From Unicorns to Zombies: Tech Startups Run Out of Time and Money – The New York Times

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

In the last six weeks, they have all filed for bankruptcy or closed. They are the latest failures in a technology start-up collapse that investors say is just beginning.

After avoiding mass bankruptcies 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 decide which young companies are worth saving and pressure others to close or sell.

It has ignited an amazing cash fire. 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 had raised $150 million, announced it was closing. 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 market cap of $7 million is less than the value of the $22 million Miami mansion that its founder, Travis VanderZanden, purchased in 2021.

“As an industry, we should all prepare to hear 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 lasted.”

It’s difficult to get a complete picture of losses because private tech companies are not required to disclose when they go out of business or sell. The industry’s gloom has also been masked by a boom in artificial intelligence-focused companies that have generated buzz and money over the last year.

About 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. These companies had raised $27.2 billion in venture capital. PitchBook said the data was not comprehensive and was likely below the overall figure as many companies quietly went out of business. It also excluded many of the biggest failures that went public, such as WeWork, or that found buyers, such as Hopin.

Carta, a company that provides financial services to many Silicon Valley startups, said 87 of the startups on its platform that had raised at least $10 million had closed by October this year, twice as many like throughout 2022.

This year has been “the most difficult year for startups in at least a decade,” wrote Peter Walker, Head of Insights at Carta, on LinkedIn.

Venture investors say that failure is normal and that for every company that goes out of business, there is outsized success like Facebook or Google. But with many companies that have stagnated for years now showing signs of collapse, investors are expecting even more drastic losses due to heavy capital investment over the last decade.

From 2012 to 2022, investments in private US start-ups increased eightfold to $344 billion. The flood of money, fueled by low interest rates and success on social media and mobile apps, propelled venture capital from a small financial industry operating largely on one street in a Silicon Valley city to a formidable global asset class akin to hedge funds or private equity.

During this time, venture capital investing became all the rage — even 7-Eleven and “Sesame Street” started venture 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 companies like Facebook and Google proved out of reach for the next wave of startups, which 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 and return the rest to investors. Others are stuck in “zombie” mode – surviving but unable to grow. They could struggle like this for years, investors said, but will most likely struggle to raise more money.

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

With the company running low on cash this year, it sought out three potential buyers, all of whom backed out. Getting so close, said Dan Lewis, co-founder and CEO of Convoy, “was one of the most difficult moments.” The company suspended operations in October. In a memo to employees, Mr. Lewis called the situation “the perfect storm.”

Such autopsies, in which founders announce the closure of their company and reflect on the findings, are now common.

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

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

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

Venture capital investors have begun gently urging some founders to consider exiting doomed companies rather than waste years squandering them.

“Perhaps it is 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.

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’re trying to make it clear to the founders, ‘Hey, you don’t want to be trapped 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 run their operations, has struggled to keep up with demand since it opened in September, said Dori Yona, the founder. Its offerings include assistance in preparing legal documents and handling obligations to investors, vendors, customers and employees.

It’s sad to see so many startups close, Mr. Yona said, but there’s something special about helping founders find closure during a difficult time – both literally and figuratively. And he added that it’s all part of the Silicon Valley cycle of life.

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

Kirsten Noyes contributed to the research.