2016 tech shakeout starts with CxO exodus

Analysis The rumblings of over-priced tech stocks, made real last month in above-market share falls, have started hitting home with a series of high-profile exits this week.

Gone are Zenefits CEO Parker Conrad, Imagination Technologies CEO Hossein Yassaie, Yelp CFO Rob Krolik and Paypal CTO James Barrese. All resigned, although it has been strongly intimated in each case that the resignation was not necessarily voluntary.

And while it's not exactly new that some C-suite execs have decided to spend more time with their families, what is remarkable in these cases is that they come from established businesses facing a financial downturn. The market is clearly angling for a tech shakeout and these four may be the first signs of it.

Others are almost certainly on their way, with Yahoo CEO Marissa Mayer and Theranos CEO Elizabeth Holmes unlikely to survive 2016.

Rule breaking

Zenefits is the new kid on the block, founded just over three years ago. The health insurance brokerage became a tech darling and was valued at $4.5bn before it was one of several big-name tech stocks that was downgraded at the end of 2015. In Zenefits' case, its value fell 48 per cent.

As founder and CEO, Conrad is also symbolic of the new breed of tech CEO: all about disruption and breaking new markets – while burning through VC cash. Except, as excitement has turned to financial realities, Conrad's approach and attitude have introduced cultural problems that have started pulling the company down.

Zenefits' new CEO, its former COO David Sacks, sent a damning letter to employees announcing Conrad's exit and declaring: "The fact is that many of our internal processes, controls, and actions around compliance have been inadequate, and some decisions have just been plain wrong. As a result, Parker has resigned." In his bid to disrupt things, Conrad flouted the rules and, like Uber and other like it, has found itself up against the authorities. But while Uber tries to find ways around local taxi licensing laws, Zenefits has hit the tougher red line of state regulations surrounding health insurance brokers.

The real problem, however, is that Silicon Valley has become addicted to growth. Growth, fast growth, no, super-fast hypergrowth is the answer to everything and the great excuser of poor corporate behavior. Zenefits stopped hitting its growth targets despite breaking the rules and Conrad has been hoisted on his own petard.

New money

Meanwhile, David Sacks' old company, Paypal – where he was COO – is also in the headlights.

Its CTO, James Barrese, announced he would resign on April 1 (no April Fools it seems) in an SEC filing and be replaced by two people.

The news comes as Paypal spent millions on a Superbowl ad arguing, somewhat bluntly, that it was "new money." Having been carved off from eBay, the company hopes it can become the digital economy's new standard. But it is facing increasing competition from the old money companies that are getting up to speed on digital payments, and Paypal's technological lead starts slipping.

While the company beat expectations in its most recent filing, those expectations had been significantly lowered leading up to the results and much lower than the company had hoped for. The company's share price recovered a little from what has been a slow decline over five years, but it is still down. Another victim of the relentless message of constant growth.

Help yelp

As for Yelp, it posts its fourth loss in a row after having briefly managed a profit the previous year. CFO Rob Krolik is gone.

Yelp doesn't have anywhere to grow. It has been a staple in the market for reviews and has enormous name recognition, but again its enormous growth has slowed as people either settle down to using it or one of its many competitors.

As these tech companies start entering their third stage of existence, it all becomes about managing most effectively what they already have. The company – whose dubious efforts to make money have been the focus of a number of lawsuits – posted a fourth quarter loss of $22.2m. Its revenues were up but its operating costs rose faster. The new CFO will start putting the screws on.

Old skool

And finally, at the opposite end of the tech scale to Zenefits comes the news of Imagination Technologies' CEO Hossein Yassaie stepping down.

He's headed the company for 18 years and thrived on the exact sort of market turbulence that has brought down so many other companies. Imagination soared when Yassaie saw, long before his competitors, that the future lies in mobile graphics chips.

Since then it has done the smart thing and diversified across a range of different markets as a way to ride the peaks and troughs of the tech industry. But competition has crept in and demand for its smartphone chips has dropped off. Yassaie's departure coincided with the news that the company will report a loss for the year.

Which just goes to show: there is always a price to pay when things slow down. In Imagination's case, the slowdown was making a loss; for the new tech CEOs, the slowdown is anything that doesn't meet its wildly optimistic expectations. And there is no shortage of those sorts of companies right now.

The 2016 tech shakeout has begun in earnest. ®