A worsening macroeconomic environment has led to a fall of venture capital (VC) investment and forced many tech companies to reverse course on their growth plans.

Between July and September 2022, the value of global VC funding stood at $82.2bn, down by a third from the previous quarter, according to Crunchbase data. This figure is less than half of the record $184.8bn poured into start-ups globally during the fourth quarter of 2021. 

Layoffs in the tech industry effectively mirror VC investment. In the third quarter of 2022, more than 400 tech companies laid off a total 35,199 workers, according to tracking website Layoffs.fyi. This is more than ten times the number of layoffs tracked when VC funding was abundant in the fourth quarter of 2021.

Benedict Evans, an independent analyst and venture capitalist, explained how rising interest rates and uncertainty have fed through to create this situation during his closely watched annual presentation at Slush, a start-up event held in Helsinki, Finland, on November 17-18.

The “unprecedented surge” of investment into start-ups in the course of 2020 and 2021 is “now kind of unwinding as everyone tries to work out what’s going to happen next”, he told the Slush conference.

“Companies that were predicated on free money and buying growth instead of buying earnings are now going to have to change their model, get bought or go out of business.” 

Start-ups typically aggressively use VC funding to expand at all costs, in the hope of disrupting industries and becoming profitable in the future. This process often involves the hiring new people to pursue growth and take on competitors. Since the start of 2022, some 187 VC-backed companies have announced at least 100 job cuts. The likes of Singapore-based digital asset platform Crypto.com, US delivery platform Gopuff and Indian ride hailing app Ola have announced more than 1000 layoffs each. Besides, established tech powerhouses of the likes of Meta, Amazon and Twitter also announced major layoffs. 

The effects of this are now “flowing through to the tech industry itself”, according to Mr Evans, as shown by Facebook’s parent company Meta announcing that it would lay off 11,000 people and extend its hiring freeze. 

“In this new environment, we need to become more capital efficient,” Meta CEO Mark Zuckerberg wrote in a statement on November 9. “We’ve cut costs across our business, including scaling back budgets, reducing perks, and shrinking our real estate footprint.”

While Meta’s decision to cut about 13% of its staff is significant, keeps the company’s headcount above that of a year ago, in November 2021. Over the past decade, a combined total of about 480,000 people have been hired by the US tech giants Microsoft, Apple, Alphabet and Meta.