From unicorns to zombies: tech start-ups are running out of time and money

From unicorns to zombies: tech start-ups are running out of time and money

From unicorns to zombies: tech start-ups are running out of time and money

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

In the last six weeks, they have all filed for bankruptcy or closed their doors. They are the latest failures in a collapse of tech startups that investors say is only just beginning.

After avoiding massive failure 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 faced with a harsh reality: investors are no longer interested in promises. Rather, it is venture capital firms that decide which young companies are worth saving and encourage others to close or sell.

This fueled an astonishing bonfire of cash. In August, Hopin, a startup 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, announced its closure. Plastiq, a financial technology startup that raised $226 million, filed for bankruptcy 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 cap of $7 million is less than the value of the $22 million Miami mansion that its founder, Travis VanderZanden, bought in 2021.

“As an industry, we should all prepare to hear about a lot more failures,” said Jenny Lefcourt, an investor at Freestyle Capital. “The more money people received before the party was over, the longer the hangover lasted.”

It’s difficult to get a full picture of losses because private tech companies aren’t required to disclose when they go out of business or sell. The sector’s gloom has also been masked by a boom in artificial intelligence-focused companies, which has generated much hype and funding over the past year.

But about 3,200 venture-backed U.S. companies have gone bankrupt this year, according to data compiled for The New York Times by PitchBook, which tracks start-ups. These companies had raised $27.2 billion in venture capital. PitchBook said the data was not complete and likely underestimated the total because many companies are quietly going bankrupt. It also excludes many of the bigger failures that have gone public, like WeWork, or found buyers, like Hopin.

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

This year has been “the most challenging year for startups in at least a decade,” said Peter Walker, head of analytics at Carta. wrote on Linkedin.

Venture capitalists say that failure is normal and that for every company that goes bankrupt, there is an outsized success like Facebook or Google. But with many companies that stagnated for years now showing signs of collapse, investors are expecting even more drastic losses due to the amount of cash invested over the past decade.

From 2012 to 2022, investment in private American start-ups increased eightfold, reaching $344 billion. The influx of money was fueled by low interest rates and the success of social media and mobile apps, propelling venture capital from a cottage financial industry that operated largely on a single road in one city from Silicon Valley to a formidable global asset class similar to hedge funds or private funds. equity.

During this period, venture capital investing became fashionable – even 7-Eleven and “Sesame Street” launched venture funds – and the number of privately held “unicorn” companies worth a billion dollars or more has exploded, from a few dozen to more than 1,000.

But the advertising profits generated by Facebook and Google proved elusive for the next wave of startups, which tried untested business models like gig work, the metaverse, micromobility and cryptocurrencies.

Today, some companies choose to close their doors before they run out of cash and return what’s left to investors. Others are stuck in “zombie” mode – surviving but unable to grow. They can mutter like this for years, investors said, but will likely struggle to raise more money.

Convoy, the freight startup that investors value at $3.8 billion, has spent the past 18 months cutting costs, laying off staff and adapting to the tough market. It wasn’t enough.

As the company’s funds were low this year, it identified three potential buyers, all of whom withdrew. Getting so close, said Dan Lewis, co-founder and chief executive of Convoy, “was one of the hardest parts.” The company ceased operations in October. In a memo to employees, Mr. Lewis called the situation a “perfect storm.”

Such postmortem evaluations, in which founders announce the closure of their companies and reflect on lessons learned, have become common.

An entrepreneur, Ishita Arora, wrote This week, she had to “face reality”: Dayslice, her planning software start-up, was not attracting enough customers to satisfy investors. She returned some of the money she had collected. Gabor Cselle, founder of Pebble, a social media startup, wrote last month: despite feeling like I let the community down, trying and failing was worth it. Pebble returns a small portion of the money it raised to investors, Mr. Cselle said. “It felt like it was the right thing to do.”

Amanda Peyton was surprised by the reaction to her blog post in October about “the fear and loneliness” linked to the closure of his payment start-up, Braid. More than 100,000 people read it and she was flooded with messages of encouragement and gratitude from other entrepreneurs.

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

Venture capitalists have begun gently urging some founders to consider exiting doomed companies, rather than wasting years of hard work.

“It might be better to accept reality and throw in the towel,” said venture capitalist Elad Gil. wrote in a blog post this year. He did not respond to a request for comment.

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

A booming field? Failing businesses.

SimpleClosure, a startup that helps other startups shut down their operations, has barely been able to keep up with demand since it opened in September, said Dori Yona, the founder. Its offerings include assistance in preparing legal documents and settling obligations to investors, suppliers, customers and employees.

It was sad to see so many startups close their doors, Mr. Yona said, but it was special to help founders find closure — literally and figuratively — in a difficult time. And, he added, it’s all part of the Silicon Valley circle of life.

“A lot of them are already working on their next venture,” he said.

Kirsten Noyes contributed to the research.