The (Tech) Sky Is Falling. Or Is It?

Jun 15, 2022

Welcome to The Digital Experience Report, your source for news, analysis, and insights on the ExTech (Experience Technologies) market and all things related to the Digital Experience.

In this report, I examine the recent rush of foreboding economic news and what it really means to enterprise and tech executives alike. Plus news from iGrafx, SMG, Adobe, Asana, Dialpad, Zoom, and Genesys.

The (Tech) Sky Is Falling. Or Is It?

The headlines are coming fast and furious. Tech is in trouble. Big trouble.

Here’s the opening paragraph from a recent New York Times column:

“The tech industry is experiencing an earthquake.
The five biggest technology giants in the U.S. have collectively lost more than $2 trillion of stock market value this year. Across big and small companies, there are regular announcements of hiring slowdowns or layoffs, including at Facebook, Uber, Robinhood and the celebrity video app Cameo. Start-up founders who were turning away eager investors a few months ago now must make an effort to get more money. (Gasp.)”

The message is clear. The party’s over. It’s time to buckle in and prepare for a very bumpy ride.

But is that really what’s happening, and what does all of this mean for both tech and enterprise executives?

The short answer is: probably not as much as you might think.

We will see some short-term disruption in some sectors, but overall, I see this as more of an opportunity than a period of doom and gloom — at least if you see it through the right lens.

Reading the Tea Leaves

Let's begin this analysis by acknowledging that plenty of not-so-great news is floating around. Just today, the Fed raised its benchmark rate by 75 basis points — the largest increase since 1994. Even the rosiest reading shows inflation up by over 8%. At the same time, recessionary threats are looming, with Jamie Dimon, CEO of JPMorgan Chase, just two weeks ago warning of a coming “economic hurricane.”

And then, there are all of those hiring freezes and outright layoffs. The rapid shift in the tech hiring trend culminated in some organizations, such as Coinbase, rescinding job offers before the new employees started.

However, in moments like this, I always remember something my dad taught me years ago.

He was with the Los Angeles County Sheriff's Department for over thirty years, and I remember one time when the news reported about a rapid increase in crime. He explained that the actual crime rate had been steady, but news outlets sold more papers and TV ads if we were concerned about crime and tuned in to see what was happening.

I think we may be seeing the tech version of a fluffed-up crime spree.

Yesterday, Business Insider published an article deconstructing this point. In it, the author tore into the data and talked with those involved in the tech hiring process. Her assessment was that "the job market in tech is still going strong."

The data she shared showed that while the national unemployment rate is 3.9%, virtually every tech-related job is enjoying a rate of half that or less, with many showing almost zero unemployment.

While she found some signs of softening (there have been layoffs and hiring freezes, after all), she saw it as nothing to panic over. “Think of it as going from unbelievably once-in-a-generation amazing to just plain old great,” she wrote.

And it's not just on the hiring front that we see resiliency. While the overall tech market is more of a mixed bag, the enterprise tech sector continues to produce healthy earnings, with ServiceNow, Salesforce, Dell, and even Zoom reporting strong performance in recent days.

The Safe Harbor of Enterprise Tech

I think the reason for this tech resiliency — particularly for enterprise tech — is that it is one of the few remaining levers of growth.

Satya Nadella, Microsoft’s CEO, made this point during the company’s January earnings call when he said, “Coming out of the pandemic we are seeing actually a lot of constraints in the economy, and the only resources that can help drive productivity while keeping costs down is digital tech.”

This fact was true then in the context of the pandemic, and is even more true now in the context of looming economic uncertainty.

Investments in enterprise tech will continue simply because they must. Doing anything else will consign your organization to a slow but certain death.

And as we saw during the heart of the pandemic, those organizations that invest when everyone else turns cautious will gain the greatest advantage.

Moreover, this isn’t just a question of leveraging technology to reduce costs. The effective use of technology is also a driver of economic efficiency in the form of inflation-busting innovation. In Forbes, David Doty explains, “What economists know, but the news reporters generally ignore, [and] the public might not realize…is that digital goods and services typically reduce both actual and measured inflation.”

This fact means that not only are enterprises incentivized to continue investing in technology to increase optimization, but to drive innovation that increases competitiveness as well.

When You Should Start to Worry

That said, there are enough troubling signs that it is prudent to watch this rapidly changing dynamic — particularly if you're a funded tech company.

The biggest risk to the enterprise tech space from falling stock prices may be a lack of funds flowing into VC and private equity funds. According to Ben Bergman, writing in Insider, if this happens, it will be because of the so-called denominator effect.

“LPs [the endowments, pension funds, foundations, and wealthy individuals that fuel venture firms] usually allocate their total assets in a variety of financial instruments, including venture capital in the private markets, hedge funds in the public markets, and private equity. With public stocks and other parts of their portfolio down sharply, LP allocations in these areas are out of whack — they suddenly have much more of their total assets put into to venture than they are allowed, meaning they have to dial that exposure back and invest less in venture capital.”

If we see a sustained downturn in the public markets, we will likely see the venture capital spigot slow to a drip, even if enterprise tech earnings remain strong. That means that any growth-oriented tech firm will have trouble raising future rounds.

The solution is to focus on the fundamentals, reduce burn rates, and be ready to play longball. To the extent that we've seen an impact thus far, it's been in those organizations that are a bit upside down in this department.

Seizing Market Opportunities

While I'm keeping a watchful eye on the broader economic outlook, I remain extremely bullish on the enterprise technology space — especially those tech providers that are helping enterprises simultaneously improve the digital experience while increasing efficiency and optimization.

And for those technology providers, I believe this cooling-off period represents a two-fold opportunity.

First, if you have the capacity, there may never be a better opportunity to score some top-shelf technical talent. Just beware that this is an opportunity for enterprises to do the same. Citi, for one, is taking this opportunity to bring on 4,000 new technical staffers.

Second, savvy enterprises will be using this period to invest wisely in those technologies that can improve efficiency and increase their experientially-led market differentiation. These organizations represent your best, long-term customer-partners because they understand that technology is a growth-oriented investment rather than a cost center. Invest in these customers.

And if you're an enterprise executive, be wise, but be ready to place some big bets. A market cooling creates that split-second pause that can give you a chance to leapfrog ahead of your competitors with some well-placed bets. Invest with those tech partners who present a vision aligned with yours and that are prepared to invest alongside you as you march toward this future.

My father, a font of colorful idioms, has another one he loves to share, this time about real estate. "Buy when the bullets are flying, and sell when the parade comes to town," he says. Well, the bullets are flying in the world of tech right now. So, now is the time to invest.

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Image credits: Bailey Rae Weaver and Saikat Bose.

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