How the tech downturn could usher in an era of ‘healthier’ innovation

Tech’s golden era may be coming to an end—but that’s not necessarily bad for all businesses, according to Azeem Azhar, a tech analyst, investor, and entrepreneur.

The past year has dealt blow after blow to the tech industry via a troublesome medley of market slowdowns, supply-chain issues, rising material costs, declining ad spend, and geopolitical uncertainty. Companies have responded with cost-cutting measures and broad-scale layoffs: More than 140,000 tech workers have lost their jobs in 2022, according to Layoffs.fyi, and companies from Alphabet to Amazon have made the decision to reallocate resources from forward-looking bets to more tried-and-true profit drivers.

But to Azhar, author of The Exponential Age: How Accelerating Technology Is Transforming Business, Politics and Society, the industry pullback may lead to a healthier environment for certain types of businesses.

“It was just never clear how many 10-minute delivery services were required, and it was never quite clear how small companies that had barely proven product-market fit could accommodate $200 million—$300 million of capital, which is what was starting to happen in the peak of it,” he told us. “So I think it actually presages a much healthier, and quite likely more innovative, period of time.”

We chatted with Azhar about the year’s most significant trends for tech and business and how those trends could play out in 2023.

This interview has been edited for length and clarity.

In your view, what were the biggest trends at the intersection of business and technology this year?

The biggest tech headline for this year has to be the sort of overexpansion of tech companies. That has been a real issue, and what we’ve seen is these really significant levels of layoffs across the Big Tech firms, which suggests that they have really been running much faster than they should have…It’s not that they’re not extremely powerful…It’s just that [there] isn’t an infinite supply of resources that they can draw on at any one time.

The second is the fact that technology really matters to nations again, in a way that it hasn’t for a really long time—and that can be seen through that lens of global technology competition. We’ve seen the Biden administration put really severe restrictions on certain advanced technologies. The impact of that…reinforces the importance of the technology sector to economies and countries as a whole. The other way that’s happened has been [through] the number of strongly proactive government programs in the US, Europe, and the UK that look like industrial policies, that support key, broad types of technology—everything from deep technology to semiconductors to climate tech. That, for me, is a second really big shift.

The third thing is that we’re seeing really fascinating activity in the AI field. If we think about breakthrough technology areas, whether blockchain, metaverse, or AI…The ones that seem to have really made good progress in terms of both innovation and diffusion have come out of the AI field, and specifically around the generative AI field. Blockchain as a sort of ecosystem has had a pretty awful year on many different levels, and the metaverse, likewise, is sort of empty for now.

What do the three pillars you mentioned mean for next year? Any predictions?

This year felt to me like it put some freshness into the AI narrative. On the one hand, you have generative AI, but you also have these really interesting breakthroughs in the intersection between AI and deep science—the next versions of [DeepMind’s] AlphaFold with protein folding, things to do with the intersection of AI with math, and just recently AI in strategic gameplay, which Meta’s research lab had come out with. Those feel like real breakthroughs that have industrial applications, and in recent years, of course, AI tools are being used much, much more extensively.

But two of the [field’s] really standout ideas—autonomous vehicles and voice assistants—have failed to get out of their “peak of inflated expectations,” as Gartner calls it, and they’re really stuck in that trough of disillusionment. It’s quite interesting. So I do think that AI for 2023 will have many more positive stories, and partly because these technologies—whether it’s generative AI, or it’s the intersection between AI and science—are actually more useful in the short- to medium-term. So they’re not making the same promises that autonomous vehicles or voice assistants were making.

[As for] the global technology competition piece, it’s like a supertanker: It’s just going to continue to build momentum. The huge chip fabs will be built. New alliances will be forged. There’ll be some response in China [as it tries] to figure out how to get around these new moves from the Biden administration. That is, again, a year where, now that the roadmap has been cast, you’ve got to think about national security, economic security, and strategic rivalry in these technology fields. It will be a year where companies will be not just adjusting, but starting to metaphorically break ground on the strategies to deliver into that new world.

How do you think other themes we saw this year—i.e., VC pullback, supply-chain issues, and inflation—play into tech’s seemingly infinite era of expansion coming to a close?

It constructs a much healthier environment for really meaningful and deeper types of types of businesses…As capital comes out of the market, what is left to fund are things that people have high conviction on. You can’t make a funding decision on the basis of momentum, on the hope that Tiger or SoftBank will come in with a really big Series C or Series D and allow you to have some kind of secondary exit and just build the momentum, and maybe a SPAC will give you liquidity quickly. What you need to do is go back and build really decent businesses with strong 10x technology at their core and the teams that can support that. In that kind of environment, you’ll get that sort of funding, but those teams need to hire more people. And they’re now not going to be competing with the overcapitalized 10-minute grocery delivery or dating app businesses—they're going to be able to compete on much more of a level playing field in the market. So I think that will result in there being better, stronger teams in these other areas.

I’m not saying that a deep correction like this—a VC pullback and layoffs and so on—is always great news. I’m saying something slightly different, which is that it will force better founders to stick with what they’re doing; it will reduce the wage pressure when they think about growing their teams; and it will force investors to think much less about momentum and much more about core differentiators and whether the technology can deliver a long-term and sustainable advantage. I think that’s probably quite a good discipline.