What do AI based layoffs say about their ability to scale?
If AI makes you twice as efficient, shouldn't you do twice as much with your current resources?
It's been a rough couple of weeks to be in a tech company. There have been widespread layoffs across many large SaaS companies.
WiseTech, Block, Atlassian and more have let go thousands of staff claiming that AI is making them significantly more efficient. I don't totally believe it's true but if it is, it sends a pretty strong message about TAM and growth.
Walking through the logic these companies are using says that thanks to AI we are now all twice as efficient (lets round to 2x for now). As a result of this new found efficiency, we will remove half our staff. This cuts costs from our bottom line and makes us more profitable.
None of the above is flawed (assuming the 2x is true). Cutting your cost base, often the biggest set of expenses, is good leverage towards profitability.
What it does say however is that these companies are hamstrung trying to double in size.
Why? Because if you take the same 2x improvement, in theory these companies should be able to double their output. If doubling their output doesn't double their revenue then they're at some sort of a ceiling.
While it shouldn't be surprising that a company can't grow forever, many of these companies are valued on the assumption that they have plenty of room left to grow.
If that assumption no longer holds true then there is a much more significant correction that needs to happen here. If Atlassian, or any of the others, is going to grow like a traditional business, its revenue multiples will need to adjust accordingly.
I think we're starting to see a little bit of this already with big downward swings in the market across technology but there still seems to be a positive market sentiment to AI layoffs. Short term, the numbers stack up, more profits today due to lower wage bills but we'll need to wait and see how those figures play out a year from now.