Written by Amanda Katiraei
Rising interest rates, national political instability, and the collapse of the Silicon Valley Bank have all revealed flaws within the technology industry that recently had high growth capabilities.
The closing of the Silicon Valley Bank in particular uncovered the flaws within the tech industry, particularly in regard to the stability of tech startups (Mims, 2023.) For instance, we see how the ripple effects of rising interest rates affect the tech industry. When interest rates rose, investment in startups largely declined, leading to investors and companies taking money out of their bank accounts (Choi, 2023.) This created issues within venture capital companies, who took money out of Silicon Valley Bank and told their portfolio companies to do that as well, leading startups to spend large amounts of cash to compensate for the decreased investments (Choi, 2023.) Since people were taking money out of the bank, Silicon Valley Bank had to sell government bonds to compensate for withdrawals (Choi, 2023.) Furthermore, with interest rates being higher than before, Silicon Valley Bank was selling bonds at a loss and eventually had to close (Choi, 2023.) Startups are facing increasing pressure now that venture investments are at a 9-year low and seek opportunities to obtain venture-debt, where they sell more stake of the company (Choi, 2023.) A large issue is that the bank that would likely offer these “venture-debts” was the Silicon Valley Bank (Choi, 2023.)
Another issue seen within the tech industry was illustrated by sociologist Charles Perrow, who described that since tech companies are so interconnected, this can lead to a national disaster as was seen in 2008. Perrow asserted that tech companies were copying each other, leading to this interdependence since they acquired the same startups, hired people of the same skill set, and took on each other’s business models (Mims, 2023.) For example, when Apple allowed their users to prevent data-gathering, this devastated the revenue of Meta’s Facebook and Instagram by over $10 billion in 2022 (Schechner, 2023.) In addition, when companies reduce spending on cloud-based software, this decreases the revenue of companies that create cloud-based tools and companies like Microsoft that are cloud service providers (Mims, 2023.)
The increased amount of remote work needs a mass production of cloud-based tools which Amazon is the largest provider for, making systems like Zoom available (Mims, 2023.) This increase in remote work has left many small businesses like restaurants with a labor shortage, which is predicted to increase as tech companies continue with layoffs and cost-cutting (Mims, 2023.)
The microchip market has also suffered decreased global demand, assumed to be because consumers had purchased many devices during the Covid-19 pandemic, and has not had a high demand for them in 2023 (Mims, 2023.) In addition, as tech companies’ cost-cutting mechanisms take hold, the cloud services they produce will also decrease as the cloud services require servers which contain microchips (Mims, 2023.) This can ultimately lead to delays in microchip manufacturing. Companies like Microsoft however are hopeful that the next demand surge for cloud services could come from the rise of artificial intelligence (Dotan, 2023.)
These flaws have impacted companies like Meta and Amazon. For example, Amazon had announced in early March to delay its $2.5 billion construction of a Washington D.C.-area second headquarters and has not stated when construction is expected to begin again (Herrera, 2023.) This project was originally portrayed as a symbol of the vastly growing tech industry, creating worries around the announced delay (Herrera, 2023.) In addition, Amazon has recently decided to pursue strict cost-cutting mechanisms, including this delay in construction and major layoffs (Herrera, 2023.) Similarly, Meta Platform’s had announced in mid-March that they plan on cutting 10,000 jobs in a new round of layoffs where recruitment and restructuring groups are being downsized and tech and business groups expect layoffs in April and May (Schechner, 2023.) Mark Zuckerberg had written “At this point, I think we should prepare ourselves for the possibility that this new economic reality will continue for many years… Given this outlook, we’ll need to operate more efficiently than our previous headcount reduction to ensure success” (Schechner, 2023.)
In conclusion, the issue of rising interest rates, a consequence of high inflation and a jump in economic activity as the Covid-19 pandemic slowed, has revealed major flaws within the tech industry that major firms like Amazon and Meta and especially tech startups are suffering from. These include the demise of the Silicon Valley Bank and decreased venture capital funding for start-ups and a flawed back-up plan for startups to obtain venture-debt, as that is most likely issued by Silicon Valley Bank. Additionally, the cost-cutting mechanisms by companies like Amazon, Microsoft, and Meta, are leading to massive layoffs and a pause for major construction in the case of Amazon. These cost-cutting processes have led to decreased production in cloud-services that ultimately impact remote work that became so prevalent during the pandemic. While tech once was portrayed as a high-growth, seemingly dependable industry, the looming recession has shaken companies and consumers, particularly after the demise of Silicon Valley Bank.
Choi, C. (2023, March 27). The Banking Crisis: A Timeline of Silicon Valley Bank’s Collapse and Other Key Events. The Wall Street Journal. https://www.wsj.com/articles/bank-collapse-crisis-timeline-724f6458?mod=hp_theme_svb-ribbon&mod=article_inline
Dotan, T. (2023, January 24). Microsoft Earnings Fell Last Quarter Amid Economic Concerns. The Wall Street Journal. https://www.wsj.com/articles/microsoft-msft-q2-earnings-report-2023-11674522540?mod=article_inline
Herrera, S. (2023, March 3). Amazon Pausing Construction of Washington, D.C.-Area Second Headquarters. The Wall Street Journal. https://www.wsj.com/articles/amazon-pausing-construction-of-washington-d-c-area-second-headquarters-b62ef6df?mod=article_inline
Mims, C. (2023, March 18). Pain in the Tech Industry is Beginning to Hit the Rest of Us. The Wall Street Journal. https://www.wsj.com/articles/whythe-tech-industrys-pain-is-spreading-df6ff087?mod=wsjhp_columnists_pos1
Putzier, K. (2023, March 3). Amazon and Other Tech Firms’ Dwindling Demand Upends Office Market. The Wall Street Journal. https://www.wsj.com/articles/amazons-and-other-tech-firms-dwindling-demand-upends-office-market-d8e23651?mod=article_inline
Schechner, S. (2023, March 14). Facebook Parent Meta Plans 10,000 Job Cuts in New Round of Layoffs. The Wall Street Journal. https://www.wsj.com/articles/facebook-parent-meta-begins-new-round-of-job-cuts-e34b81cc?mod=article_inline