The year that brought Silicon Valley back to earth | CNN Business

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On the first trading day of 2022, Apple hit a new milestone for the tech industry: The iPhone maker became the first publicly traded company to hit a $3 trillion market cap, with Microsoft and Google not behind. As surprising as that valuation was, there were headlines speculating about how long it would be before Apple and its rivals surpassed $5 trillion.

The already dominant tech industry only seemed destined to grow even further earlier this year. The spread of the Omicron variant suggested continued demand for digital goods and services fueled by the pandemic, which had boosted many tech companies. Interest rates close to 0% meant that startups still had easy access to the funding that had fueled their high valuations and risky ventures.

But the year ends on a very different note. A perfect storm of factors has forced a dizzying reality check for the once-high-flying tech sector, turning it into one of 2022’s biggest losers.

Over the course of the year, demand for many pandemic-era technology tools changed; inflation soared; interest rates rose and fears of an impending recession weighed on consumer and advertiser spending, the latter of which is the core business of many household names in tech.

The result was a bloodbath unlike anything the tech industry has seen in the last decade. Tech stocks fell, amid a broader market decline. Tens of thousands of grassroots tech workers lost their livelihoods amid mass layoffs, both at tech giants like Amazon and Facebook parent Meta and at smaller tech companies like Lyft, Peloton and Stripe. The crypto world imploded. And an entire industry known for burning money on ambitious moon plans instead began shuttering projects and announcing cost-cutting efforts.

Even the title of the world’s richest man, which once belonged to serial tech founder Elon Musk, ended up going to Bernard Arnault, the chairman of French luxury goods giant LVMH, after he bought Musk’s chaotic Twitter seemed to thank the investors of his car company, Tesla. .

The sharp shift in sentiment not only removed the industry’s air of invincibility; he also exposed some of its underlying myths. For years, Silicon Valley has portrayed its founders as visionaries who can see far into the future. But suddenly, many of its most prominent founders had to admit a harsh truth: they couldn’t even predict two years ahead.

As Facebook founder Mark Zuckerberg said in a memo to staff last month announcing the company would cut 11,000 jobs, “Unfortunately, this didn’t work out the way I expected.”

He was far from the only one in the industry caught off guard.

When the pandemic upended the wider economy in the early 2020s, tech companies only seemed to grow bigger and more powerful as people were forced to live their lives online. Facebook (now Meta) could afford to nearly double its workforce and make multibillion-dollar bets on a future version of the Internet called the metaverse. Similarly, Amazon went on a hiring spree and doubled its fulfillment center footprint to meet increased demand for online shopping.

“At the start of Covid, the world moved rapidly online and the rise of e-commerce led to massive revenue growth,” Zuckerberg wrote in his memo to staff last month. “Many people predicted that it would be a permanent acceleration that would continue even after the pandemic ended. So did I, so I made the decision to significantly increase our investments.”

Then the market changed.

“People are terrible at predicting the future, and we always think that what’s happening now will happen forever,” Angela Lee, a Columbia Business School professor who teaches courses in venture capital, leadership and strategy, told CNN. “But the reality is that the pandemic was a black swan event and none of us knew what was going to happen in the future.”

One by one, Silicon Valley visionaries issued mea culpa. The founders of Stripe, Twitter and Facebook admitted again that they either grew their companies too quickly or were too optimistic about pandemic-fueled growth in their industry.

“We were overly optimistic about near-term growth in the Internet economy in 2022 and 2023 and underestimated both the likelihood and impact of a broader slowdown,” Stripe CEO Patrick Collison wrote in a note to employees announcing last month. 14% of the workforce would be cut.

It wasn’t just a shift in consumers going offline again that hurt the industry. The technology sector was particularly affected by the impacts of rising interest rates this year. Silicon Valley as a whole is arguably more sensitive to rising interest rates than other industries, as many tech companies rely on easy access to financing to get their ambitious projects off the ground, usually before even make profits

In a move to rein in inflation, the Fed approved seven straight rate hikes through 2022. Since the start of the year, the tech-heavy Nasdaq index fell more than 30% on Dec. 21. By comparison, the Nasdaq soared more than 40% in 2020 and another 20% in 2021. And the S&P 500’s information technology sector lost more than 28% this year through Dec. 21. considerably higher than the broader S&P 500’s decline of just 19% over the same period.

Apple’s market capitalization now sits above $2 trillion. Amazon shares are down 50% year to date. And Meta’s stock has been hit even harder, losing nearly two-thirds of its value by 2022. Since Meta was a trillion-dollar business last year, it’s seen its value market share fell below companies such as Home Depot.

The shift in sentiment around technology has also affected the next generation of companies that aspire to be household names.

Global venture funding hit a nine-quarter low of $74.5 billion in the third quarter of 2022, according to data from analytics firm CB Insights. This was the largest quarterly percentage decline in a decade (34%) and a 58% drop from the investment peak reached in the fourth quarter of 2021.

Another sign of how this played out in the startup world: More than two new unicorns (startups valued at $1 billion or more) were born on average per business day in 2021, according to separate data from CB Insights. That rate fell to a rate of less than one new unicorn every two business days in the third quarter of 2022, according to CB Insights’ most recent analysis, the lowest since the first quarter of 2020.

Lee, who is also the founder of the investment network 37 Angels, said when she met with tech founders this year: “I said these words, which is, ‘I could have done this deal last year, but i won’t now.’ And I’ve heard a lot of other people say that too.”

While belt-tightening may be painful for tech founders, Lee says he sees it as a good thing for the tech industry as a whole. Many industry experts have long called for such corrections it can help remove some of the excess from the market and ensure that the most financially viable companies survive.

“Right now, there are a lot of headlines that say, ‘The sky is falling, the end is near,’ and the way I describe it is more like a return to normalcy,” Lee said, noting that most charts tracking venture capital spending (from the number of mega rounds to the number of IPOs) had a big spike in 2020 and 2021 when interest rates were low, and now these charts are starting to look like they did in 2019.

“I would just call it a ‘return to sanity,’ versus like, ‘the sky is falling,'” Lee said. “I don’t think the company is cratering or the tech industry is cratering as an industry.”

But for now, at least, there seems to be no end in sight to the pain for Silicon Valley and those who work there.

In his own memo acknowledging the job cuts at Amazon, CEO Andy Jassy said the layoffs at Amazon, estimated to total about 10,000 positions, would continue into 2023. In a conference call last month, he qualify the previous hiring day as a “lesson” for everyone.