Would love a wide variety of responses from what you guys are witnessing in your daily work.
I have heard this is already happening in some industries but not sure about tech.
Software engineers cost a lot of money. Their employment is largely driven by corporate loan interest rates. Some pay with equity as well, but let's ignore that for now.
This example is massively oversimplified but should help put the point across:
Say it's January 2022 and you pay $1M per year for some software engineers. You take out a loan of $1M to pay those engineers. That loan comes with an interest rate and a maturity date. Generally a corporate loan is 2% above the fedfunds rate. January 2022 had a fedfunds rate of 0.08%, so the corporate loan interest rate was 2.08%. To keep the example simple, let's say that the maturity date is in 1 year after the loan creation.
In 1 year, you will owe $1M plus the $20,800 interest on top. If you can use those engineers to increase your revenue by more than the $20,800 in a year, those engineers are a good investment.
You can take that extra revenue to pay the $20,800 interest. But what about the other $1M owed? Well, you can do something that's called rolling over a loan, which basically means you push out the maturity date, and renegotiate the interest rate on the loan.
It's January 2023, so the fedfunds rate is 4.33%. The corporate loan rate is +2%, which makes for a total of 6.33%. For the engineers to be worth it, they need to increase revenue by $63,300 from 2021 (or $42,500 from 2022), 3x as much as 2022.
Ah, but it's actually more than that! Because we still need to pay our engineers, we need to take out an additional $1M for their salaries this year. So our new loan is $2M, and the amount of additional revenue we need to generate is $126,600 from 2021 (or $105,800 from 2022), which is 6x our 2022 revenue goals.
Before I go any further, what levers do you think management have to help manage this situation?
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EDIT: FEDFUNDS graph: https://fred.stlouisfed.org/series/FEDFUNDS
This decreases our new loan amount to $1.5M. Revenue now needs to increase by $74,150 instead of $105,800. That's less than if we retained all our engineers, but it's still quite high.
What about something more drastic? What if we lay off 90% of the engineering workforce?
This decreases our new loan amount to $1.1M. Revenue now needs to increase by $48,830. The pour soul(s) that are left are going to be spending all their time maintaining the existing systems, they won't be able to increase revenue by over 2x what we did in 2022.
However, other companies that are your clients are doing the same thing - cutting costs by no longer paying your company. It's an economic positive feedback loop. Companies cut costs, which reduces the revenue of other companies, so they cut costs.
Share transfer is easiest to understand. You give up x% of your company and give it to the other entity.
Share dilution is trickier. Basically you create additional shares out of thin air, and give them to the other entity. This reduces the value of each share, as there's a greater number of shares representing the same company.
Google is laying off a lot of people who aren’t working on “AI” or ads.
Amazon is laying off all sorts of AWS people which surely is reducing some decisions.
But no, stuff still seems to be happening.
Additionally the industry is big and global, both horizontally and vertically.
Much bigger than just Big Tech.
For e.g. AWS lay offs does not give a full picture of that sector as investment in data center real estate is hot in certain markets. However many are cautious about new big projects this year.