Next-generation Google implements stronger oversight measures

The impact of the economic downturn has hit younger companies the hardest. With rising interest rates, the prospect of future profits for startups seems less appealing in the present. As a result, venture capitalists are cutting back on investments. Global venture capital funding in the first half of this year amounted to $144 billion, less than half of the $293 billion raised by startups in the same period in 2022. Even the companies that do manage to secure funding are experiencing downward pressure on their valuations. According to Carta, a startup equity platform, nearly one-fifth of all venture deals in the first quarter of 2023 were “down rounds,” where companies secure funding at a lower valuation than before. For example, fintech star Stripe saw its valuation drop from $95 billion to $50 billion after its latest funding round in March.

This situation is causing aspiring companies to follow the lead of established tech giants and reevaluate their spending habits. Efficiency has become the focal point in Silicon Valley. Companies that were used to spending freely to gain market share are now finding themselves in the unfamiliar position of having to cut costs. And there are plenty of areas where costs can be trimmed.

A logical starting point for cost-cutting is payroll. Experienced founders often complain that salaries are the biggest expense for young companies. In July, job postings for startups on Hacker News, a news site for coders, declined by 40% compared to the same month last year (see chart 1). The average startup is already operating with a leaner team. Data from CB Insights, a provider of market intelligence, reveals that the median number of employees at young companies has been steadily decreasing. In 2018, a typical company that raised between $10 million and $25 million had around 50 employees. In 2023, a similar company would have 41 employees. This trend holds true for larger startups as well, including those at the late-stage that have raised over $500 million (see chart 2).

In the past, companies would hire many employees who didn’t have significant responsibilities. That’s no longer the case. Most startups can operate with smaller teams without significantly affecting their revenues. Tech companies are embracing artificial intelligence (AI) to achieve greater productivity. For example, an AI “co-pilot” on GitHub, a platform owned by Microsoft, boosts coders’ productivity by 30%. AI-based tools are also benefiting other employees, from chatbots that generate emails for marketers to software that improves sales efficiency. A founder of an early-stage startup with less than ten employees estimates that AI has already increased their company’s productivity by 30-40%.

The spirit of austerity is even evident among startups developing AI tools themselves, which have remained unaffected by investors’ newfound caution. For instance, Anthropic, a company founded by defectors from OpenAI (the creator of ChatGPT), has raised $1.2 billion with just 160 employees. Adept, a company started by former employees of DeepMind (an Alphabet-owned AI lab), has raised $415 million with only 37 employees. This is in stark contrast to the startups of the previous boom, such as Klarna, a Swedish payments firm that had 2,700 employees when it raised $1.2 billion, and Databricks, a database-maker with a staff of 1,700 at a similar stage.

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