Silicon Valley began the new year back in its wheelhouse, showcasing the toys and tech of the future. The 2023 Consumer Electronics Show staged its first full-scale exhibition in three years, bringing 100,000 people to Las Vegas in January to marvel at $1,100 VR headsets and a BMW with an AR windshield. After the gut punch of 2022, the sector needed some good vibes and cool gadgets.

The tech industry became tense last year – as an industry accustomed to persistent growth met a harsh reality. For the first time since the dot-com crash 20 years ago, the sector is confronting significant job losses, crashing stock prices, and a headwind that could last into 2023.

The anxiety was palpable, even as the overall U.S. unemployment rate eased to 3.5 percent in December. Tech companies laid off more than 150,000 employees, the Nasdaq Composite fell 32 percent, and Bitcoin led a crypto collapse. The new year brought more worries, with Amazon announcing more than 18,000 layoffs, Salesforce cutting 10 percent of its workforce, and the FTX scandal resonating in the Bahamas. 

The Atlantic called the moment a “reckoning” for Silicon Valley, which scaled so fast that it became bloated. That said, how can Silicon Valley learn from its recent woes heading into a crucial 2023? The answers require some context. 

Tech’s Unsustainable Growth Rate

In a letter to employees announcing job cuts, Salesforce CEO Marc Benioff distilled Silicon Valley’s reckoning into a sentence: As our revenue accelerated through the pandemic, we hired too many people leading into this economic downturn we’re now facing, and I take responsibility for that.”

Tech companies grew voraciously in 2020-21, as people went online for everything: work, school, health care, shopping, entertainment, and even socializing. Companies once focused on being agile and innovative took these cues to scale at a pace unseen since the dot-com bubble of the late 1990s; they simply hired too many people.

“The growth rate that they experienced, whether hardware, software, e-commerce, healthcare apps, fintech, crypto — you name it — was completely unsustainable,” said Saikat Chaudhuri,  faculty director of the Management, Entrepreneurship, & Technology Program at the University of California, Berkeley.

The 2022 economic downturn struck tech especially hard, as did rising interest rates and society’s re-normalization. People went outside again, leaving their computers and prompting investors to reconsider their investment in digital products. The billion-dollar unicorn valuations in tech flattened, and CEOs quickly tightened spending.

They also did something else. Despite their reputations as innovators, tech titans can be followers. Stanford business professor Jeffrey Pfeffer attributed Silicon Valley’s layoff binge partly to “copycat behavior:” 

“Could there be a tech recession? Yes. Was there a bubble in valuations? Absolutely. Did Meta overhire? Probably. But is that why they are laying people off? Of course not,” Pfeffer said. “Meta has plenty of money. These companies are all making money. They are doing it because other companies are doing it.”

Keys to a Tech Recovery

Experts believe tech will rebound because it represents a huge societal and economic force — and, frankly, it has recovered before. The Bureau of Labor Statistics still predicts hefty job growth in fields such as information security (35 percent by 2031), software development (26 percent), and computer science (21 percent). Meanwhile, Gartner forecasts worldwide IT spending to increase 5.1 percent in 2023, calling it “recession-proof.”

Gartner further identified a series of strategic technology trends beyond cost savings. Among these trends are three innovation sectors in which organizations should consider investing:

  • The metaverse, which will operate with a virtual economy in a 3D digital space
  • Superapps, which blend the features of apps and platforms into a broad, constantly updating ecosystem
  • Adaptive AI, which companies will use to deliver feedback in real-time with ever-changing data

One more fundamental to watch is sustainability. At CES, companies introduced more tech-based solutions to the world’s climate challenges. Many of these ideas focused on cleantech and green tech, such as the electric hydrofoil boat. Experts now want the sector to turn the sustainability concept inward.

Companies that accelerated hiring in 2020 and laid off those employees in 2022 may ultimately re-hire them again at higher salaries. It’s an unsustainable loop. Instead, Chaudhuri suggested, companies should stop chasing scale and use this time to reset:

“While I recognize that layoffs are painful for many people right now, the industry as a whole needs this adjustment to bring us to a path of more sustainable economic growth in tech,” Chaudhuri said, “because what was happening, especially with hiring over the last few years, was just completely unrealistic.”