US technology startups run out of time and money – 12/07/2023 – Tech

WeWork has raised more than $11 billion in funding as a privately held company. Olive AI, a healthcare startup, raised US$852 million. Convoy, a shipping startup, raised $900 million. And Veev, a home construction startup, raised $647 million.

In the last six weeks, all of them have filed for judicial recovery, bankruptcy or closed their activities. These are the latest failures in a wave of tech startup collapses that investors say is just beginning.

After avoiding mass bankruptcy by cutting costs over the past two years, many once-promising technology companies are now on the brink of running out of time and money.

They face a harsh reality: investors are no longer interested in promises. Instead, venture capital funds are deciding which young companies are worth saving and encouraging others to close or sell.

This movement fueled an impressive cash burn. In August, Hopin, a startup that raised more than $1.6 billion and was 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 it was shutting down.

Plastiq, a finance technology startup 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 share price. Its $7 million market capitalization is less than the value of the $22 million Miami mansion its founder Travis VanderZanden bought in 2021.

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

Getting a big picture of losses is difficult since privately held technology companies are not required to disclose when they close or are sold.

Industry pessimism has also been masked by a boom in companies focused on artificial intelligence, which has attracted enthusiasm and funding over the past year.

But roughly 3,200 privately held, venture-funded technology companies in the United States have failed this year, according to data compiled for The New York Times by PitchBook, which analyzes startups.

These companies had raised $27.2 billion in venture financing. PitchBook said the data was not comprehensive and likely understated the total as many companies close quietly.

It also excluded many of the biggest flops that went public, like WeWork, or that 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 have closed this year through October, double the number for all of 2022.

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

Venture capitalists say that failure is normal and that for every company that goes out of business, there is a disproportionate success like Facebook or Google.

But as many companies that have been chugging along for years now show signs of collapse, investors expect the losses to be more drastic because of the amount of money invested over the past decade.

From 2012 to 2022, investment in privately held startups in the United States increased eightfold to $344 billion.

The flood of money was driven by low interest rates and successes in social media and apps, propelling venture capital from a small financial industry that operated mainly on a street in a Silicon Valley city to an active asset class. formidable global player, similar to hedge funds or private equity.

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

But the advertising profits gushing from companies like Facebook and Google have proven elusive to the next wave of startups, which have tried untested business models like on-demand work, the metaverse, micromobility and cryptocurrencies.

Now, some companies are choosing to close before they run out of money, returning what’s left to investors. Others are stuck in “zombie” mode—surviving but unable to grow.

Convoy, the shipping startup that investors valued at $3.8 billion, has spent the last 18 months cutting costs, laying off employees and adapting to the tough market. It was not enough.

As the company ran out of money this year, it lined up three potential buyers, but they all backed out. Getting that close, said Dan Lewis, co-founder and CEO of Convoy, “was one of the hardest parts.”

The company ceased operations in October. In a memo to employees, Lewis called the situation “the perfect storm.” Venture capital investors have encouraged some founders to consider abandoning doomed companies rather than waste years struggling in vain.

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

Lefcourt of Freestyle Ventures said that so far, two of his company’s startups have done just that, returning 50 cents on the dollar to investors. “We’re trying to show founders, ‘Hey, you don’t want to be stuck anywhere,'” she said.

An area that is thriving? Companies in the business of failure.

SimpleClosure, a startup that helps other startups shut down their operations, has barely kept up with demand since it opened in September, said Dori Yona, the founder. Their services include helping to prepare legal documents and resolve obligations to investors, suppliers, customers and employees.

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

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