When I first started in the recruiting industry back in the early 1990s, the tech sector was going through a minor recession along with the US Economy on the whole, with unemployment peaking at 7.8% in 1991. The firm I worked for at the time had a nationwide footprint, and the effects of the recession were not equally felt in every market across the US. The East Coast seemed to take the brunt of the slowdown, and top management at the time felt it was important for the company culture to spread the pain of regional slowdowns equally across the firm. This meant that even though our little outpost in San Jose, CA was ahead of goal, no bonuses were paid so that other producers could be propped up in the less successful regions. One for all and all for one I guess, but it seemed a rude introduction to what is normally an eat-what-you-kill industry. Perhaps for me it was an early lesson that self-determination may not always be possible in a large corporate environment.
As the economy started to improve nationwide, the kindling of the DotCom boom was beginning to catch fire. Throughout the 1990s, the tech sector grew at a faster rate than all others as innovation in computing power was having tangible productivity gains across all businesses. Computers were faster, had cheaper memory and storage, and applications continued to grow. Oracle, Intel, and many other bell-weather tech firms were growing at a rapid clip; a specialized graphics chip company called Nvidia was starting to take hold. To be a recruiter on the way up in this environment was fast paced and rewarding.
By the late Nineties, we were hurdling full speed ahead into the DotCom boom. The internet was new and exploding with possibilities. People from all over the world were flocking to the San Francisco Bay Area to be a part of the digital gold rush. Companies were formed quickly and were funded easily. I remember going to a talk by Guy Kawasaki, who postulated that if the opportunity for the internet was a sail across the Pacific Ocean, in the late 90s the boat had not even left the Bay. Prescient! To be a recruiter in this era was almost easy. In fact, it seemed just about everyone was a recruiter and everyone was on top of the world. Until we weren’t.
Painful times
The pain of the DotCom bust is hard to explain to those who did not live through it. It is estimated that in the early 2000s, the Bay Area alone lost 360,000 jobs. I remember looking at a list of clients from 1999-2001 in 2003 and NONE of the companies existed anymore. When there are 360,000 people laid off, a company generally does not need to hire a recruiter. (As I have said in earlier blogs, the number of “A” players does not really change, and even in lean times a specialized and highly experienced professional recruiter can help deliver game-changing talent. In the arena of CFOs, it is critical that a company have a top-notch CFO in good times and in bad.) The air was out of the balloon. The good news for those of us who chose to stick around is that when things did start to return to “normal,” there were far fewer recruiters to compete with!
While things did not jump back to pre-DotCom levels, there were some very exciting companies that emerged in remains of the bust. Facebook (2004), LinkedIN (2005), Palo Alto Networks (2005), Airbnb (2007) to name a few. So the Valley was not dead, just not chasing eyeballs as much as chasing revenue streams. Certainly, the blue-chip VC firms found a way to survive, but many of the lesser-known firms simply disappeared along with the companies they had invested in. It seemed we were starting to get some good momentum when along came the Lehman crash of 2008, and the dominos fell hard in the real estate sector. While this recession was not tech-centric, it did put a damper on the enthusiasm that had started to seep back into the market.
Baby bear moment
With some distance now, it seems to me that the most “normal” economy we have had in Silicon Valley was between 2014-2018. It was a baby bear moment – not too hot, not too cold. Companies with a solid business plan could find funding at valuations that were in line with long-time consensus. The honey that allowed this “normal” economy was the near 0% interest rates that the Fed had imposed to help the real estate market recover. With investors not able to find good returns to support their pension annuity assumptions, more and more investment dollars flowed to “Alternative Assets,” of which our VC community is a leading vehicle. As more money flowed in, things started to get frothy again. Good companies were raising money, but valuations were getting out of step with the underlying business models.
Reality check
So where are we now in mid-2024? Fed rates at 5.5% give money managers more optionality in investing in safer money than Alternative Assets. The big VC firms with good returns will raise new funds; those without a track record will have a tough time. It is estimated that there are some 1200 private tech unicorns. I do not see a path for most of these companies to IPO at their last valuation. And this is now the stalemate we find ourselves in. Private company valuations do not match the public market valuation models. Nor do they match the models for P/E or late-stage growth investors. It is going to take some time and pain to work through this disconnect. While the national unemployment rate is running at a 50-year low, the tech sector has felt some pain in terms of layoffs. In fact, in the last 18 months we are back over that 360K number we had during the DotCom bust! (Source: Layoffs.fyi)
I think the biggest learning emerging from what was an easy money environment to today’s tighter money environment is simply valuation. Companies who can raise money now should focus on who their funding partner is and seek a long-time supportive partner, and not chase the highest valuation. In fact, they should focus on keeping their valuation as low as they can. (I recently did a CFO search for a post F VC-backed company. I was concerned at the kickoff about valuation, but in fact the founder had been a VC in a prior life. He kept his company’s valuation extremely low!) This should always be the rule, but for a lot of reasons this was not the guiding principle over the last few years.
Always optimistic!
As for me, it is shaping up to be a good year, and I will weather this storm too. And indeed, it is already the case that there are far fewer recruiters working in tech. This Valley is resilient, and I am always optimistic about technology and innovative tech companies changing our lives for the better.
I welcome your comments.
Cheers,
Dave