Monday, May 20

From unicorns to zombies: tech startups are strapped for time and money

WeWork has raised more than $11 billion in funding as a private company. Olive AI, a healthcare startup, raised $852 million. Convoy, a freight startup, raised $900 million. And Veev, a homebuilding start-up, has amassed $647 million.

In the last six weeks, they have all declared bankruptcy or closed. They are the latest failures in the collapse of a technology start-up that investors say is just getting started.

After avoiding mass bankruptcy by cutting costs over the past two years, many once-promising tech companies are now on the verge of running out of time and money. They are facing a harsh reality: investors are no longer interested in promises. Rather, venture capital firms are deciding which young companies are worth saving and pushing others to close or sell.

It fueled an astonishing bonfire of money. In August, Hopin, a start-up that raised more than $1.6 billion and was once valued at $7.6 billion, sold its core business for just $15 million. Last month, Zeus Living, a real estate startup that raised $150 million, said it would close its doors. Plastiq, a financial technology start-up that raised $226 million, went bankrupt in May. In September, Bird, a scooter company that raised $776 million, was delisted from the New York Stock Exchange due to its low stock price. Its market capitalization of $7 million is less than the value of the $22 million Miami mansion that its founder, Travis VanderZanden, purchased in 2021.

“As an industry we should all be ready to hear about many more failures,” said Jenny Lefcourt, an investor at Freestyle Capital. “The more money people made before the party was over, the longer the hangover would be.”

Getting a full picture of losses is difficult because private technology companies are not required to disclose when they go out of business or sell. The industry’s depression has also been masked by a boom in AI-focused companies, which has attracted publicity and funding over the past year.

But about 3,200 U.S. companies backed by private venture capital have gone out of business this year, according to data compiled for the New York Times by PitchBook, which tracks startups. Those companies had raised $27.2 billion in venture funding. PitchBook said the data is not complete and likely undercounts the total because many companies quietly go out of business. It also excluded many of the biggest failures that have gone public, like WeWork, or found buyers, like Hopin.

Carta, a company that provides financial services to many Silicon Valley startups, said 87 of the startups on its platform that raised at least $10 million had closed their doors this year as of October, double of the entire 2022 number.

This year has been “the toughest year for start-ups in at least a decade,” Peter Walker, Carta’s head of insights, wrote on LinkedIn.

Venture capital investors say that failure is normal and that for every company that fails there is a huge success like Facebook or Google. But as many companies that have languished for years show signs of collapse, investors expect losses to be more drastic due to the amount of money invested over the past decade.

From 2012 to 2022, investment in private US startups increased eightfold to $344 billion. The flood of money was fueled by low interest rates and the success of social media and mobile apps, pushing venture capital from a cottage industry that operated largely on one street in a Silicon Valley city to one formidable global asset class similar to hedge funds or private funds. equity.

During that period, venture capital investing became fashionable — even 7-Eleven and “Sesame Street” launched venture funds — and the number of private “unicorn” companies worth $1 billion or more exploded from a few dozen to more than 1,000.

But advertising profits from the likes of Facebook and Google proved elusive to the next wave of start-ups, which tried untested business models like gig work, the metaverse, micromobility and cryptocurrencies.

Now some companies are choosing to close before they run out of cash, returning what’s left to investors. Others are stuck in “zombie” mode: surviving but unable to thrive. They can go on like this for years, investors said, but will most likely have trouble raising more money.

Convoy, the freight start-up valued by investors at $3.8 billion, has spent the last 18 months cutting costs, laying off staff and otherwise adapting to the challenging market. It wasn’t enough.

As the company’s money was tight this year, three potential buyers lined up, all of whom backed out. Getting this close, said Dan Lewis, co-founder and CEO of Convoy, “was one of the hardest parts.” The company went out of business in October. In a memo to employees, Lewis called the situation “the perfect storm.”

Such post-mortem evaluations, in which founders announce their company’s closure and reflect on lessons learned, have become common.

An entrepreneur, Ishita Arora, he wrote this week he had to “confront the reality” that Dayslice, his scheduling software startup, wasn’t attracting enough customers to satisfy investors. He returned part of the money raised. Gabor Cselle, a founder of Pebble, a social media start-up, wrote last month that while he felt he had let the community down, it was worth trying and failing. Pebble is returning a small portion of the money raised to investors, Cselle said. “It seemed like the right thing to do.”

Amanda Peyton was surprised by the reaction to her October blog post about the “terror and loneliness” of closing her payments start-up, Braid. More than 100,000 people read it, and she was inundated with messages of encouragement and gratitude from other entrepreneurs.

Ms. Peyton said she felt like the opportunities and potential for growth in software were endless. “It’s now clear that’s not true,” she said. “The market has a ceiling.”

Venture capital investors have begun gently urging some founders to consider walking away from failing companies, rather than wasting years grinding away.

“It may be best to accept reality and throw in the towel,” Elad Gil, a venture capital investor, wrote in a blog post this year. He did not respond to a request for comment.

Ms. Lefcourt of Freestyle Ventures said two of her company’s startups so far have done exactly that, returning 50 cents on the dollar to investors. “We’re trying to point out to the founders, ‘Hey, you don’t want to be trapped in no man’s land,’” she said.

A thriving sector? Companies in the business of bankruptcy.

SimpleClosure, a start-up that helps other start-ups close their businesses, has barely kept up with demand since it opened in September, said Dori Yona, the founder. Its offerings include assistance in preparing legal documents and resolving obligations to investors, suppliers, customers and employees.

It was sad to see so many startups close, Yona said, but it was special to help founders find closure – both literally and figuratively – in a difficult time. And, she added, it’s all part of the life cycle of Silicon Valley.

“Many of them are already working on their next companies,” he said.

Kirsten Noyes contributed to the research.