The Year of Efficiency: Much Needed in Silicon Valley
In the past few weeks, many tech firms have announced layoffs and it’s been making headlines.
According to Layoffs.FYI, tech companies announced 260,000 layoffs between 2022 and 2023, with a few of the larger announcements coming from these companies:
META (Facebook’s parent) – announcing a second round this week, after a November round of 11,000 layoffs (13% of their workforce) and making 2023 the “Year of Efficiency”
PayPal – 2,000 (7%) in late January 2023
Alphabet (Google’s parent) – 12,000 (6%)
Amazon – 18,000 (5%)
Twitter – 3,700 (50%) and significant attrition so that they now run at about one-quarter of their prior workforce
On the face of it, such numbers might sound like grim news, but the reality is that these are minor adjustments in the context of the past few years. Until Q4 2022, these tech firms had been hiring like crazy. From Q3 2019 to Q3 2022, the companies added a ton of headcount:
META increased FTEs by +94%
Alphabet / Google +57%
So even after these announced layoffs (and let’s assume that these firms won’t be hiring at all in Q1 2023), all of these companies are only back to where they were at the end of 2021. During the past 5 years, many of these and other large tech firms geared up for a different economic reality than what they face in 2023.
Revenue Per Headcount: “Productivity”
Speaking as someone who used to run finance at PayPal and was the CFO of Sonos Inc. (NASDAQ: SONO), a good way to think about the efficiency of a business in the Valley is look at revenue per headcount and benchmark what your company is doing against other competitors. As of the end 2021, there were significant differences among the market leaders. For instance, in 2021, Netflix was the most efficient company with over $2.6M in annual revenue per employee. Apple was right behind at $2.4M per employee; Apple is a cyclical business with 45-50% gross margins (compared to 55-60% at Alphabet, 75% or higher at META Platforms, and about comparable to Netflix). META ran a fairly tight ship at about $1.6M and eBay a looser one at under $1M. PayPal, an intense payments business requiring a lot of customer service and operational expertise, is about $820,000 in revenue per employee … not much better than when I was there 10 years ago.
Over the past 5 years, most of these companies really haven’t made any improvements. For instance, in 2018 Google generated about $1.4M in revenue per employee; that metric actually decreased to around $1.3M in 2020 before spiking up to $1.8 million during the pandemic. But it was back to $1.4M again by the end of 2022 as their business slowed due to a market drop in ad rates.
The Twitter Experience
Before Elon Musk bought Twitter, the company was bringing up the rear with just $650,000 in revenue per employee, an almost inexcusably low number for a communication platform. That’s one-third of how efficiently META operates, but Twitter’s product is far less complicated to manage. It’s a single platform (unlike META, which also runs Instagram and WhatsApp), and serves no videos (which complicate ad sales). Unlike competitors such as Alibaba or TenCent, most of Twitter’s employees are in extremely high-cost areas (specifically the Bay Area, with a SF headquarters). Twitter’s revenue has not quite doubled since 2016-2017 – from when they generated $2.5B to around $4.4B in 2022 – yet headcount has ballooned from 3,300 in 2017 to over 7,500 at the end of 2021.
The overall US economy is humming along at a 3.4% unemployment rate. That hasn’t changed as the current round of announced tech layoffs has picked up steam. Let’s recognize that the total number of tech layoffs represents just one week of the nation’s initial unemployment claims.
It appears that most of the affected tech workers to date have found jobs – most of them before severance ran out. The US broadly is experiencing a once-in-a-generation labor shortage, with US labor force participation rate dropping to below 63% for the first time in 50 years. As of December 2022, labor force participation (the share of adults working or looking for a job) stood at 62.3%, a 50-year low. It’s below where it was prior to the pandemic (around 63.4%) and way down from the mid-2000s, when it was routinely at just over 67%.
I think that tech layoffs will keep picking up as we enter Q2 (which traditionally coincides with the planning cycle of major tech companies), but in the broader economy the labor market is very strong:
Payroll employment added 517,000 jobs in January, which is reasonably robust.
The unemployment rate fell to 3.4%, matching a 50-year low (set in 1969).
The US right now is running at historically low workforce participation rates for a host of reasons that aren’t going away any time soon. First, over the last 6-7 years, the number of immigrants coming to the US has dropped precipitously, leaving millions of jobs unfilled. Net international migration was at 1 million plus annually in 2015 and 2016, but dropped to less than half of that in 2019 and slowed to a trickle of 250,000 annually in 2021 and 2022.
Second, labor force participation among the nation’s youth has dropped like a rock. In 2001, the civilian population participation rate among 16-19 year olds was 49%. Among 20-24 year olds, it was 77%. Today, these participation rates stand at 29% and 68% respectively. That’s a result of more kids staying in school for a lot longer than they need to, and not having the ability or the desire to work their way through school as prior generations did.
Finally, beginning in 2021-2022, the oldest baby boomers hit the age of 75, and that probably means a continuing retirement boom over the next few years, shrinking the available workforce for the first time in generations.
With all of these headwinds affecting labor force participation negatively, it’s probably a very good thing that tech companies with excess supplies of unproductive employees are downsizing and allowing those workers to take productive and needed jobs elsewhere.
Aman was the COO of 500 Startups, has been the CFO of Sonos, and led finance at PayPal. Before that, Aman worked at Lehman Brothers and McKinsey, majored in economics at Stanford, and earned a law degree from Harvard, so he is particularly good at dollar signs and clauses and commas.
Aman has more than 15 years of financial and operational experience from both private and public technology companies. He has been a member of the management teams at some of the most successful companies in the world, including PayPal, eBay, and Sonos.
Prior to PVC, Aman was the COOof 500 Startups, which during his tenure was the world’s most active VC firm, measured by the number of investments made. Aman managed 500’s global fundraising team, the seed accelerator team, and the Series A growth programs. He also managed the Investment Committee for the firm’s global funds ($500MAUM).
Aman led the strategy teams at both PayPal and eBay Marketplaces and served as the divisional CFO of eBay’s North American Marketplace business, which generated over $2B in revenues and nearly $1B in operating profit.
As CFO, Aman has guided his companies to over $1B in debt and equity financings from family offices, HNWIs, VC/PE funds, banks, and public markets.
CFA since 2000
Financial Analyst at Lehman Brothers, Associate at McKinsey
Taught Economics at Harvard University
JD, Harvard Law School
BA, Economics and Public Policy, Stanford University
PayPal Mafia: wrote the first draft of PayPal's S-1 in the winter of 2000.
CFO at two different unicorns: Sonos, Inc. (NASDAQ: SONO) and CAN Capital