Fed rate hikes will ‘hurt the generation of new tech startups’: Appian CEO

Appian CEO Matt Calkins sits down with Yahoo Finance Live to discuss using Fed interest rate hikes, recession concerns, and impacts on tech companies and layoffs within the sector.

Video Transcript

RACHELLE AKUFFO: Well, the Federal Reserve said it may need to push interest rates higher than already planned in order to combat the high inflation weighing on the economy. Our next guest shares that sentiment, even though the backdrop of rising rates is taking a toll on his industry. Joining us now is Appian CEO, Matt Calkins. Matt, thank you for joining us today. So this is a very different tone that we're seeing from a lot of other CEOs. Why are you really pushing for the Fed to do more, to be more aggressive right now?

MATT CALKINS: Oh, I think the Fed has to move in order to fight off inflation. I think inflation has been building for a year now. And it's time to take action before the genie really gets out of the bottle. So I'm cheered by the notes that we saw today. I think the Fed has the right factors in mind. And it's going to be necessary to put the economy back right.

JARED BLIKRE: And Matt, I got to tell you, this is really fascinating from somebody who's in the business that probably benefits from lower interest rates. Do you think that the path to get back to lower interest rates is to have these punishing high interest rates in the first place, something that the Fed is embarking on and maybe not fast enough, according to you?

MATT CALKINS: I think this is a necessary move. The most important thing is we get inflation under control, and particularly, the variance on inflation. If we get inflation to be at a predictable level, then the cost of spending money in the future won't be so high. And that's the most important thing for the economy. Just don't put that extra tax on people who are trying to make an investment and create something new. And so, I'm in favor of a policy that allows us to have a low cost of money in the long run. And I believe that means raising interest rates now.

RACHELLE AKUFFO: And obviously, we still have a very tight labor market, as we saw from the latest JOLTS numbers. But we are still continuing to see these layoffs in the tech sector. Do you think that helps or hurts the Fed's case when it comes to being more aggressive?

MATT CALKINS: Yeah, I think those layoffs are going to continue. There's going to be some of that. And the reason is that our industry, the technology sector, tends to be funded speculatively, which is to say that the first mover advantage is so strong. Being the first in a new market is so important that we're willing to fund a speculative enterprise to get big, even before we know that they've tested their model.

And when we do that and our session hits, then we pull back on that speculative financing. So this is going to be a hard time to get funding for speculative or unproven business models. And I think that's going to hurt this generation of new tech startups. However, it will be fine for tech startups that have already found their audience and have loyal customers. But this is just the way that the technology industry incubates its next generation. So yeah, there'll be some layoffs definitely. We're seeing that from some of our competitors, for example. And you've heard about the hiring freezes.

JARED BLIKRE: Well, and Matt, let me just expand on that. When we're talking about all these layoffs-- and it seems like they're starting first from the tech sector, not necessarily seeing it, for instance, in the restaurant sector. But is this typically what happens at this stage in the business cycle, where you see it kind of in these high growth industries that are interest rate sensitive? Are these the jobs you expect to lose first? And then where does it go from there?

MATT CALKINS: Yeah, I think it's really the speculative ones. It's not necessarily high growth because you'll have high growth plays that have still found their markets, and they're not going to need to dial back. It's the speculative plays, the funding for which is out ahead of the proven business model. That's where you'll first see it.

I've also got a little bit of worry about the way that our industry, the enterprise software industry, handles inflation. We haven't been through a bout of inflation of this size. Most businesses in the enterprise software space are new enough so that they haven't seen this. And I'm not sure that they're going to be very good at handing forward to their customers inflationary price hikes.

RACHELLE AKUFFO: And I want to ask you about something in your note. You talk about the low code industry really exploding due to the global pandemic. What do people need to know about this and, really, investment in this space?

MATT CALKINS: Low code is about facilitating change. And the last few years, change has become more important than ever. Organizations need to adopt new behaviors. And low code, being a new and faster way of making applications, is an ideal way for an organization to change its behavior. So we've risen in prominence. And we're going to be tested at this moment.

But our strategy is actually contrary to the typical recession reaction. We're building our recruiting department right now, figuring that this moment of extended labor mobility is going to be good for us. We're out there, trying to pull in some great employees who have moved from other organizations. This is an extended period of labor mobility. When you add this to what we've already been through in the recession, this is really a remarkable thing in the tech organization. And that resorting of talent is going to be good for dynamic firms.

We've also had a long time to plan for this recession. We saw it coming. I think fiscal policy showed it was going to happen. Monetary policy late last year showed it was going to happen. Even the restraints we've had on commerce and trade-- and I agree with Austan Goolsbee that those tariffs have been an enormous tax. I think you put all that together, and this was a man-made and very foreseeable recession that we're probably heading into.

And we've reacted to that by buying a process mining firm to allow our pitch to focus on efficiency, because we're expecting that that's what a recessionary buyer is going to prefer. And we're beefing up our recruiting function in order to capitalize on the higher rate of labor mobility.

JARED BLIKRE: And we've got time for one more here. I'm looking at some of your customers. You have Bayer, Sanofi, Ryder, Pandora, Santander Bank, US Food and Drug Administration, and the USDA. These are some big companies and government organizations. Got to think that there's a lot of potential for process improvements there. Just wondering what your conversations are looking like or sounding like with some of these big entities, given the environment that we're in right now.

MATT CALKINS: Well, we're very proud of our customers, first of all. And we do come from the high end of this market. So we're used to satisfying the big companies with the big demand. We have a 99% gross retention rate. So our customers are extremely loyal. And even in a recession, they're going to be looking for new ways to use our product to increase their efficiency.

So I actually think that we're going to be pretty strong, coming through a period of turbulence here. And our customers, as I say, are anxious to use our product in new ways, in this case, perhaps, to find the efficiency in their processes and to squeeze more out of every dollar they spend.

JARED BLIKRE: We have to leave it there, but Appian CEO, Matt Calkins, thank you for stopping by.