From unicorns to zombies: Tech start-ups run out of time and money

WeWork raised more than $11 billion in funding as a private company. Olive AI, a health care start-up, raised $852 million. Convoy, a cargo startup, raised $900 million. Weave, a home-building startup, raised $647 million.

In the past six weeks, they all filed for bankruptcy or shutdown. Those failures are the latest in what investors say is the beginning of a tech start-up collapse.

After staving off mass failure by cutting costs over the past two years, many once-promising tech companies are now on the brink of losing time and money. They face a harsh reality: Investors are no longer interested in promises. Instead, venture capital firms decide which young companies are worth saving and urge others to close or sell.

It has ignited an astonishing cash bonfire. In August, Hoppin, a startup that had raised more than $1.6 billion and was once valued at $7.6 billion, sold its core business for just $15 million. Last month, real estate start-up Zeus Living said it had closed after raising $150 million. Plastics, a fintech startup that had raised $226 million, filed for bankruptcy in May. In September, scooter company Bird, which had raised $776 million, was delisted from the New York Stock Exchange due to its low share price. Its $7 million market cap is less than the $22 million Miami mansion worth its founder, Travis VanderSanden. bought In 2021.

“As an industry we all have to hear about a lot more failures,” says Jenny Lefcourt, an investor at Freestyle Capital. “No matter how much money people get before the party is over, the hangover is long.”

It’s difficult to get a full picture of losses since private tech companies aren’t required to disclose when they go out of business or sell. The industry’s gloom has been overshadowed by a boom in artificial intelligence-focused companies that have attracted hype and funding over the past year.

See also  JP Morgan CEO Jamie Dimon: Fed's Jerome Powell may raise rates

But roughly 3,200 private venture-backed U.S. companies have gone out of business this year, according to data compiled by The New York Times through Pitchbook, which tracks start-ups. Those companies raised $27.2 billion in venture capital. PitchBook said the data isn’t comprehensive and the total number could be reduced because many companies are quietly going out of business. It also excluded some of the biggest failures that went public, like WeWork, or found buyers like Hopin.

Garda, a company that provides financial services to many Silicon Valley start-ups, said 87 start-ups that had raised at least $10 million on its platform had closed as of October this year, double the number for 2022.

This year has been “the most difficult year for start-ups in at least a decade,” said Peter Walker, Garda’s head of insights. wrote There is LinkedIn.

Venture capitalists say that failure is normal, and that for every company that goes out of business, there is an overachiever like Facebook or Google. But many companies that have languished for years are now showing signs of collapse, and investors expect the losses to be even steeper given how much money has been invested over the past decade.

From 2012 to 2022, investment in private US start-ups will increase eightfold to $344 billion. The flood of money, driven by low interest rates and the success of social media and mobile apps, has spurred venture capital from a cottage finance industry that has moved down a road from Silicon Valley town to a formidable global asset class such as hedge funds or private equity. Stock.

See also  US stocks fall, oil rises on Middle East conflict

During that period, venture capital investing became trendy β€” even 7-Eleven and “Sesame Street” launched venture funds β€” and the number of private “unicorn” companies valued at $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 for the next wave of start-ups that tried untested business models like gig work, metaverses, micromobility and cryptocurrencies.

Now some companies choose to close before they run out of money and return what’s left to investors. Others are stuck in “zombie” mode – unable to survive but thrive. They could mess around for years, investors said, but would struggle to raise more money.

Convoy, the freight-forwarding startup valued at $3.8 billion by investors, has spent the past 18 months cutting costs, laying off employees and adapting to a tougher market. That’s not enough.

As the company ran out of cash this year, it lined up three potential buyers, all of whom backed out. Getting that close, said Don Lewis, Conway’s co-founder and chief executive, is “one of the hardest parts.” The company ceased operations in October. In a note to staff, Mr. Lewis called the situation a “perfect storm.”

Such post-mortem evaluations have become common as founders announce the closure of their company and reflect on lessons learned.

An entrepreneur, Ishita Arora, wrote This week, Dayslice had to “face the reality” that its scheduling software startup wasn’t attracting enough customers to satisfy investors. She returned some of the money she raised. Gabor Cselle, founder of social media startup Pebble, wrote last month Although The feeling that he has let society down is worth trying and failing. Pebble returns a small portion of the money it raises to investors, Mr. Cecil said. “It just felt like the right thing to do.”

See also  Biden to meet NATO leaders on eastern flank amid Russia concerns

Amanda Peyton was surprised by the reaction to her Blog In October, he shut down his payments start-up, Brad, over “fear and loneliness”. More than 100,000 people read it, and he was inundated with messages of encouragement and gratitude from fellow entrepreneurs.

Ms Peyton said she once felt that the scope and potential for software development was limitless. “It became clear that was not true,” he said. “There is a ceiling on the market.”

Venture capital investors are gently urging some founders to consider walking away from doomed companies rather than waste years.

Elad Gil, a venture capital investor, says, β€œIt’s better to accept the truth and sweep it up. wrote In a blog post this year. He did not respond to a request for comment.

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

A growing area? Companies in business fail.

Simple Closure, a start-up that helps other startups scale back their operations, has been unable to keep up with demand since it opened in September, founder Tori Yona said. Its offerings include assisting in the preparation of legal documents and settling obligations for investors, vendors, customers and employees.

It was sad to see so many start-ups shut down, but Mr. Jonah said. And, all these are part of the circle of life of Silicon Valley.

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

Kirsten Noyes Research contributed.

Leave a Reply

Your email address will not be published. Required fields are marked *