Business
After staving off collapse by cutting costs, many young tech companies are out of options, fueling a cash bonfire.
By Erin Griffith, New York Times Service
SAN FRANCISCO — WeWork raised more than $11 billion in funding as a private company. Olive AI, a health care startup, gathered $852 million. Convoy, a freight startup, raised $900 million. And Veev, a home construction startup, amassed $647 million.
In the last six weeks, they all filed for bankruptcy or shut down. They are the most recent failures in a tech startup collapse that investors say is only beginning.
After staving off mass 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 face a harsh reality: Investors are no longer interested in promises. Rather, venture capital firms are deciding which young companies are worth saving and urging others to shut down or sell.
It has fueled an astonishing cash bonfire. In August, Hopin, a startup that raised more than $1.6 billion and was once valued at $7.6 billion, sold its main business for just $15 million. Last month, Zeus Living, a real estate startup that raised $150 million, said it was shutting down. Plastiq, a financial 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 because of its low stock price. Its $7 million market capitalization 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 be braced to hear about a lot more failures,” said Jenny Lefcourt, an investor at Freestyle Capital. “The more money people got before the party ended, the longer the hangover.”
Getting a full picture of the losses is difficult since private tech companies are not required to disclose when they go under or sell. The industry’s gloom has also been masked by a boom in companies focused on artificial intelligence, which has attracted hype and funding over the last year.
But approximately 3,200 private venture-backed U.S. companies 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 was not comprehensive and probably undercounts the total because many companies go out of business quietly. It also excluded many of the largest failures that went public, such as WeWork, or that found buyers, like Hopin.
Carta, a company that provides financial services for many Silicon Valley startups, said 87 of the startups on its platform that raised at least $10 million had shut down this year as of October, twice the number for all of 2022.
This year has been “the most difficult year for startups in at least a decade,” Peter Walker, Carta’s head of insights, wrote on LinkedIn.
Venture investors say that failure is normal and that for every company that goes out of business, there is an outsize success like Facebook or Google. But as many companies that have languished for years now show signs of collapse, investors expect the losses to be more drastic because of how much cash was invested over the last decade.
From 2012 to 2022, investment in private U.S. startups ballooned eightfold to $344 billion. The flood of money was driven by low interest rates and successes in social media and mobile apps, propelling venture capital from a cottage financial industry that operated largely on one road in a Silicon Valley town to a formidable global asset class akin to hedge funds or private equity.
During that period, venture capital investing became trendy — 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 the advertising profits gushing from the likes of Facebook and Google proved elusive for the next wave of startups, which have tried untested business models like gig work, the metaverse, micromobility and cryptocurrencies.
Now some companies are choosing to shut down before they run out of cash, returning what remains to investors. Others are stuck in “zombie” mode — surviving but unable to grow.
Convoy, the freight startup that investors valued at $3.8 billion, spent the last 18 months cutting costs, laying off staff and otherwise adapting to the difficult market. It wasn’t enough.
As the company’s money ran low this year, it lined up three potential buyers, all of whom backed out. Coming so close, said Dan Lewis, Convoy’s co-founder and CEO, “was one of the hardest parts.” The company ceased operations in October. In a memo to employees, Lewis called the situation “the perfect storm.”
Such portmortem assessments, where founders announce their company is closing and reflect on lessons learned, have become common.
One entrepreneur, Ishita Arora, wrote this week that she had to “confront reality” that Dayslice, her scheduling software startup, was not attracting enough customers to satisfy investors. She returned some of the cash she had raised. Gabor Cselle, a founder of Pebble, a social media startup, wrote last month that despite feeling that he had let the community down, trying and failing was worth it. Pebble is returning a small portion of the money it had raised. “It felt like the right thing to do,” Cselle said.
Amanda Peyton was surprised by the reaction to her blog post in October about the “dread and loneliness” of shutting down her payments startup, Braid. More than 100,000 people read it, and she was flooded with messages of encouragement and gratitude from fellow entrepreneurs.
Peyton said she had once felt that the opportunity and potential for growth in software was infinite. “It’s become clear that that’s not true,” she said. “The market has a ceiling.”
Venture capital investors have taken to urging some founders to consider walking away from doomed companies, rather than waste years grinding away.
“It might be better 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.
Lefcourt of Freestyle Ventures said that so far, two of her firm’s startups had 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,’” she said.
One area that is thriving? Companies in the business of failure.
SimpleClosure, a startup that helps other startups wind 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 helping prepare legal paperwork and settling obligations to investors, vendors, customers and employees.
It was sad to see so many startups shutting down, Yona said, but it felt special to help founders find closure — both literally and figuratively — in a difficult time. And, he added, it is all part of Silicon Valley’s circle of life.
“A lot of them are already working on their next companies,” he said.
This article originally appeared in The New York Times.
