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In Silicon Valley, startups are laying off staff as investors pull back from big tech

EMILY FENG, HOST:

The pandemic supercharged big tech companies, but now those companies have seen share prices drop dramatically. Smaller tech startups are feeling the pain, too, as companies lay off employees and look for other ways to cut costs.

NPR tech reporter Bobby Allyn joins us to explain whether the slowdown represents a tech bubble bursting or something else entirely. Hi, Bobby.

BOBBY ALLYN, BYLINE: Hey, Emily.

FENG: So there are big changes afoot in Silicon Valley. Companies have announced hiring freezes. Investors are losing tons of money on these plunging tech stocks. Bobby, the tech sector was booming just months ago, so what is going on here?

ALLYN: Yeah. So the pandemic is important context. During lockdowns, as we all know, we became more dependent on our devices and apps, and tech companies were rewarded handsomely. Their profits soared. So what's happening now is a bit of a comedown from those frenzied times. One tech investor described it to me as a reality adjustment.

But on top of this, there are other big-picture factors affecting companies - you know, inflation at a 40-year high, the war in Ukraine, lockdowns in China. Taken together, it's a real problem for tech companies. I mean, Netflix lost 70% of its value from its pandemic high. Google recently had its worst month since the 2008 financial crisis.

I rung up Greg Martin about this. He's a tech investor in Los Angeles, and he explained how Google's problems can have broad ripple effects.

GREG MARTIN: So if you see Google's ad business declining, well, that doesn't augur well for - how things are going, you know, in the ad tech world doesn't augur for how consumers are spending money. And so those are going to have impacts on companies that look to Google as an example of how good things are going in the economy.

FENG: OK. So trouble for Google could mean trouble for the whole economy. Just how bad could it get?

ALLYN: It's hard to say. These companies have been surging for more than a decade, remember? And let's stick with Google for an example. I mean, it has more than 150,000 employees. It's worth around the same as Italy's entire economy - right? - a huge company. So some analysts say, you know, some kind of adjustment was going to happen eventually, it's just this particular slowdown in big tech and the startup sector is spooking the entire industry.

FENG: How exactly?

ALLYN: Yeah. So like I said, the startup sector is experiencing a big - a bit of a pullback here. Remember, all of the tech titans - so Google, Facebook and the rest of them - all began as startups. And now we're seeing trouble there. So-called unicorn companies - so companies worth more than a billion dollars - are seeing their value sink.

For example, Instacart, the food delivery app that was a darling in the pandemic, it recently lost 40% of its value. Startups are being forced to lay people off because money is running out. And venture capitalists like Greg Martin in LA say there is just a serious pullback in investment happening across the board.

MARTIN: Venture investors are, you know, in much more pause mode. Let's slow things down. Let's spend more time thinking about the environment. Let's look at companies from all angles. Let's take the negative perspective and make sure the business works.

ALLYN: Yeah. Making sure that the business works - it almost sounds ridiculous to say that out loud, but look - for a really long time, startups were getting lots of easy money based on, sometimes, a good feeling about a company, not whether the company actually had a way to make money.

FENG: So just quickly - many listening might be wondering, is this a tech bubble?

ALLYN: So all the tech investors I talked to said it sure looks different than declines of past years. But whether this is a bubble in the tech industry about to burst or just some new, less hyped-up reality, we just don't know yet.

FENG: NPR's Bobby Allyn, thank you.

ALLYN: Thanks, Emily. Transcript provided by NPR, Copyright NPR.