Fork 8 | (Necessary) Trends for 2023

What is coming next? It is the question we state in many directions in order to prepare for the future.

TL;DR

Things which will happen:

1. Shrinking companies to operate at the same level but with less headcount will become the new goal to save OpEx and increase bottom-line
2. PE firms will take more public SaaS companies private
3. VCs will give away their money much more hesitantly
4. Most layoffs will impact white-collar jobs, meaning people sitting at a desk

Things which should happen:

1. Remote work will become a must-have for recruiting people
2. New rules for remote working need to be adopted in company culture
3. Leadership needs to push their non-technical teams to become more technical as part of their skillsets

Shrinking is cool again

After a long time of comfort and careless growth, we were all witnesses to the “restructuring” by Elon Musk of his newly acquired company Twitter. While I am calling it a restructuring because I like to see it in a neutral way, others might use words that emphasize the project

• in a positive way, so they call it a “transformation” or
• in a negative way which they may describe as “destruction”.

However you see it ethically, he is operating a company that is now running on 50 % of the workforce and it seems to be working as Twitter has been staying operational during the turmoil. With that in mind, tech companies’ OpEx costs are usually 80% payroll which might supercharge Twitter’s margin in the future. This is important when considering the current fear of a global recession as well as the higher risk-free rate of capital.

As a consequence, this reduction in costs will (or should) signal to different parties to review their costs with regard to unproductive teams, overhead, and bureaucracy:

• Private Equity and other capital allocators will review their portfolio’s payroll spending while
• Top Management might take into consideration shrinking their organizations, too, without losing productivity

Private Equity will come for tech companies

One example is the Thoma Bravo deal of taking Coupa Software private for $8 billion in December. Let’s say (I am making up these numbers), they bought the company at a 20x EBITDA and they think (looking at Twitter) we might be able to cut 30-50 % of the headcount, they end up buying the company at a 12-16x when you consider the 80 % cost estimation mentioned before.

Therefore, it can be expected that

1. PE firms can still get high loans for purchasing companies
2. they will probably take more of the tech companies private (because they have high free cashflow rates)
3. After the reduction in force (RIF), we will have a view on the pioneers of how many people you actually need to effectively run a company

Venture Capitalists are going back to (more) reasonable funding

How the numbers within 2022 have changed is mindblowing:

This is a reduction in Series D money by 85 % between Q1 2022 and Q3 2022!! And it will not get better considering three things related to ‌general demand for the near future:

1. When we consider that companies will spend less money (recession fear etc.), the new business for growth startups will be much less than expected.
2. The churn of customers will be higher due to the decreasing workforce (fewer users/licenses needed).
3. Further down the road, companies going out of business due to higher capital costs or no new funding round demand might even crash.

Last but not least, corporations will also need to rethink reviewing their OpEx spending if they search for validation in the public markets. RIFs may be the fastest way of increasing the bottom-line or at least the EBITDA clearly what investors want to see at the moment.

Which brings me to the next point.

Big Layoffs - especially in the Managerial Class aka email caste aka white-collars

I see two significant points which will amplify the layoffs: On the one hand, non-tech companies will get influenced by the layoffs of tech companies. But, more importantly, in terms of effects, they will get pressured by lower demand in 2023. It seems to be certain that consumer demand will be lower in 2023 when the unemployment rate across industries is going to increase.

So, who is going to be impacted by these factors the most? The answer seems to be that this time it is actually the people who don’t have a hard skill they are contributing to a company (I am part of this group, by the way). Most recently, Amazon announced to cut more than 18.000 people or more than 5 % in relative terms (announced yesterday) of which most people had “office” functions like in human resources or business divisions while leaving untouched its hundreds of thousands of warehouse workers.

Other prominent names are Meta (formerly Facebook) and Salesforce (you can see others in the graphic or on layoff.fyi).

I believe it is a healthy process, to be honest. There are too many people managing things without knowing what is actually going on within their areas of responsibility. Or being very average in their function while getting compensated way more than average.

What will happen next to the impacted people will be seen but it will be interesting. It could be the first to a bigger movement because one of the biggest and least-talked-about social questions in the West is:

There are too many young folks having a degree in psychology or business trying to make it in the markets. So, as I am seeing myself as part of this group of people (I have a Bachelor's degree in Business Studies), am I afraid of losing my engagements with my clients? Absolutely not because I am great at my job.

Remote Work is a crucial requirement for recruiting

I know several people who are searching for a new job at the moment. Interestingly, money is only the second most crucial point after being able to work at least 40 % from home. But demand and supply are starting to decouple.

Summary: My anecdotal experience + the higher search demand will give companies that embrace remote work as part of their culture a competitive advantage in recruiting.

To make this work, company culture needs to adopt different concepts in my opinion:

• Asynchronous workflows within teams
• Collaborative tools which enable asynchronous work
• Decoupling the output of an employee from his working time

It sounds simple but it is. I will expand on these topics in a future series on remote work.

Every non-company non-tech employee will need to adopt more tech knowledge

Guys, understanding how the tech world works is fundamental to your value in the VUCA world. Tech is not just valley in San Francisco. It is a symbol of a special approach to products, services, hardware, tools, and even to work itself created within the spirit of engineer’s frameworks. The easiest example can be retrieved from the creation of the agile manifesto:

Scrum => Agile Development => Agile Teams => Agile Organizations

Digitization is an attitude. An approach to problems, a new way of thinking about products. Engineers are the architects and builders of this new world, not managers or other administrative functions. They hold the key to playing in this world. Anyone who is not at least capable of speaking to an engineer about tech concepts is missing the key.

Unfortunately, I see rather the opposite happening in reality. I assert that people are using more technology, they build and sell without understanding the basic concepts which make it work. Before we move forward, let's be clear on the meaning of “understanding” tech.

Being “technically literate” means one's confidence in the fundamentals of how technology functions, and, more significantly, an understanding of the area of IT systems you are using and/or are collaborating with. It's not a prerequisite for every person to know how transistors operate. But suppose you are working on an IT project or a project in which IT plays a role (basically every project) and a database is part of a discussion. In that case, you should be able to identify the contrast between SQL and NoSQL, for example.

According to Justin (author of the substack “Technically”), competent and functional technical literacy involves two layers:

• The base: the basics of software and hardware
• What’s a computer? (hardware)
• What's the internet? (network)
• What's a database? (data)
• The domain: deeper knowledge that’s relevant to your job
• What products are we building, selling, and using?
• How do they work? What problems do they solve?
• How do our engineers build and use them?

I hope this helps a bit in starting an amazing journey.