From Unicorns To Zombies: Tech Startups Run Out of Time and Money (nytimes.com) 59
After staving off collapse by cutting costs, many young tech companies are out of options, fueling a cash bonfire. From a report: WeWork raised more than $11 billion in funding as a private company. Olive AI, a health care start-up, gathered $852 million. Convoy, a freight start-up, raised $900 million. And Veev, a home construction start-up, 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 start-up 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 start-up 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 start-up that raised $150 million, said it was shutting down. Plastiq, a financial technology start-up 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 out of business 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 start-ups. 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.
It has fueled an astonishing cash bonfire. In August, Hopin, a start-up 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 start-up that raised $150 million, said it was shutting down. Plastiq, a financial technology start-up 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 out of business 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 start-ups. 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.
Very familiar... (Score:4, Insightful)
The dotCom days are back.
Where companies that had no fundamentals in a given industry thought they could power through that by being "tech" enough and surely the boring old ways of doing the respective core businesses are easy to figure out and the "tech" is something the traditional companies won't crack.
Then it turns out that the tech piece is very nice and enables great things, but it's easier for the established players to up their tech game than tech companies to up their "everything else" game.
Of course it's valuable still, the fact that those tech companies could *almost* threaten the established players despite having no credible capabilities in the core businesses told the established players just how important the tech was.
Re:Very familiar... (Score:5, Insightful)
The dotCom days are back
They never went anywhere. This what I keep going on with folks who are looking for respite in the housing market. When the dotcom shit blew, those speculators didn't just disappear into the ether, they started getting into real estate. When paper oil started going shit, they got into crypto. It's not some different group doing this shit every time, it's the same shysters that keep conning people into the latest fad. That's why folks who realize that the 21st century is the "age of the grift" are way wiser than they know.
It's not dog eat dog, that's too obvious. Top dog has the bucket and he's handing out cups with holes in them. See you think you're buying a drink but the reality is the juice just runs back to the bucket and you're out two bucks. But somehow they've got so many folks thinking this is progress.
Nah, those dotcom days and hell before that the raging Reaganomics. Nah, that's gone nowhere. Just people get wise to the scheme and so they have to set shop elsewhere. That's all Reaganomics has been, "get yours before I get mine, because there won't be anything left once I got mine." People need to understand this is the neoliberal paradise some always wanted. We're just on the bust cycle for the late comers who didn't bloom in the techbro era.
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Look, I know each user is making us -$67.51 on average, but look at the size of our user base, we'll make it up in volume!
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It's worse than just waiting for established players to up their tech game though. When private equity hands some charlatan a giant pile of cash to set on fire you risk not only that they lose money, but the interim the established players can be badly wounded or driven out of business. When the dust settles you either end up with wreckage of collapse, or a quasi or outright monopoly in the case of success. Subsidized services turn into hell for workers and jacked up prices for everyone else.
The private
Zombie companies (Score:5, Interesting)
"Zombie companies" was what these companies were called. The idea was that with boomer cohorts in their highest earning potential phase of 50-65, they were chasing every opportunity to make that extra percentage point off their investments before they retire and move to safe investments instead.
This is the current bubble, where companies didn't care about profit. They cared about "user numbers". You didn't really need income, you needed to look good for the investors. This is Enron, Subprime, ESG, etc. As more and more boomers got into that highest earning, highest profit chasing age just before retirement, investment insanity became more and more insane, allowing for companies to just straight up ignore fundamentals and just post "user numbers" or similar metrics without any explanation on how these numbers would transform into "profit" and cash in.
But now boomers are actively retiring and pulling their money from risky investments and into lower profit stable ones. That means that companies that haven't managed to become profitable can no longer secure cheap and easy funding just by showing off metrics like "user numbers". And that means that there are several sectors where companies large and small are effectively zombies. They still shamble around as if they're alive, but the moment it's their turn to get the next tranche of investor money to keep on shambling, they don't get that in the current market and collapse. Except that they were dead long before the inevitable collapse, because they were fundamentally dysfunctional and only propped by the high risk investor craze.
Re:Zombie companies (Score:4, Insightful)
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It's not just interest rates. Its general availability of the capital.
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Not at all. Investment is far more than "interest rates", because a lot of investment doesn't actually pay dividends that are tied to banks and interest rates. Especially high risk investment into startupts, specialty of IT is about investing money in expectation of getting a many times the investment as a lump sum later, not periodic returns somehow tied to key interest rates.
"(Key) interest rates" are simply a highly generalized term in macroeconomics that tries to describe general market conditions. The
Re: Zombie companies (Score:2)
Except that here in the real world, money flows away from risky assets (like startups) when interest rates rise. And throwing good money after bad (a common feature of startup investor strategies) becomes more expensive when interest rates rise.
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Not a big fan of history, are you? Historic industrial rebuild after WW2? Extremely inflationary, rates between 10% and 20%.
And investment money flowed to build up said industrial base.
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>Building up the industrial base wasn't speculative startups though was it Luckyo.
Of course it was. When you're rebuilding civilian infrastructure, you have two massive risks:
1. Building a wrong thing. Technology has moved on.
2. Overbuilding. Everyone is building the same thing.
Both materialized during the historic period I mention.
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Indeed. Most people genuinely don't seem to understand investment beyond "bank pays interest rates". VC funding for example works mostly (again, generalization for "most correct", not "all correct") like this:
VC sets up a fund with purpose of investing into a specific thing. Mineral extraction, refining capacity of that specific mineral, manufacturing of refined mineral into something, specific kind of software that runs on products from that mineral, etc, etc, etc. It goes fishing around for clients, selli
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>But somehow this "fund" isn't dependent on interest rates.
Correct. The mechanism is explained above. It's nothing new or exciting either, this method of financing existed for longer than modern banking system. I.e. it predates the whole concept of yearly interest.
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Your missing the other part of the racket (That in fairness everyone else misses too). I've noticed something working at a lot of unprofitable startups. While the company is bleeding money, investments still come in and theres a board filled with random hedge fund and pension fun advisors all earning a $200K salary from the unprofitable company to effectively turn up once a year to the AGM and nothing else.
Well its those guys who are doing the investing. And they *know* these companies wont return on the in
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Issue being is that difference between fund manager that does this and fund manager that gets out of the bubble in time is the fund manager that gets paid shit tier salary of 200k a year (in his field) and stagnate professionally, vs people get rapidly past this low mark and upper hundreds of thousands and ultimately millions a year and keep earning more every year as they progress in their careers because they're actually successful.
And if fund manager is actually stupid enough to get bribed for measly 200
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This is global and happening everywhere from PRC to Germany to US to Brazil.
All we need to do is ... (Score:4, Insightful)
So many ventures have such skeptical ideas at their foundation, and yet gather millions of dollars in funding for them.
"We will rent offices to people who can't afford an office!" Maybe they didn't need an office, but thought it would be nice?
"We will have computers doing the thinking for people if you just give us money!" Did your computer come up with that idea?
We've always had companies trying and failing to advance some idea. It's just become easier to throw lots of money at them today... and complain in a while how we were fooled about the basic idea, or otherwise didn't know it was a stupid idea at the start.
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Most ideas are sceptical until they take off. The very computer you are typing on was dismissed as a non starter even by the people who at the time were pioneering them.
Also your ideas aren't as shaky as they seem. The two examples you describe can be applied to some wildly successful companies as well. The difference is the idea of rapid expansion didn't fit with the target market category. The likes of WeWork didn't fail because the idea you listed wasn't sound, it failed because they rapidly expanded pou
Unicorns? (Score:4, Insightful)
Lots of these companies appear to have just been random ideas, designed to get funding and make their founders wealthy. There isn't anything particularly innovative or unique about most of them, aside from the apparent sales skills of the founders. Just to take three random examples from the list:
- Veev: Modular houses. Wow. As far as I know, they were first mass-marketed by Sears in 1908. I lived in a modular house in the 1970s, and I'm living in another one now. Walls built up in layers - yup, how else are you going to do it? Veev has pretty graphics, but otherwise it's hard to see anything new about their approach.
- Bird: You know bicycles? Anyone who rides one know what happens to bicycles left in public spaces, even when you try to be careful. Ok, Bird did have a new idea: toss bicycle-equivalents out in the world, and leave their care to other people. What could go wrong?
- Zeus Living: A rental agency. Huge overhead (assuming they own the houses). Regardless, competing with *lots* of established players.
Honestly, it's hard to see "Unicorn" in any of these.
Re:Unicorns? (Score:4)
Seriously, an owners house is worth more than his company now?
A company once worth $7.6 BILLION now worth $15 Million?
Someone really needs to have their books audited.
Re:Unicorns? (Score:4, Informative)
Was never "worth $7.6 BILLION", it had a projected value of $7.6B based solely on the amount of money they raised vs the percentage of the company they sold for that money. If I can sell you 1% of my "resell garbage from fast food dumpsters" business for $1B, then my company is valued at $100B though these metrics, but isn't work $1.
Re: Unicorns? (Score:2)
If you can sell garbage for a billion dollars you are worth at least a billion dollars.
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Was never "worth $7.6 BILLION", it had a projected value of $7.6B based solely on the amount of money they raised vs the percentage of the company they sold for that money. If I can sell you 1% of my "resell garbage from fast food dumpsters" business for $1B, then my company is valued at $100B though these metrics, but isn't work $1.
This is the problem with how we calculate "wealth", we don't do it on what people and companies are actually worth, rather what we pretend they are worth if they could turn everything they had into gold, I mean literally.
Same with companies and market cap, it's what a company might theoretically get bought for if everyone paid the current stock price. If Microsoft's or Amazon's highest share holders tried to liquidate 10% of the company, the stock would tank in no-time. Companies aren't worth anything ne
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Someone really needs to have their books audited.
Books, what books? It's all in crypto, bro! Dear trees are for losers.
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Actually 'walls built up in layers' is a stupid idea.
There is only 1 cost-efficient and cost-effective way to build a house and its to use insulated concrete forms.
ICF kits are dirt cheap. Concrete is dirt cheap. Resulting structure is insulated on both sides and no need to remove anything or use limited resources. The only limiting factor is waiting for concrete to dry, and the resulting house is earthquake- and hurricane proof.
Anything else is stupid and deserves to die.
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the resulting house is earthquake- and hurricane proof.
And insanely well insulated and sealed. I can't quite get behind "Anything else is stupid and deserves to die", that seems a bit short-sighted, but I'll agree that it's a very good building method.
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Isn't Veev the name of a hair removal product?
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I'm sort of glad Bird is out of the equation. I remember when they started dumping their scooters on private property, and now you got a population of people trying to carve their way on sidewalks and knocking over people (or winding up getting punched in the face when people got tired of being shoved or shoulder-checked by the scooter duded), zipping out between cars at 25 mph (they were later limited in speed, but initially the scooters were going 25-30 mph), people tossed the scooters in front of doors,
Re:Unicorns? (Score:4, Interesting)
Funny you criticise Bird's business model. They have many competitors in this space also leaving bikes out in public who are not bankrupt and doing just fine. The issue again (just like the poster above you) is not that the idea isn't fundamentally sound, it's that the company was run by morons. They were so expansion crazy that they never stopped to look at markets and decide strategically where to put their scooters. That left a lot of them unused a colossal waste of money generating no revenue. In many cases the workplace was toxic. Leadship were a bunch of clueless bros, turnover at the company was by all accounts insane, and there's even that one great story where they fired people on the spot on a Slack call which auto locked employee's laptops literally at the end of the call, except that they didn't have enough Slack licenses to get everyone on the call, they didn't correctly identify who to fire and the script they run also fired the IT staff so their own IT people were locked out and couldn't fix the problem.
Then these idiots fudged the financial numbers and when the SEC finally came knocking the company was done for.
Yet I look around and I still see shared scooters and shared bikes, not from unicorns, but from actual profitable companies not run by morons.
Change in fundamentals (Score:3)
This was expected (Score:5, Interesting)
It's well understood that silicon valley was operating under unusual circumstances for the last 20 years: really inexpensive borrowing (aka access to lots of capital) and relatively cheap labour (due to a relatively large millennial generation who graduated during an economic slump). To fund a startup you need to be able to fund growth that costs far more than your revenue can make up, so it's fundamentally a long term risky investment. There was a large cohort of investors (colloquially known as boomers) who were in the 50's looking for a place to plop down their investment money where it had a chance to grow fast before their rapidly approaching retirement. Those boomers are now at peak retirement age and are moving that capital into safer harbours. That reduces the available capital for lending to high risk investments like startups, and startups also have to compete with a whole bunch of infrastructure rebuilding that the US is trying to do because globalization just came to an end at the same time, and a lot of manufacturing is moving back to North America. Labour-wise, there are far more people retiring every year (boomers) than graduating (gen z), so the supply of cheap labour, both to build apps and to staff under-paid service industry work like Uber and delivery services is drying up, and we're also seeing a jump in manufacturing jobs due to re-shoring, which are frankly better than working in the service industry.
Everybody wants to apply some political or cultural narrative to this, but that's unnecessary to explain what's going on. Economics and demographics with a slash of world geopolitics explains everything that's happening. If you're in silicon valley, don't wait around for someone to "fix" this, because it's unfixable. Get the heck out of there and find a job in the manufacturing industry where they'll give you great benefits in some town where you can actually afford a house.
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Most manufacturing jobs are going away.
For the foreseeable future we will still need welders, electricians, and pipefitters. These are manufacturing-related jobs which are still in demand. We do also have a shortage of tool and die makers, those are manufacturing jobs, but we don't actually need all that many of those people. More than we have, but not nearly enough to employ even a significant fraction of those losing their bullshit software jobs.
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Most manufacturing jobs are going away.
For the foreseeable future we will still need welders, electricians, and pipefitters. These are manufacturing-related jobs which are still in demand. We do also have a shortage of tool and die makers, those are manufacturing jobs, but we don't actually need all that many of those people. More than we have, but not nearly enough to employ even a significant fraction of those losing their bullshit software jobs.
Manufacturing is making something of a comeback, but it's automation heavy. There will be more manufacturing-related jobs than you think, but the days of people on an assembly line are fading away. A lot of these will be construction jobs, as factories will be constantly expanding and/or renovating sections at a time to get the latest infrastructure innovations put in. But we've reached a tipping point where skilled manual labor's jobs are more secure at the factory than the office workers jobs. You'll actu
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The don't need "lots" of those people compared to the number of people who worked in the factories before.
Most of the people who worked there cannot do those jobs, and even if they can technically do them, they won't be good at them with any amount of training.
"Get into manufacturing" is now advice for only a tiny segment of the population.
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Cash bonfire? (Score:2)
I suspect a lot of that money was simply stolen, not 'burned' in the metaphorical sense of legitimate expenditures vastly exceeding expected turns. The assumption here is that products and services just didn't work out. But I think maybe a lot of tech startups are effectively scams. They've been sufficiently camouflaged to be allowed to declare bankruptcy, but they're really just grifts. How many more Elizabeth Holmes's are out there, just waiting to not get caught?
WeWork was always a scam (Score:3, Informative)
The rest of 'em are just struggling because of the rate increases. This is by design. Rate increase are designed to trigger layoffs [youtube.com]. They lower inflation by forcing you to spend less because you don't have a job or because you took a massive paycut or because your boss can force you to work unpaid overtime now (increasing per worker productivity). It's a means of reducing inflation by balancing the books on the backs of consumers.
Oh, and it doesn't work if corporations are price gouging [penncapital-star.com]
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yes and the latest idea Democrats are pushing is steal you tax dollars, redistribute them to every kid (probably citizen or otherwise but I don't know) in the form of 401k investment; which will almost certainly be some DEI focused vehicles designed to funnel money to their SiValley campaign contributors.
You are basically the poster child for the gritters here. Maybe when you stop actively supporting the leading gritters someone will care what you think of the fed.
Is WeWork stupid? (Score:2)
WeWork's whole business was real estate and commercial property prices are up. Even with the whole return to work after COVID they have valuable property.
Or you're telling me that they didn't buy anything with those $11 billion and only burdened themselves with long term leases instead. With $11 billion?
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So rising real estate prices won't have helped them in the slightest.
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Tech Startup? (Score:2)
How are an office company, a freight company, and a home construction company "tech" startups!?
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In the same way a cab company is a "tech startup".
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Lawyers, saddle up and ride... (Score:2)