Headcount at VC-backed startups has been declining, per new report from Redpoint

The overall state of startups and venture right now is kinda weird.

And, yes, on calls or conducting interviews, I actually use the phrase “kinda weird.” It’s informal and inexact, but it’s a characterization I stand behind. This market seems to be filled with contradictions and in-betweens: We’re on the right side of a bust without having yet entered a boom. Interest rates remain higher than anticipated, revealing both resilience and fragility in the ecosystem. And, depending on who you talk to, there are either too many venture dollars out there or too few, as LP pocketbooks close off. So, it tracks that, if it’s an uncertain time for founders and VCs, that would be equally (or more) true of startup employees.

“The [talent] market’s in a super weird place right now,” said Atli Thorkelsson, VP of network at Redpoint Ventures, which just published its State of Talent report.

The report includes new data that suggests that startup life has perhaps lost some of its sheen: For the first time in at least five years, overall headcount at venture-backed startups declined in 2023. It’s not that startups aren’t hiring or that people are leaving en masse, per se.

“It’s just that hiring was so slow for replacements,” Thorkelsson said.

Naturally, there is one sector exempt from this trend and you’ve almost definitely guessed what it is. AI startups “have grown headcount rapidly” since 2023, the report says. Additionally, data science and machine learning job postings were up 56% last year as a proportion of total postings—and up an additional 9.4% in Q1 of this year. Thorkelsson expects this demand to continue increasing, with a catch.

There’s a difference between “true AI talent” that can build advanced systems like LLMs, and talent that’s more AI adjacent, which can help implement AI in products or services, he said. Right now, the market is conflating these two categories, leading to misunderstandings about AI talent compensation.

“People hear about these crazy, crazy comp packages from OpenAI and Anthropic,” said Thorkelsson. “They hear about an AI engineer getting life-changing, generational money on a yearly basis...It’s really a very small segment that’s getting those things, but it's coloring how the whole market thinks about comp for AI talent.”

He expects that over time this gap will close, and normalize. As the AI hype cycle plays out today, Thorkelsson is optimistic about how next year will play out across the talent marketplace.

“I think there will be a pretty significant increase in hiring this year relative to last year,” he said. “Founders are going to do it in a much more careful way than they have in the past. We’re trying to give them options for that. How can you accelerate hiring while keeping your equity burn rate tenable?”

So, yeah, there’s a lot out there right now that’s kinda weird. But if Thorkelsson is right, there’s optimism ahead for the startup talent market, even if that optimism is far more disciplined than it might have been before.

See you tomorrow,

Allie Garfinkle
Twitter: @agarfinks
Email: alexandra.garfinkle@fortune.com
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This story was originally featured on Fortune.com