4 ms·

How often are these (big) companies actually raising capital though? I presume they have plenty of free cash flow to self fund

leetnewb 4y ago
I think the better explanation is the quest for a return on spending. In a low interest rate environment, the bar to generating a return is low because the alternative is close to a 0% return. So any projects that anticipate a 1% or greater return justify the investment. In a higher interest rate environment (say 3%), the minimum threshold for return on spending suddenly made projects unviable. Big tech companies might be axing projects that no longer clear the new return hurdle, or they might be cutting heads that they anticipated would be needed for future projects that are no longer viable, or they might be inducing higher returns on existing projects by continuing with fewer people / less costs. Also something to keep in mind is that other things in the environment are changing. Facebook was hurt by Apple privacy tightening. Consumer decisions and behavior may change as a result of widespread job cuts and higher borrowing costs. And politicians are ramping up pressure on the sector. Lastly, for better or worse, investing in headcount is more forgiving than investing in heavy capital equipment because companies can make large scale job cuts relatively easily. It's easy to be upset about the downside, but the upside is that some large proportion of the time between economic cycles, large profitable tech companies might be willing to add headcount that isn't absolutely required.
twelve40 4y ago
I sometimes get to talk to a founder CEO of a very successful fintech unicorn, recently public. They are doing pretty well so far (little affected by tech stock rout). He's pretty obsessive about what "investors" (i'm assuming public share holders by now) think and what they tell him. I was surprised because I wouldn't think that a public, seemingly independent money-maker would be paying so much attention to what a bunch of people effectively outside of the business say. So while there is no need for a company with cash flow to raise money VC-style, I think they pay a lot of attention to how "investors have changed how they’re evaluating companies" for reasons like: having to struggle with the board and the largest shareholders (all the way up to the board firing the CEO if need be), potential activist investors picking up fights with something they dislike, or even a random outside analyst (or several) publishing a crappy outlook. Some of those seem tangential to the business, because CEO is closer to the operations and often knows better, yet it seems to be a factor.

leetnewb 4y ago

I think the better explanation is the quest for a return on spending. In a low interest rate environment, the bar to generating a return is low because the alternative is close to a 0% return. So any projects that anticipate a 1% or greater return justify the investment. In a higher interest rate environment (say 3%), the minimum threshold for return on spending suddenly made projects unviable. Big tech companies might be axing projects that no longer clear the new return hurdle, or they might be cutting heads that they anticipated would be needed for future projects that are no longer viable, or they might be inducing higher returns on existing projects by continuing with fewer people / less costs. Also something to keep in mind is that other things in the environment are changing. Facebook was hurt by Apple privacy tightening. Consumer decisions and behavior may change as a result of widespread job cuts and higher borrowing costs. And politicians are ramping up pressure on the sector. Lastly, for better or worse, investing in headcount is more forgiving than investing in heavy capital equipment because companies can make large scale job cuts relatively easily. It's easy to be upset about the downside, but the upside is that some large proportion of the time between economic cycles, large profitable tech companies might be willing to add headcount that isn't absolutely required.

twelve40 4y ago

I sometimes get to talk to a founder CEO of a very successful fintech unicorn, recently public. They are doing pretty well so far (little affected by tech stock rout). He's pretty obsessive about what "investors" (i'm assuming public share holders by now) think and what they tell him. I was surprised because I wouldn't think that a public, seemingly independent money-maker would be paying so much attention to what a bunch of people effectively outside of the business say. So while there is no need for a company with cash flow to raise money VC-style, I think they pay a lot of attention to how "investors have changed how they’re evaluating companies" for reasons like: having to struggle with the board and the largest shareholders (all the way up to the board firing the CEO if need be), potential activist investors picking up fights with something they dislike, or even a random outside analyst (or several) publishing a crappy outlook. Some of those seem tangential to the business, because CEO is closer to the operations and often knows better, yet it seems to be a factor.