By Hillel Fuld
Many people have asked me to share my opinion on what’s happening now in the Israeli tech world, as companies are laying off tons of employees and even filing for bankruptcy or downsizing significantly.
First, that is the symptom, not the disease.
Second, it is not exclusive to Israel; it’s a global crisis.
Third, four of the most important words you can tell yourself are relevant here: “This too shall pass!”
The markets are crashing, valuations are decreasing, capital is drying up, and just generally speaking, the climate in the business sector right now is highly unsympathetic.
I have a few thoughts on the matter, but let’s give some background.
Not sure if you watched the HBO series Silicon Valley, but if you’re in tech, you must. There is one scene I have to share.
The CEO on the show is talking to his team. Their investor is sitting on the side on the phone.
The CEO says to the team something like, “And our business model is…”
All of a sudden, the investor jumps up and says to the CEO “Wait, what? Business model? What are you talking about?”
The CEO looks at him all confused and says, “Watya mean? We need to make money!”
The investor replies, “What? Revenue? Don’t make revenue! Your company now has a pre-revenue valuation. It can be anything! Once you start making money, your valuation will be tied to your revenue! Don’t make money!”
The reason this show is so funny is because it’s so close to reality, and the reality in tech has been ridiculous for years.
There are companies that raised billions of dollars before they had a product. There are companies worth many billions that are bleeding money and show no signs of ever becoming profitable. There’s something wrong!
And now, the other side of that argument.
Imagine you are 11 years old, and you want to make a lemonade stand on your street. What do you need to do?
You need to go the store and buy water, lemonade powder, a table, a tablecloth, a sign, a marker, and anything else you need to start selling lemonade.
You cannot sell one cup of lemonade without buying those things. So, tell me: when you go buy those things in the store, are you losing money? Or are you investing in the business?
Without that “loss,” you can’t ever become profitable.
So, the companies that are now bleeding money are doing so in order to eventually turn a profit.
In fact, I’ll take it one step further. Growth and monetization are often mutually exclusive. You can’t make money unless you lose money.
What do I mean? Imagine you have an app. Now, we know the numbers, people don’t pay for apps. Think how many apps you have on your phone that you paid for. One? Two? Five? How many free ones? People don’t pay for apps.
So how does the developer who made the app make any money? Well, there are a few options, but the main one is advertising.
Now tell me, have you ever used an app that had ads and said, “Oh, that ad helps the user experience of this app!” The answer is no. Mobile ads stink, and they ruin the UX.
What that means is that the developer has to focus on growth, aka, giving the users an amazing product, and sacrifice monetization or on monetization, aka having in-app ads but sacrificing a good experience.
Growth vs. Profitability
Every company has to make this decision.
WeWork had to decide whether to buy more properties and spend, spend, spend, or stop buying and focus on turning their existing properties into a profitable business. (Yes, I am aware that the unit economics were problematic. That’s a topic for another time.)
Amazon had to make the same choice. So did FB. So did Uber. So did Airbnb. So did everyone!
So, one can argue both sides about companies being valued at billions even though they’re losing money.
But the market has been too extreme over the last few years. Call it a bubble. Call it whatever you want. It makes no sense for a company to be worth billions of dollars when they don’t even have a product, or they have a product but no clue what to do with it or who to sell it to.
So, in the bigger picture, the market is now correcting itself. Companies are doing down rounds (raising at a lower valuation than their last round). That’s basically suicide for a startup. Valuations are way more conservative, and investors are way more careful when taking out their checkbooks.
The result of all of that combined is that companies have less money in the bank. Less money means less runway. Less runway means they need to cut costs to increase that runway and keep the lights on. That means layoffs.
So far, I’ve said nothing new.
But here is why I am not worried.
Before I explain why I am optimistic, let me just say that I am in no way minimizing the pain and agony one feels when being laid off. I was laid off from my first job, and it sucked; it majorly sucked.
So, is this a small hiccup or is it illustrative of a trend that is only beginning? In my opinion, this is a temporary situation, and I am optimistic that stocks will begin to bounce back, valuations will begin to increase again, and things will go back to normal soon.
But that’s the key word: normal.
I think the tolerance for fluff and hot air is gone forever.
The reason I am optimistic is if you look at some of the public companies on Wall Street whose stock is plummeting, many of these companies are making tons of money, or have strategic partnerships that will yield massive numbers.
Their stock currently does not reflect that, but eventually the market will come around and realize that these companies that have this partnership in place are actually worth billions of dollars even if that money is not in the bank right now.
Disclaimer: I am not a financial adviser, so take everything I write here with a grain of salt.
Companies like Wix, for example, upon which half of the Internet is built, will come back. Yes, their stock has plummeted, but all logic dictates that the stock will bounce back.
The stock of companies like Innoviz, which is building the future of transportation, will bounce back. This is a company that has signed a strategic partnership with one of the biggest car manufacturers in the world, a company that will use their technology to facilitate fully autonomous driving. This is an incredible company, and the stock does not currently reflect that. It will come back.
I could give you 100 more examples, but you get the point. The markets are not pretty right now, no one can debate that. The big question is if this a permanent change or a temporary one in which the market is correcting itself and will eventually bounce back, not to the previous insanity, but to a more normal environment in which companies that have revenue, or impending revenue, could actually be worth a lot of money. I think it is the latter.
There is one more important point to mention, and it is comprised of four letters: SPAC.
So many companies went public last year, using a vehicle called SPAC, which enabled them to begin publicly trading on Wall Street while skipping over all the bureaucracy and due diligence generally associated with going public.
Now there’s a reason it is usually so difficult and bureaucratic to go public, and that is to avoid companies without sufficient revenue or a solid business model from going public and eventually crashing and burning.
The fact that so many companies skipped that part is a serious contributor to the fact that many of these companies are indeed crashing and burning.
Those companies, the ones without the revenue to justify a high valuation, should be worried. The market won’t tolerate their nonsense anymore. And that’s a good thing in the long run.
So, what does this mean for the people who were laid off? It means hang tight. It means you are talented and that’s why the company hired you in the first place. You are not the problem. Even the company is not the problem. The problem is the market. The problem is inflation. The problem is that many circumstances happened all at once.
A global pandemic, for example, that led to major supply chain issues, which were then amplified by a war in Ukraine. No one could have predicted this. No one could have prepared for this.
So, the bottom line is, don’t despair. Yes, right now, you’re worried. I get it. You lost your job. You have a family to support. I know. Trust me, I know. (Send me your CV, please!)
But I promise you, things will be OK. Spend this time doing what the market is doing, recalibrating your goals and realigning your aspirations.
Was that job you got laid off from really your dream job? Do you have a passion that you’d love to translate into a job? Take this time to reevaluate your priorities.
Maybe you have thoughts or insights about your passion. Start a blog and begin writing them down. Maybe you’ve always wanted to start something but didn’t have the time. Now you do.
The market will continue to correct itself and then it’ll bounce back. Spend this time “correcting yourself,” so when the market does indeed bounce back, you can bounce back with it.
You got this!
Hillel Fuld, named Israel’s top marketer and “The Man Helping Transform Startup Nation into Scale-Up Nation” by Forbes, is a tech journalist, startup marketer, and technology expert. Hillel’s work has been featured in CNBC, Inc. Magazine, Fast Company, Entrepreneur Magazine, TechCrunch, The Next Web, and many other leading tech publications. Hillel was recently named the 7th most influential tech blogger on the Internet and among the top 100 most influential social media personalities across the globe. You can read more about Hillel’s work at hillelfuld.com.
