From unicorns to zombies: tech startups are running out of time and money

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

In the past six weeks, they have all filed for bankruptcy or closed their doors. They are the latest failures in the collapse of a tech startup 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 brink of running out of time and money. They are confronted with a harsh reality: investors are no longer interested in promises. Instead, venture capital firms decide which young companies are worth saving and push others to close or sell.

It has sparked an astonishing 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 would close. 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 $7 million market cap is less than the value of the $22 million Miami mansion that its founder, Travis VanderZanden, purchased in 2021.

“As an industry, we all need to be prepared for many more failures,” said Jenny Lefcourt, an investor at Freestyle Capital. “The more money people got before the party ended, the longer the hangover.”

It’s difficult to get a full picture of the losses because private tech companies are not required to disclose when they go bankrupt or sell. The industry’s gloom is also masked by a boom in companies focused on artificial intelligence, which has generated hype and funding over the past year.

But about 3,200 privately backed U.S. companies have gone bankrupt this year, according to data collected for The New York Times by PitchBook, which tracks startups. These companies had raised $27.2 billion in venture capital. PitchBook said the data was not comprehensive and likely understated the total because many companies are quietly going bankrupt. It also excluded many of the biggest failures that went public, like WeWork, or 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 as of October, twice as many as in all of 2022.

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

Venture investors say that failure is normal and that for every company that goes bankrupt there is a great success, like Facebook or Google. But as many companies that have languished for years are now showing signs of collapse, investors expect losses to be more drastic given the amount of money invested over the past decade.

From 2012 to 2022, investments in private US startups increased eightfold to $344 billion. The flow of money was driven by low interest rates and the successes of social media and mobile apps, propelling venture capital from a small, largely one-way financial sector in a Silicon Valley town into a formidable global asset class on par with hedge funds or private funds. equity.

During that period, venture capital investing became trendy — even 7-Eleven and “Sesame Street” launched venture capital funds — and the number of private “unicorn” companies valued at $1 billion or more exploded from a few dozen to more than 1,000.

But the advertising profits of the likes of Facebook and Google have proven elusive to 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 close before they run out of money, returning what’s left to investors. Others are stuck in ‘zombie mode’: they survive but cannot grow. They can muddle along like this for years, investors said, but will likely struggle to raise more money.

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

As the company ran out of money this year, three potential buyers were lined up, all of whom 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, Mr. Lewis called the situation “the perfect storm.”

Such port-mortem reviews, in which founders announce that their company is closing and reflect on the lessons learned, have become common.

One entrepreneur, Ishita Arora, wrote this week that she had to “face the reality” that Dayslice, her scheduling software startup, wasn’t attracting enough customers to satisfy investors. She gave back some of the money she had raised. Gabor Cselle, founder of Pebble, a social media start-up, wrote this last month Despite the feeling that he had failed the community, trying and failing was worth it. Pebble returns a small portion of the money raised to investors, Mr. Cselle said. “It felt like the right thing to do.”

Amanda Peyton was surprised by the response to her blog post in October about the “fear and loneliness” of closing her payments company Braid. More than 100,000 people read it and she was flooded with encouraging and grateful messages from fellow entrepreneurs.

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

Venture capital investors have gently urged some founders to consider walking away from doomed companies, rather than wasting years languishing.

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

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

One area that’s flourishing? Companies going bankrupt.

SimpleClosure, a startup that helps other startups scale down operations, has barely kept up with demand since opening in September, says founder Dori Yona. The offering includes assistance with preparing legal paperwork and settling obligations to investors, vendors, customers and employees.

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

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

Kirsten Noyes research contributed.