Network Effect? Tech Companies Of All Sizes Initiate Layoffs

Is this a trend, another turn of the cycle, a logical response to tech-specific forces - or a more ominous sign for the broader economy?

We have become so dependent for so long on tech's ability, even necessity, to be our economic savior that signs of a slowdown in the digital golden goose could have both financial and psychological implications. This is especially worrisome given the paucity of alternative solutions available, due in large measure to the belief that technology would always bail us out - until it can't - or doesn't. JL

Alexei Oreskovic reports in Business Insider:

What do Twitter, Microsoft and Snapchat all have in common?

What do Twitter, Microsoft, and Snapchat all have in common?

They have all had layoffs in recent months.

The reasons for the layoffs are as varied as the companies' products, but the job cuts provide an interesting counterpoint to the parade of mega-funding and billion-dollar startup announcements that have dominated headlines all year.

Even as the tech industry appears to be thriving (and, some argue, at or nearing dangerous bubble levels), tech companies are cutting costs and handing out pink slips.

The question is whether the layoffs are a healthy sign, reflecting disciplined businesses taking measures precisely to avoid overextending themselves, or the first early-warning signals of a changing market.

"There is a general sentiment that the tech-financing market is getting tougher at every stage," says Chi-Hua Chien, cofounder of the venture capital firm Goodwater Capital.

He notes that recent layoffs at Twitter and at the startup Flipagram are most likely different. But he says: "Smart boards are looking ahead to tighten up fixed costs and trim the fat in their organizations. We'll probably see more of this in the next few quarters."

Old guard versus vanguard

The tech industry giants Hewlett-Packard and Microsoft have already slashed thousands of jobs this year. Those companies are old-guard firms scrambling to retrench and restructure aging businesses.

Some of the internet companies that have recently cut jobs are also in the troubled category, such as Groupon and Living Social.

But layoffs are starting to hit the younger mobile and social apps that are the vanguard of today's tech industry.

Consider just the past week:

• Flipagram, a photo-storytelling app backed by the marquee investors Sequoia Capital and Kleiner Perkins Caufield & Byers, cut 20% of its staff, as Business Insider's Biz Carson reported.
• Zomato, the $1 billion India-based restaurant-discovery startup that took over Urban Spoon, is reportedly cutting 300 workers from its staff, many in the US.
• Snapchat shuttered a group developing original content and reportedly will lay off the dozen or so members of the group (though the company noted that some may be assigned to different roles).

And then there's Twitter, which announced on Tuesday that it would cut 336 jobs, or 8% of its workforce.

Twitter's struggles aren't new. But Twitter's biggest problem is not its spending, but rather its inability to grow its number of users. The company has been losing money for years, and that has never bothered investors before. So Twitter's decision to slash its headcount, rather than redeploying staffers on new growth initiatives, is worth paying attention to.

Twitter isn't just any company either. It is one of the flagship startups of the recovery from the 2008 financial crisis. The company had a banner IPO in 2013 and is the anchor tenant of San Francisco's new stature as the country's tech capital.

Fasten your seat belts

With Twitter now looking shaky and hundreds of its workers packing their boxes, don't be surprised to see reverberations across a spectrum of sharing-economy startups, restaurants, and real estate, all interconnected and dependent upon a growing supply of free-spending techies.

Tomohiro Ohsumi/Bloomberg via Getty Images

Layoffs are only one symptom of a souring market — rising burn rates, bulging accounts receivables, and bankruptcy filings will all come together when the bubble bursts. And initial public offerings will flop.

Which brings us back to Twitter. The paperwork for the tech industry's most highly anticipated IPO was filed last week by Square. The San Francisco-based digital-payments company shares the same CEO as Twitter: Jack Dorsey.

Square has lost hundreds of millions of dollars in the past three years and shows no signs of reversing the trend.

As Business Insider's Jay Yarow wrote, one person who tracks the performance of startups closely, Danielle Morrill of Mattermark, thinks Square is looking to raise money in the public markets because it could not do so at a price it was happy with in the private markets.

That sounds a lot like the "greater fool" theory that led to the 2000 dot-com crash, and it doesn't bode well for the health of the industry.

The Square IPO may end up being another blockbuster, as Twitter's was back in 2013. But if the Square IPO flops, get ready for more layoffs.