
Behind tech layoffs lay cash flow-negative companies - hat_tr1ck
https://medium.com/@watfly/behind-tech-layoffs-lay-systemic-cash-flow-negative-companies-bd8592110422
======
ksj2114
How is this article on the front page of HN? It conflates cash flow with net
income, and shows a lack of understanding of the business models of these
companies.

Also... "why did we allow so many unprofitable companies IPO? When did losing
money become acceptable and the new normal for publicly traded companies?"

This shows a fundamental misunderstanding of how public markets work.

~~~
sillysaurusx
Your comment isn't really saying anything, though. It can be summed up as "Nu
uh."

Could you go into detail about _why_ there's a lack of understanding of the
business model, or how public markets work?

~~~
tylerhou
Because many of the businesses are profitable, but spend money to grow.

Uber, for example, could probably lay off 80% of its engineering staff and
turn profitable if it was truly necessary. This would be stupid, because then
they can't build new products (and thus compete) but they are default-alive
[1].

The original author says that these companies "dump" stocks at IPO, but fails
to recognize that (1) institutional investors who purchase most of the supply
of stock at IPO are highly sophisticated and (2) there is a lot of regulation
around proper disclosure of financials of public offerings.

Hell, the one recent tech company which tried to "dump" stock at IPO got
laughed out of the public markets (WeWork).

I agree with the above poster that this article is nonsense and shows a
complete misunderstanding of how markets and valuations work. Of course you
would expect companies that are not profitable because they are investing in
growth to lay off employees in tough times!

[1] [http://paulgraham.com/aord.html](http://paulgraham.com/aord.html)

~~~
braythwayt
> Uber, for example, could probably lay off 80% of its engineering staff and
> turn profitable if it was truly necessary.

A lot of people say these things, but:

We don’t know if that’s true. If they turn off the hype and marketing juice
and stop spending more money acquiring customers than the revenue they accrue,
do we know that they’ll become profitable?

We really need something more specific than, “just lay off all the expensive
tech workers and bam, instant profitability.”

What we need is a specific plan, that we then go over with a fine-tooth comb
looking for unintended consequences that could bite our “rightsizing” plan in
the ass.

Many a company has set out to cut costs and drive towrds profitability, but
very few make it. Honestly, very few make it. Most of the time, when a CEO
sets out to make a systemically unprofitable company profitable, they end up
in Chapter 11.

It’s really, REALLY hard to pull off, and it’s not for lack of trying or
inexperience on the part of management. It turns out that for most companies,
the right way to become profitable is to grow your revenues, not cut your
costs by 80+.

JM2C.

~~~
tylerhou
Yes, minus engineering and marketing, they are profitable for now
([https://news.ycombinator.com/item?id=23382477](https://news.ycombinator.com/item?id=23382477)),
but it's not a good idea. Growing revenues is much better, especially since
Uber has competitors who are also trying to grow.

~~~
urthen
I don't know what companies you've been working for, but even if you do zero
product research and development, a company as tech-focused as Uber is still
going to need a _substantial_ engineering department just to keep the lights
on. Not to mention a tech company that isn't developing new products and
features, and isn't marketing, isn't going to remain profitable for long no
matter how much they've cut labor costs.

I understand that they're investing in growth, but the key points still stands
- money is flowing down the drain with the promise that it'll all be worth it
"some day."

~~~
tylerhou
> a company as tech-focused as Uber is still going to need a substantial
> engineering department just to keep the lights on.

Which is why I initially estimated keeping 20% of engineers. Then Uber would
be slightly profitable in the short term, pre-coronavirus.

~~~
braythwayt
This is all speculative, of course, so you are entitled to your beliefs based
on your views and experience.

In my case, I have often seen the case that companies have certain stable
modes, and many unstable modes. It could easily be that after slashing 80% of
their engineering workforce, and cutting their marketing, they subside into
becoming a slightly higher-tech taxi company.

But what about the remaining 20% of engineering? Do they want to work for a
company that has let go 80% of its engineers, and has given up on self-driving
cars and drones and whatever else they were dreaming of?

Or will the rest of the talent head for the exits, their options hopelessly
underwater forever, because investors have no interest in the faded hulk of a
company that was once a Unicorn?

It could be that if they try to shrink to 20% of their engineering talent,
they keep on shrinking involuntarily, shedding their best talent in all areas,
not just engineering.

I don't know for a fact what will happen, but for the moment, if I had to bet,
my bet is that if they try to cut 80% of their engineering and most of their
marketing, they will keep on shrinking until they become a penny stock.

It would probably be easier for them to have Private Equity come in and take
the company private first. If they have to cut that much flesh off the bones
in public, it's going to be brutal.

------
nostrademons
There's an adverse selection problem with today's public markets. If you're
profitable, in a solid and sustainable business, you a.) usually don't need
more cash b.) if you do need more cash, there are plenty of private investors
that will give it to you, c.) don't want to disclose your profitability to
attract competitors and d.) don't want to spend the multi-millions per year
for SOX compliance. So the only reason you have for going public is to unload
your shares in an unsustainable business before the rest of the world realizes
it's unsustainable. Hence, that's what we get on the public markets.

There are definitely profitable tech companies out there which are still
hiring, but they are largely private. Some may have $35B valuations and a few
thousand employees, but don't find it worthwhile to go public.

~~~
ebiester
At the same time, Amazon was not cash flow positive when it IPOed and it
figured out its profitibility just fine. Further, SOX makes this a lot more
complicated.

If you give out stock (say, an employee stock ownership plan or options), you
are already subject to SOX.
[https://www.bradley.com/insights/publications/2004/03/sarban...](https://www.bradley.com/insights/publications/2004/03/sarbanesoxley-
what-it-means-for-private-companie__) shows an older article about some of the
other reasons you might be subject to SOX.

Further, if you give out options, your employees might expect to be able to
sell those. So, once you normalize options, you have set yourself on the path
to either acquisition or IPO. Once you take venture capital, they will want a
way to sell their shares at the highest price, which means acquision or IPO.
So, while you can point to ESRI or Basecamp or any number of private
companies, they are in the minority.

If you can bootstrap a company (or rely on alternative funding sources to VC),
and you can make it profitable enough to hire employees at market rate without
the lure of options, and you can fend off any VC-backed competitors who can
undercut you on cost and hire a larger team, then you're golden. However,
there's more than an adverse selection problem going on here.

~~~
belly_joe
Amazon is also the apotheosis of the growth model tech companies build on. I
was working in finance in the early 2010s, and it was then fashionable for
analysts to point out that Amazon's classic profitability metrics were
flashing red.

However, the Amazon model (and to a lesser extent the Uber model, etc.) was to
continue penetration pricing as well as plowing every dime made over costs
into growth. It made the company look overvalued but the share price was in
retrospect justified.

~~~
vishnugupta
> plowing every dime made over costs into growth

I've been trying to build a mental model around this i.e., what options do
companies have to utilize profit?

1\. Distribute to shareholders -- dividends. 2\. Distribute amongst employees
-- salary increase, bonuses. 3\. Add it to their pile of cash. 4\. Invest in
growing the business. 5\. Something else!?

Perhaps a combination of all four?

I guess Apple does mostly #3 which is how they are now sitting on a huge pile
of cash. Perhaps it's a signal that they don't need cash to grow their
business or maybe they don't see how to grow either.

Whereas Amazon genuinely believe that investing in growth is the best return
the cash from profit can earn. I guess it makes sense, e-commerce is still
about 10% of retail in US alone. So there's a big room for growth.

~~~
Apocryphon
Some companies also invest in growing other businesses.

[https://www.cbinsights.com/research/startups-investing-in-
st...](https://www.cbinsights.com/research/startups-investing-in-startups/)

[https://www.businessinsider.com/to-4-corporate-venture-
capit...](https://www.businessinsider.com/to-4-corporate-venture-capitalist-
funds-slack-airbnb-coinbase-stripe-2019-6)

~~~
vishnugupta
Indeed! I think another option is financialization through investment banks
wherein the money is used in all sorts of investment vehicles such as forex
trading, futures/options, bonds, hedge funds and whatnot. There's been a
steady increase of such companies it seems.

[https://knowledge.wharton.upenn.edu/article/pitfalls-
financi...](https://knowledge.wharton.upenn.edu/article/pitfalls-
financialization-american-business/)

[https://www.scielo.br/scielo.php?pid=S0103-63512018000200549...](https://www.scielo.br/scielo.php?pid=S0103-63512018000200549&script=sci_abstract&tlng=en)

[https://www.researchgate.net/publication/308901243_Financial...](https://www.researchgate.net/publication/308901243_Financialization_of_non-
financial_companies_an_insight_in_the_automotive_sector)

------
jpm_sd
I'm pretty amused by the byline on this piece.

"Here’s to a new generation of entrepreneurs who prioritize building
sustainable businesses," says the guy whose job title is apparently "Flying
cars salesman" at a company that has mostly produced CG renderings of their
future product.

[https://www.watfly.ca/](https://www.watfly.ca/)

As the market is currently discovering, what goes up, must come down. A
principle that applies to flying cars as well.

------
mtnGoat
To me this just illustrates the excess some companies have. Frankly I wonder
what some of these companies are doing to even require these staffing numbers
do VCs like headcount or something?

~~~
momokoko
Yes. Headcount is a metric just like anything else and is often included in
decks as an example of growth.

Most of the jobs are sales people. When trying to scale fast, most VCs expect
most of the money to be spent on sales people in a b2b product that has found
product market fit.

~~~
mtnGoat
fair enough. makes sense, in that light.

Sales isn't my thing/department, I'd probably be amazed at how big the sales
teams are at some of these places. Is that part of tech a kinda of a turnstile
as it is?

------
mshenfield
Many of these businesses are also predictably linked to the broader economy -
ticketing at Eventbrite, reservations/shopping for Yelp. It would be prudent
to keep a cash stockpile for the inevitable cyclic downturns.

Full disclosure, I worked at Eventbrite two years ago.

~~~
carlineng
Until recently, Yelp had a giant stockpile of cash, but an activist investor
successfully launched a campaign to get Yelp management to return much of that
cash via buybacks [1]. By the end of 2018, Yelp had a cash balance of ~$837
million and proceeded to return almost $500 million in cash to stockholders
via buybacks in 2019 [2].

Hoarding cash may seem like a good idea in hindsight, but public market
investors will often raise a huge stink if you try.

[1] [https://sqnletters.com/content/uploads/2019/01/Yelp-A-
Fresh-...](https://sqnletters.com/content/uploads/2019/01/Yelp-A-Fresh-
Perspective-SQN-Investors-01.16.2019.pdf) [2]
[https://ycharts.com/companies/YELP/stock_buyback](https://ycharts.com/companies/YELP/stock_buyback)

~~~
gresrun
GOOG[0] & AAPL[1] each have stockpiles of cash & securities in excess of
$100B. If thier investors are raising a stink, their CFOs don't seem to care.

Disclosure: Google employee

[0][https://abc.xyz/investor/static/pdf/2020Q1_alphabet_earnings...](https://abc.xyz/investor/static/pdf/2020Q1_alphabet_earnings_release.pdf?cache=4690b9f)
[1][https://www.apple.com/newsroom/pdfs/FY20_Q2_Consolidated_Fin...](https://www.apple.com/newsroom/pdfs/FY20_Q2_Consolidated_Financial_Statements.pdf)

~~~
ckdarby
GOOG & APPL market capital is basically 1000x larger.

Activist investor shows up with $100M fund that they can throw behind Yelp
giving them ~10% of the company, they'll have a major say and in some other
public companies they might hold the largest share stake depending on the
shareholder splits.

The same investor could show up with $100M on a $1T company, have 0.01% and
nobody even knows who they are and they can't really push the company to do
anything.

There are not that many funds that can take major voicing stakes in GOOG or
APPL because of the capital it would require.

------
omgbobbyg
I am surprised at the poor economics behind Eventbrite. In 2019, they lost a
cool $26 million with a -21% margin. What are their major unit cost items? At
the risk of sounding ignorant, isn't it _just_ a website?

~~~
redisman
I’m pretty sure 99% of the companies people on this website work for could be
described as “just a website” if you want to be snarky

~~~
MattGaiser
Yeah, but there is physical and people infrastructure behind many websites.
Uber/DoorDash/Lyft have drivers and cars. My organization has large parking
garages. GoPro makes hardware. Zoom has horrendous bandwidth costs and
requires a ton of servers.

They all have some element of their business which doesn't meaningfully scale
exponentially.

What does EventBrite have that would be like that?

~~~
jankassens
\- Sales staff to get event organizers to use their platform and help with
setup. \- Customer support to deal with issues. \- Maybe loss and employees to
deal with fraud of some kind (since payments are involved).

------
gregdoesit
“Why did we allow so many unprofitable companies IPO? When did losing money
become acceptable and the new normal for publicly traded companies?”

First off, the SEC “allows” companies to go public in the US. Any company can
do so, assuming you meet the regulatory requirements. Being profitable is not
one of them. Being transparent enough on their business and their outlook _is_
one of them.

Now, when you go public, you take on a bunch of additional constraints - like
having to report regularly to shareholders, that private companies don’t have
to do. So now, the question should be “why did investors invest their own cash
into unprofitable companies IPO’ing?”

The answer partially lies into how profitable companies typically do not IPO,
as they do not need capital. Want to be a part of IKEA? Not a public company?
The Mars Group, who sell most candies worldwide? They are also doing great.
LEGO? Nope.

Okay, so you have investors - pensions funds, private individuals and many
others - who want to invest, and gain returns on their money. So why do they
invest in no -profitable companies? Because they think it’s an investment that
they are comfortable with. And they usually believe that short- or long-term,
their stock value will go up, thanks to the performance of the company.

Welcome to how publicly traded markets work.

------
olefoo
And once again the tech workforce wakes up in the gutter wearing clown makeup
and wondering what happened.

In a functioning economic regulatory environment the whole "Spend big money
upfront to Capture & Control $MARKET" game would have been illegal from the
get go. We would have had a much greater variety of companies and a much
greater variety of size of companies. But, hey. Here we are. In the gutter.
Covered in slapstick.

~~~
achillesheels
By your reasoning Intel would have never been created. QED.

~~~
Apocryphon
Who's to say that wouldn't have been a better world, technologically speaking?
Who's to say Intel's market dominance was a good thing? I thought it was a
truism in tech that monocultures are a bad thing?

~~~
achillesheels
I think the more pertinent focus is to ask: was Intel created naturally or
artificially? To that, we must look at its effects on human civilization,
including the compounding network effects on the Valley. I see its merits as
natural and therefore, per Aristotle, necessary. So I can't consider a
parallel universe where Intel is not a wealth creation signal which causes the
venture capital industry to grow to the point where now every cosmopolis has
some sort of VC Fund.

~~~
Apocryphon
It's easy to get sucked into counterfactuals, which are fun hypotheticals but
sort of useless in debate. Yet one has to consider- if Intel was never
created, wouldn't someone else simply have invented the microprocessor
technologies they created? Were there not competitors? It seems inevitable.

~~~
achillesheels
I remember from a Nova special that TI was actually right there with the
planar lithographic technique. And yes, I am also of the position that their
R&D was really more like "intrinsic value exploration" \- microprocessors
being an inevitable necessity for advancing the state of the art of human
civilization, so there is a first mover advantage. But this is where "risk-
taking" is so underrated, even in a "swingin' dick" American culture, there
aren't many of those types in EE departments and Bell Labs!

So, while I would argue it was practical necessity to mass fabricate central
signal processing units, gunning for that opportunity would be reserved for a
self-selected population pool, which Nature has determined to be those already
opting to be mavericks when launching Shockley Semiconductor.

------
kjgkjhfkjf
Companies such as Uber tend to be biased towards growth rather than
profitability, even at the time of their IPOs. Uber's layoffs are in part due
to the coronavirus situation, but perhaps also due to their transitioning
towards a profit bias.

It may seem counter-intuitive to invest in companies that are not biased
towards profitability, as they tend to be risky and volatile, but portfolio
management theory predicts that including some volatile assets in a portfolio
makes it perform better. See e.g.
[https://www.investopedia.com/terms/c/capm.asp](https://www.investopedia.com/terms/c/capm.asp).

------
7leafer
> When did losing money become acceptable and the new normal for publicly
> traded companies?

It's when big investors decided they'd better keep a selected few companies on
life support while they kill fair competition with their suicidal price
dumping, and then milk the monopolies they inevitably become.

They don't lay off because they're on their deathbeds, they do so because of
automation and optimization. No need for that many mechanical turks.

------
nixass
Many of these are gig companies, middle man companies who add no value to the
market. Maybe it's time for them to go to the history.

------
saltedonion
This is like saying most people who died are old.

------
MangoCoffee
>why did we allow so many unprofitable companies IPO?

the Amazon business model? VC/Public's money to gain market shares.

------
cryptozeus
Op of the article assumes that you have to be cash flow positive to operate or
even IPO. This is false on so many levels. Just look around so many companies
exist today which were not cash flow positive at the IPO or even after
IPO...Amazon, Tesla to name a few.

------
polote
Since when making points with dirty data is actually relevant ?

We don't even know if the data is representative of anything, there have been
millions of layoff, and this db contains 60k of them, and this guy even
decided to consider 30 % of it

~~~
watfly
Numbers are on par with what Bloomberg is reporting. Maybe comment with source
to the millions of layoffs in the tech industry?

------
tgs4
This topic is best explained by Russ:
[https://www.youtube.com/watch?v=BzAdXyPYKQo](https://www.youtube.com/watch?v=BzAdXyPYKQo)

------
papito
"We are burning money like hay but we need these 20 people to be maintaining
our Kubernetes clusters. THIS IS THE WAY."

------
byoung2
The unit economics of some of these companies may have worked during the good
times, but these are unique times. Uber and Lyft are notable examples that
barely made a profit even during the good times. Yelp was already in decline
long before COVID-19 and having mass business closures didn't help. These
layoffs exposed the fact that many companies are like most Americans who live
check to check.

~~~
onlyrealcuzzo
There's a ton of speculative cash-flow negative rental properties. Probably
much more money is invested in this space than VC companies. I wonder how
these landlords will fare in this and which will cause a bigger long-term
problem.

~~~
JJMcJ
> speculative cash-flow negative rental properties

Usually that means rents aren't enough to cover the mortgages.

Example: Buy a house for $2 million. Mortgage, taxes, upkeep, insurance,
pushing toward 100K a year. But there is no chance at all you are going to be
able to get $8K/month rent to cover that.

Long term rental property owners, on the other hand, are doing very very well
even if they don't sell.

------
ddmma
Most of these are sustained by investment funds that are interested also in
the consumer data

------
hat_tr1ck
Allegedly, most public tech companies that have fired staff, are largely
unprofitable.

~~~
rvz
One thing that is obvious in this observation is those high growth companies
who have an all time high burn rate, headcount, little revenue and once the
pandemic hit the tech industry, those found in that category are hardest hit
and are operating in an unsustainable fashion.

------
jtdev
...and loads of ML/AI hype.

------
crazygringo
> _...why did we allow so many unprofitable companies IPO? When did losing
> money become acceptable and the new normal for publicly traded companies?_

Huh?

In a market nobody's "allowing" things or not, people simply choose to
purchase/invest or not. Losing money has _always_ been acceptable in _every
business ever_ because businesses require investment and investment takes time
(months, years, decades) to pay off.

Why _shouldn 't_ you allow an unprofitable company to IPO? He's arguing that I
should be _prevented_ from buying shares in Uber or Yelp no matter how badly I
want to? That's incredibly presumptuous of him to think he knows better how I
ought to invest my money than I do.

> _Here’s to a new generation of entrepreneurs who prioritize building
> sustainable businesses._

Nobody would be investing money in these companies if they didn't think there
was a good chance of them becoming sustainable long term. Obviously, the board
of Uber is doing their best to make it a sustainable business. (You may
disagree that it's sustainable, but that's business -- you can disagree about
everything.)

Essentially, the author appears to be anti-investment, which is basically
anti-economic growth broadly.

Bizarre.

~~~
legolas2412
Well, zero interest rates from federal reserve definitely allow such
businesses to flourish. Where you try to corner a market with infinite money
for a monopolistic position.

~~~
tylerhou
Startups don't get 0% loans from the federal reserve. Banks "do", but interest
rates for unsecured, high-risk startups is well above 0%.

Startups get investments from investors, but investors have an opportunity
cost. A lower bound on opportunity cost is market index growth, around 7% per
year.

------
vchak1
I believe they are trying to make it up in volume.

------
ben7799
Interesting to see some of the comments from people who are so buried in the
bubble that they can't see how bad these companies often are.

I feel like this insanity started in SV and has grown out to the other tech
hubs over the past 10-12 years. Whatever the case it's made me glad I never
managed to move out to SV.

I've tried to navigate my career around not ending up at this kind of company.
The common things IMO:

\- Not profitable

\- Keep getting more rounds

\- Likely B2C

\- Likely involved web marketing, ads, etc..

\- Likely involvement in "social".

They're all a gamble.. if you're young/single and have little to risk and you
go to one of these and it hits you might win big.. but they've never been
safe/responsible companies.

I did work for 1 year at one place that I quickly realized was super messed
up. It was amazing to me when they IPOed with accelerating losses.

It wasn't always this way.. you used to have to make solid product with a
business model that clearly showed growth AND profitability.

~~~
vmception
> It wasn't always this way.. you used to have to make solid product with a
> business model that clearly showed growth AND profitability.

Its because there isn't anywhere to put cash.

The market tolerance has expanded because the market was desperate for things
to invest in.

So whether it is non-voting shares, profitless companies and bigger issuance
sizes, it is all a symptom where there is no predilection for a cure.

The government's growth targets cannot be met without giving money to the
credit worthy. Money is free for them and they have make more from that money.
It doesn't "trickle down" very far, but it does still lack a place to go where
a return beats inflation (the speed at which the government gives other
organizations cheap money).

~~~
Apocryphon
And yet, these investors still aren't putting a lot of money in companies
working on the stereotypical moonshot "big problem" ideas that Silicon Valley
is derided for not caring about- curing cancer, fixing climate change,
fighting poverty, inventing fusion power, etc.

~~~
fivre
Turns out the 50+ years we'd need for fusion is a bit too long a position for
a system that demands quarterly growth for growing retirement accounts,
whodathunk. They take 50 years to mature anyway, what's the point?

Granted, you probably want a bit less than <the time you expect to cash out
the account> to figure out if your bets were correct or not and you actually
have a retirement account, so it sorta makes sense, but we've gone off the
deep end in the other direction, so it doesn't.

~~~
Apocryphon
Eternal never fusion is basically a public policy failure writ large:

[https://i.imgur.com/D6cDJ22.png](https://i.imgur.com/D6cDJ22.png)

------
thecleaner
Isn't this also because of tax considerations ? If you make a profit you have
to pay taxes, so its better to inflate expenses as much as possible. However
this argument gives some credibility to the business models of these
companies.

~~~
mdoms
No one ever went poor paying tax.

~~~
marcosdumay
I'm out on a tangent, but that is too broad a statement.

There exist constant taxes over non-liquid assets. I am pretty sure we'll
people that have been bankrupt over then if we look. They just aren't a
problem for people with money (top of middle class or above).

