Six reasons why high-tech companies are laying off employees
Israeli high-tech is alive and kicking, and the demand for manpower remains great. But after years of money flowing like water and hiring sprees, the industry is tightening its belt. Calcalist examines the reasons that led companies to lay off employees - from investor pressure to a change in business direction - to understand where the trend is heading
It was clear to everyone that this moment would come, and yet 2022 caught the high-tech industry by surprise. After several prosperous years of spending money without limits on recruiting employees, obtaining real estate in dreamy locations, improving conditions and lavish parties, technology companies were forced to suddenly slam on the brakes and quickly recalculate their route. The first pressure came from the "people with the money," some of whom are veterans with lots of experience with crises, such as the giant American fund Sequoia, which demanded that companies start making immediate cuts and adjust to the crisis that was occurring. High-tech companies in the United States were quick to respond and fired about 20,000 workers in a very short time. Giant companies such as Robinhood and Coinbase, which are on the seam between high-tech and the capital market, fired thousands in one day. Giant companies such as Meta and Intel, whose stability is not feared, have also announced a freeze on recruitment.
The layoffs in the U.S. were accompanied by declining investment and growing investor anxiety. Even Alon Musk tweeted that the company he intended to acquire must cut its workforce quickly. Later, as usual, he hurried to calm everyone down, but the message of the crisis had already been received.
In Israel, at least for now, these concerns have not had the same impact. So far, relatively fewer workers have been laid off here, and it is estimated that the number of layoffs amounts to a few hundred - and a large part of them have already been absorbed back into an industry that still needs quality workers.
However, it is important to examine the reasons that led several Israeli companies to lay off workers quickly. These reasons clarify the pressures that will be exerted on the Israeli technology market, and indicate the possible direction of the high-tech industry in the near future.
1. Investors are piling the pressure - and the company wants to show initiative.
Investors like to see that the company in which they invested takes initiative and is not passive in the face of the crisis, even if its coffers are full of cash. Israeli company OpenWeb, whose executives sit in the U.S., very close to the company's investors, is an example of such pressured layoffs. The company, which the software it developed allows for dialogue on content sites, raised $150 million last November alone. The company did not lack money, and yet it laid off 14 research and development workers and reduced its workers' salaries by about 20%, while guaranteeing a bonus.
The laying off of 14 employees is a drop in the bucket, and will not affect the balance sheet dramatically. If OpenWeb was in real trouble, the number of laid off employees would be many dozens. So why is it happening? In this case, the main factor was the physical presence in the United States, where the level of panic is much higher than that of Israeli funds, for example. A quick layoff move is evidence that the company has "a hand on the pulse," and has power in reassuring investors.
At the same time, OpenWeb has announced that it is preparing for the future and is even hiring new employees to increase its revenue through advertising. How does this make sense? Well, here, too, lies a message, directed both inside and outside the company: our employees have nothing to fear and no need to look for opportunities outside, and our investors have nothing to worry about. We are moving in the direction of increasing revenue.
The company's CEO Nadav Shoval said: “The changes in the markets require every company, even those with cash reserves, to make difficult decisions, re-examine investments and focus on ensuring growth. We have decided to invest more in the great opportunities we have in advertising and data products, at the expense of other investments."
2. There are excess fats - and this is an opportunity to re-examine the business focus as well
Many companies have accumulated quite a bit of fat in recent years. The marketing departments were filled with employees, consultants, assistants and content people. Start-ups hired workers even when there was no immediate need for them, simply because the demand and competition for quality workers was insane. The development departments felt they were in a battle with all the other companies, and hired every employee that could be hired.
The result was that many companies grew from a few dozen employees to hundreds, in a very short time. Some of them have as a result encountered difficulty in building an organizational culture or assimilating orderly work processes among the employees of the inflated company.
The atmosphere of the crisis now allows them to think deeply about the hiring of workers that have already happened and to examine whether the current period can be utilized to reduce the workforce without compromising important positions. Elementor, for example, which is one of the world's leading companies in the development of WordPress sites, has laid off about 50 employees, which is about 10% of the workforce. In a statement issued by the company it stressed that mainly marketing people and not development people were fired. In the case of Elementor, the core business has been maintained, and it gave up on rapid expansion.
Yoni Luxenberg, CEO of the company and one of the founders: “We made a difficult decision to say goodbye to some talented and good colleagues. The global situation is changing, and there is an increase in inflation and an economic slowdown. We have embarked on a process of organizational change to streamline some areas of the company, but at the same time continue to increase the supply of products to ensure success and growth for years to come."
The Israeli cyber company Deep Instinct, which laid off about 40 sales people in the United States, also turned cutting out the excess fat into an opportunity for a change in business focus: selling technology to large organizations, at the expense of small and medium-sized organizations. The company said: "A strategic decision has been made to focus on huge organizations in which the company is successful. There are no and will not be layoffs in Israel or other departments, and we continue to recruit employees.”
3. IPO is on the horizon - and it's time to signal to future investors
Cybereason is one of the most successful cyber companies in Israel. Still, earlier this month it decided to lay off 100 employees, most of them overseas. Why? Company insiders have made it clear that the layoffs are part of Cybereason’s preparations for a forthcoming IPO. The company submitted documents to the U.S. Securities and Exchange Commission this year, en route to a possible IPO in New York. Dismissals on the eve of an IPO are a familiar procedure, and a step that signals to future investors that the company will reach them with a suitable workforce and only the best people.
4. The giants are not afraid - but understand that the mood in the markets is changing
In Israel, there are about 350 development centers of multinational companies. In fact, any notable company in Silicon Valley, New York or Europe has an innovation center, a development center and even a business center here. These centers are responsible for employing about 50% of the high-tech industry in Israel, and in the opinion of many are also responsible for the soaring costs of the workers. Companies like Google, Meta, Amazon or Intel are able to offer employees salaries that very few young companies can offer, and the growing competition has led giants to add thousands of employees in recent years.
But even the giant companies have realized that the coming years will probably not be easy. Intel has announced a temporary halt to staff recruitment in some divisions, Meta has announced a halt to staff recruitment and other companies are slowing down the rate of recruitment. Will they also lay off workers? The assessment is that it will not happen so fast. Most of them will have a very difficult time recruiting them anew in the future, and the layoffs also have a heavy internal organizational cost. Therefore, it is estimated that most large companies will be satisfied with stopping the flow of recruitments in Israel, in order to examine in depth the real needs. Small development centers, on the other hand, that are far from the heart of parent companies' activities, can become a burden and eventually close, as has happened in quite a few cases in the past.
5. The case of AVO - investors want a path to profitability
In the pre-2022 era, many entrepreneurs set up companies with models relying mainly on investor money, hoping that in the long run it would pay off. Many companies in the field of mobility, for example, still lose money on their customers, with most of the funding falling on investors. One such company is AVO, which has developed a model of fast deliveries to companies and residential buildings. Its model was built on accumulating a mass of customers in each region, so that both the cost of shipping and the cost of retail products would result in a profit.
The company arrived at the start of the year after raising too little money from leading investors such as Kleiner Perkins and Insight. Its executives, led by Dekel Valtzer, realized that without drastic measures the company would not survive, so within a short time most of AVO’s hundreds of employees in Israel and New York were fired, leaving only about 20 employees, who should serve as a future skeleton for the company - on the very optimistic assumption that a profitable model will one day be found.
The case of AVO is a clear indication of a change in investors' perception: they want to see a real, revenue-based business model, with an outline that leads to profitability. In the crowded worlds of deliveries and mobility, only a few companies will be able to present such a model. AVO and the like will probably not be among them.
6. The future is not clear yet - so whoever burns cash becomes redundant
Many times the response in Israel to crises is late. If in the United States employees are fired by email when their personal objects are already waiting at the entrance to the office, in Israel the sensitivity to those laid off is higher, and many companies see this as a last resort. They will prefer to reduce welfare budgets or temporarily cut the salaries of employees and management. Therefore large waves of layoffs and company closures will come only when companies that try to raise money will run into a wall, and realize that they have no choice but to significantly cut the workforce.
And not just difficulty raising money will serve as a pretext. Similar to OpenWeb, which chose the not-so-easy step of firing R&D people, many companies will prefer in difficult days to focus only on sales, which provide revenue. Everything else will be pushed aside. The name of the game in the near future is cash and whoever burns a lot of cash may become redundant. In contrast, those who produce cash are of critical importance to the organization.
And yet they continue to recruit - because it is clear to everyone that good workers will remain rare
And even after all this, recruitments of tech workers in Israel aren’t expected to stop. Very few quality R&D workers and good sales people will remain unemployed for long. The thirst for development workers is still huge and many companies are indicating that they are looking for workers.
Assaf Rappaport, for example, CEO of the cyber company Wiz, told Calcalist that he is thirsty for development workers and does not even expect a drop in wages.
Yuval Tal, one of the top fintech entrepreneurs in the country, also does not believe that we will see many high-tech people unemployed. Quite a few companies - for example the American giant KLA - as well as many cyber companies, continue to recruit employees even today.
This trend will change in the event of a deep recession, especially in the U.S. market. Such a scenario could create a chain reaction that will severely hurt Israeli high-tech, which relies largely on sales to the American market. Then there will be many companies that will be forced to reduce activity, lay off employees, and in some cases even close down.