by WeWork 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 new home construction company, raked in $647 million.
In the last six weeks, everyone has filed for bankruptcy or gone out of business. They are the latest failures in a collapse of tech startups that investors say is just beginning.
After avoiding massive failures 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 close or sell.
It has 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, said it was closing. Plastiq, a fintech 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, owns. 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 full picture of losses is difficult, since private technology companies are not required to disclose when they close or sell. The industry’s pessimism has also been masked by a boom in companies focused on artificial intelligence, which has attracted publicity and funding over the past year.
But about 3,200 privately-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 complete and likely understates the total because many businesses are quietly closing. It also excluded many of the biggest bankruptcies that went public, like WeWork, or 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 closed this year in October, double the number in all of 2022.
This year has been “the toughest year for startups in at least a decade,” said Peter Walker, head of insights at Carta, wrote on Linkedin.
Venture investors say that failure is normal and that for every company that closes, there is a huge success, like Facebook or Google. But as many companies that have languished for years now show signs of collapse, investors expect losses to be more drastic given the amount of cash invested over the past decade.
From 2012 to 2022, investment in US private startups grew eight-fold to $344 billion. The rush of money was fueled by low interest rates and successes in social media and mobile apps, driving venture capital from a cottage financial industry that largely operated on a highway in a Silicon Valley town. to a 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 skyrocketed. from a few dozen to more than 1,000.
But the advertising profits flowing from companies like Facebook and Google have proven elusive for the next wave of startups, which have tested unproven 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: they survive but cannot grow. They can get by for years, investors said, but they will most likely struggle to raise more money.
Convoy, the freight startup that investors valued at $3.8 billion, has spent the past 18 months cutting costs, laying off staff and adapting to the tough market. It was not enough.
As the company’s money ran out this year, it lined up three potential buyers, all of whom backed out. Getting this 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.”
These types of post-mortem evaluations, in which founders announce that their company is closing and reflect on the lessons learned, have become common.
A businesswoman, Ishita Arora, wrote This week he had to “face the reality” that Dayslice, his new scheduling software company, was not attracting enough customers to satisfy investors. He returned some of the money he had raised. Gabor Cselle, founder of Pebble, a social media startup, wrote last month that although Feeling like I had let the community down, trying and failing was worth it. Pebble is returning a small portion of the money it had raised to investors, Cselle said. “It seemed like the right thing to do.”
Amanda Peyton was surprised by the reaction to her blog post in October about the “fear and loneliness” of closing his new payments company, Braid. More than 100,000 people read it and she was inundated with messages of encouragement and gratitude from other business owners.
Peyton said he once felt like the opportunity and growth potential in software was endless. “It has become clear that that is not true,” she said. “The market has a ceiling.”
Venture capitalists have gently urged some founders to consider walking away from doomed companies rather than waste years working.
“Maybe it would be better to accept reality and throw in the towel,” said Elad Gil, a venture capital investor. wrote in a blog post this year. She did not respond to a request for comment.
Ms 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 signal to founders: ‘Hey, you don’t want to get stuck in no man’s land,'” she said.
An area that is thriving? Companies in the business of failure.
SimpleClosure, a startup that helps other startups go out of business, has barely been able to keep up with demand since it opened in September, said Dori Yona, its founder. Their offerings include helping to prepare legal paperwork and settle 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 he added that this is all part of the circle of life in Silicon Valley.
“Many of them are already working on their next companies,” he said.
Kirsten Noyes contributed to the research.
