out of hand, but for others, the times more so present a convenient (as opposed to necessary) opportunity to operate more leanly. By laying off under-performing, second-tier, or nonessential employees during a time when layoffs have become commonplace, companies have optimized both efficiency and optics by avoiding the stigma that comes with firing people. Overall, the tech industry’s outlook still appears strong, but even one of the strongest industries cannot withstand the impact of economic drop-off and inflation, a key contributor to the removal of 67,000 jobs in 2023 and counting.
Although a handful of companies perhaps could not survive without a round of layoffs, what is unfortunately but likely true: We have seen the domino effect in play. Each layoff seems to reckon an additional one as acceptable and almost somewhat anticipated now that numerous companies have followed suit. Such behavior aligns with the pattern of companies trying to emulate the success of other companies by copying them both in success and setback, like canaries in coal mines. Derek Thompson, staff writer at The Atlantic, puts it like this: “Chief executives are normal people who navigate uncertainty by copying behavior.”
A company usually keeps one eye on its customer and the other on its competition. Having said this, all ears go to investors, because they hold the power of funding. Companies often respond even more strongly to the input of investors, who of late have seemed to pull back from brand new investments and further risk. In Q4 of 2022 alone, investments in North American startups dropped by 63%, plus annual global venture funding dropped by 35% year over year.
Additionally, first-time executives may make more conservative business decisions. They may more readily accept external pressure to conduct preemptive layoffs as they prepare for the worst. With rising prices, less spending, a market filled with incertitude, and tech giants proceeding with layoffs, even if they’re not in the sway of it at this very moment, companies are gearing up for the long-term implications of current economic conditions.
Excessive borrowing and spending due to low interest rates
Interest rates have also played a huge role in stimulating layoffs. During the pandemic, interest rates fell to all-time lows. The ability to borrow money and invest in ideas, experiments, and new businesses peaked due to easy, broadened access to funds. Borrowing to spend big on experimentation and focus on growth is not new, as many businesses have historically relied on this practice to facilitate growth at different stages of the company’s life cycle; however, the amount of borrowing and investing over the pandemic happened at an unprecedented scale.
Before when companies could access more capital, they could take on more risks, hire people at a faster rate, and let the market catch up. With the economic slowdown, inflation, and increasing interest rates, the same growth rates that companies planned for simply cannot sustain. The state of the economy calls for a correction to bring back some balance.
Growth at all costs
Not only have the circumstances outside of companies lent themselves to mass layoffs but also internal corporate philosophies and actions. A lot of companies, especially in startups and across open source, have employed an aggressive philosophy of growth at all costs, even at the expense of profitability and sustainability. In the face of shrinking cash reserves, companies still pursued new rounds of investments that they’d put toward trying to double the customer base. Rinse and repeat. For every $2–$3 spent, companies received maybe $1 as their annual recurring revenue. They operated as if more spending to earn more revenue would eventually cause them to somehow hit profitability.
Over the last decade or so, the prominent cycle of companies spending more than they bring in has compelled them to borrow money. By making the cost of borrowing effectively nothing, low interest rates over the last three years have accelerated this further. Plenty of companies took advantage of the liberty to overhire. For instance, Uber fell short of generating money on rides but continued to spend big, depending on their financiers to support them through their growth despite accruing losses.
Now that interest rates have hiked and companies can no longer afford this system, companies find themselves with few options but to self-correct through layoffs. Layoffs have occurred across all industries, but the degree to which they have hit tech, one of the sectors that most leveraged low, nearly free interest rates, indicates that the eventually profitable mindset likely played a role in bringing us to this point. As the growth-at-all-costs mentality accelerated, channels to cash have simultaneously dried up. The eventually profitable model is finally biting back.
What a dried-up VC market means for the tech industry
We are witnessing now how quickly the market can turn and the danger of resting on your laurels. We’ve seen companies with a successful IPO go through a round of layoffs just over 1.5 years later. Most recently, the biggest bank in Silicon Valley failed over a stunning 24-hour period. The reasons cited:
- Rising interest rates affected the bank’s investments
- The bank collected fewer deposits as its customers did not receive the same level of investments from VCs
- Because of less cash influx as well as a slowing economy, startups are burning more cash to stay afloat
This underscores how rapidly the market has changed for startups and tech in general.
Is open source recession proof?
If the economy proportionally impacts larger companies, many of which qualify under tech, then it makes sense that the industry finds itself largely affected by all of these factors. With this in mind, tech companies have sought to prepare for the awaited economic impact instead of reacting to it after the fact.
This begs the question: Because open source is all about community-driven, free software, shouldn’t it be safe to assume that open source would remain less affected by the trends seen across tech? The reality is that both are highly interconnected. Many people think of OSS as a pure space separate from profit-driven ties to the tech industry. The heart behind this may be true, but research by Aiven examining GitHub archives shows that the most open source contributions actually come from major tech players: Microsoft, Google, Amazon Web Services, Intel, and Red Hat. This goes to show that changes in companies such as these will impact OSS as in an ecosystem.
In Michael Nolan’s talk on the winners and losers in FOSS at FOSDEM 2023, he concludes that bigger companies (e.g., Google and Microsoft) are funding open source more than the independents dedicated to the space. Because the teams of these larger companies working on open source projects do not directly generate revenue, their susceptibility to layoffs appears higher and their projects are subsequently affected. An article by Steven J. Vaughan-Nichols further suggests that Google’s layoffs more greatly impacted open source teams than non-open source teams. As these larger companies lay people off and cut back on spending, the open source companies that try to sell to them inevitably get impacted too.
If you’re a tech company, what can you do in this economy?
Considering what has taken place, here are a few thoughts about how to improve your operations and safeguard against layoffs as much as possible.
Save cash and grow efficiently by focusing on real usage
There is still money from investors to be had, but investments will be based on proven growth. In the software space, we have seen secondary metrics such as the growth of one’s community Slack channel or the number of stars on GitHub serve as the justification behind investment. These metrics show growth of the community but not actual potential usage or potential paying customers. Instead, you need to choose the right metrics, target activities that will grow your business, and weather the storm until circumstances improve. In a recent survey, the actual number of users running the software in production constitutes the top factor that investors evaluate. Without demonstrating real growth, investment is unlikely.
Once you do secure investment, the consideration then becomes how you steward it and garner a return. The question that always looms with projects that have not yet reached their peak is whether we are just X amount of time away from profitability. It’s the idea that if we just spend X more time, perhaps then we will reach our goals. When external elements force you to decide a project’s success and continued investment now versus later, you don’t have the luxury of waiting the project out or seeing it fulfill its potential. This is why it is critical for your leading indicators to accurately indicate how your project will turn out. The right set of metrics enables you to make better predictions and grow more efficiently.
Ship features that matter faster
With new production user growth as the goal, tightening feature set and focus areas for each release that will move people to adopt and use your software faster remains a high priority.
Experiment. Iterate. Repeat.
You’ll want to achieve specific milestones with each release, but behind the scenes, there is ongoing work to be done. Finding the balance between perfecting a business idea and testing it out to see if you’re headed in the right direction sometimes proves the hardest part of the process, because it requires discernment—not just knowledge and ingenuity. There is a time to pivot and a time to patiently keep investing until the project can develop into something really transformative. What we can know without a shadow of a doubt is the importance of testing out a project with intentionality, monitored by indicators within a specified incubation time frame. You can start to get a pulse on a project’s trajectory probably earlier than you think. If you’ve hired the right people, adapting and moving on to a new project if the initial incubator does not pan out as planned should not present the biggest roadblock. You should leverage the freedom to run with an idea through experimentation, always complemented by fast iteration based on accurate leading metrics. Of course, there are also projects that will not sustainably generate revenue in the near future but carry long-term strategic significance. You’ll want to monitor those too while remembering that context.
Consider service offerings to generate short-term revenue
Bear in mind, you don’t have to roll out perfected software to start collecting cash. In open source, oftentimes you can find customers who will pay for support, services, or non-recurring engineering. These are viable options to help self-fund initiatives and endure times of slowdown. Offering support and services is actually one of the most common open source business models. It can provide a faster avenue for revenue by leveraging expertise that you already have.
Review and refine your commercialization strategy
Beyond the reduction of jobs, layoffs are bound to impact the industry in other ways. Thinner marketing budgets will mean less sponsorships, less events, and less open source funding. For this reason, strong commercialization strategies will become more crucial than ever. Open source maintainers who rely on goodwill donations must find a pathway to commercialization, no matter how popular the project is (as seen with the widely adopted Core-JS library). Those who work on open source projects that cannot be commercially viable by nature of their setup face a much larger challenge to address sooner or later. As a starting point for tackling this problem, knowing what software different companies depend on would certainly help.
Beyond finding ways to strengthen the nuts and bolts of your commercialization strategy, you’ll want a plan for the long haul. Many early-stage startups strive to grow their community or user base while putting the option to sell services or paid-for software to the side. For them, it’s all about growth first and then eventually coming up with an enterprise offering. A better order consists of planning for a paid-for software starting now. If you offer one and it’s not being used, then all the more reason to figure out your position in the market so that you can build a loyal user base that will turn into customers.
Today, the tech industry substantially comprises infrastructure companies that build mission-critical software upon which we heavily rely. Open source plays such an important role here, because it ensures that a software lives beyond its company. TechCrunch suggests that the tech jobs market might not be as shaky as it feels, but the impact of recent layoffs is still deeply felt and can cause us to wonder what is really going on.
- A combination of factors—economic downturn, herd mentality, and excessive spending and borrowing, and a growth-at-all-costs mindset—have all led to recalibration. We could add more reasons to the list, but these are some of the more prominent ones.
- Open source businesses are not immune to the recent waves of layoffs and will continue to feel the impact. If anything, layoffs seem to affect open source more than other pockets of the tech industry.
- There are measures that you can take to minimize potential layoffs in the future. These include choosing the right kind of growth,mesuring the right metrics, releasing transformative features quickly, testing and adjusting your ideas regularly, offering services, and strengthening your commercialization model. Only focusing on one single strategy without the others won’t work, but taking them in tandem produces optimal results. We cannot always control external circumstances, but we can influence how our teams prepare and respond to different scenarios.
If you’re eager to start tracking real usage of your open source software, a great first step is to begin tracking download and usage metrics. Scarf provides data insights into how users are interacting with your software so that you can get better acquainted with your user base and deliver a product that best serves their needs. For additional resources, check out other episodes of The Hacking Open Source Business Podcast. We’ve got more on the way!
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