6 ms·

Venture-backed startups are failing at record rates

180 points by rustoo 3y ago

freitzkriesler2 3y ago
Era of easy money is over...for now. Grow the old fashioned way. It's harder and slower but at least you won't be beholden to the big bad banker or mr money bags.
- leetrout 3y ago
  it never felt "natural" to chase these big, over inflated values and exits to me.
  - malablaster 3y ago
    An appeal-to-nature fallacy is even more silly than usual when used in the context of venture capitalism.
  - lacrimacida 3y ago
    Do you think what comes next is going to be more sane?
    - mlinhares 3y ago
      For a little bit, but it will eventually devolve into the same Unicorn or bust scheme once the interest rates go low enough again.
    - linster 3y ago
      What comes next?
      - freitzkriesler2 3y ago
        Era of organic growth and modest teams.
- reilly3000 3y ago
  There’s at least a generation who haven’t experienced the old ways and really lack a mental model for it. Engineering in cash-constrained settings brings out creativity. Growth at any cost engenders numbness to reality.
xg15 3y ago
Also if this resulted in the "grow at any cost - monopolize - enshittify" playbook finally dying, I think it would in fact make the world a better place by a significant margin.
- raincole 3y ago
  It's a good strategy until everyone is doing it. Kinda like technical analysis.
  - iamacyborg 3y ago
    I don’t think technical analysis has ever been a good strategy
  - JumpinJack_Cash 3y ago
    Technical analysis only works if everyone is doing it.
  - gopher_space 3y ago
    What does technical analysis mean in this context?
- api 3y ago
  That will only die when people start seeing “free” as a negative or a red flag, especially when it’s on a highly polished piece of software or a service that costs money to run. Until then it’s impossible to bootstrap because you’ll be eaten alive by someone with funding dumping on the market.
  - phkahler 3y ago
    That will only die when people start seeing “free” as a negative or a red flag, especially when it’s on a highly polished piece of software or a service that costs money to run. August 1st Facebook shut down the servers for EchoVR, a formerly popular VR game. The announced it months ago. In the days leading up to the shutdown, people were still making fun of those who paid for optional items. You know, supported the game we were all going to miss. I said maybe if more people paid they might not shut it down. I think one kid actually had a bit of an epiphany.
tjrgergw 3y ago
You only find out who is swimming naked when the tide goes out - Warren Buffet
Banwarmintros 3y ago
This phenomenon is largely due to the inability or perhaps unwillingness of venture capitalists to identify outlier businesses. The recent generation of startup investors turned the industry into a rent-extraction scheme by chasing growth and paper markups over identifying valuable businesses. And research now shows that most of the popular heuristics VCs' use to select startups are negatively correlated with returns. One solution is simply to disendow large VC funds, and change the processes limited partners use to select investors. https://www.wired.com/story/to-save-the-innovation-economy-break-big-venture-capital/ https://www.wired.com/story/to-save-the-innovation-economy-b... https://www.theinformation.com/articles/venture-capital-isnt-the-problem-its-venture-capitalists?rc=ovijbh https://www.theinformation.com/articles/venture-capital-isnt...
- zackmorris 3y ago
  Thank you for formally describing what's been bothering me about the VC system. To me, we're living in a bizarro reality that's the opposite of the original 90s vision of the web. The idea then was that geeks living in their parents' basements could build stuff like Netscape, eBay, PayPal, etc on a shoestring budget in the low $10,000s and disrupt established monopolies/evil-corps (Microsoft at that time) in the status quo. But today that's been replaced by VC gatekeeping, so now we have to live where the "network" is, San Francisco or wherever, and rub shoulders with someone who knows a VC and has access to the millions of dollars needed to start a startup and hire programmers for $150k per year or more. Maybe we build SAAS products and need a network of salespeople too. And advertising isn't enough, now we have to find an influencer to endorse our product because merit isn't enough. This is how meritocracy becomes illusion. I mean that's cool and everything, it's fun to make money, but we're still under the yoke like any other job. The dream of real independence is all but dead. We find ourselves locked into a mature and successful model whose main product is a failure rate so high that many of us haven't had a win in our entire careers. We just try to rescue project after project, fail, and our work gets thrown away. For every winner, there are 10, 100, 1000 or more losers who tried to build the exact same thing and got beaten to the finish line. I would propose that a better system looks like the opposite of all this. Rather than putting all of our eggs in one basket with unicorns, we should be casting a wide net. I still believe that nearly every programmer would work for room and board if it meant total control of their creative vision. Small teams paying perhaps $24k or $36k per year to each developer, with enough runway to last at least 2-3 years. Focusing on getting real work done above all. And most importantly, creating a pay-it-forward culture with a broad goal like providing UBI within our lifetimes to free people from servitude. Meaning something like a tech guild where members take an oath to pay some portion of their earnings into a pot shared by everyone. 1% of a successful billion dollar exit is $10 million, enough to materially change the lives of perhaps 100-1000 other developers at $10-$100k each. Imagine what could be done with 10%, or 50%.. instead of having 1 trillionaire who owns the world with all of us becoming renters. This voluntary wealth redistribution is a soft form of (cough) socialism. The inevitable conclusion of this line of thought is that our current crony capitalist system is not compatible with a benevolent future for tech workers. Currently every innovation enriches a handful of key players at the expense of everyone else. We feel this everywhere, in the long hours, lack of pay raises, ever-increasing rents, loss of personal autonomy. And soon in our unemployment as AI solves the last challenge of computer science, programming itself. This is why I've been disappointed with HN lately, for not anticipating these eventualities. I'm saddened that it's abandoned its original vision of handing out life-changing grants to a large number of promising developers and projects. And worry now that maybe its participation in the doubling-down on winner-take-all capitalism is speeding us faster towards the looming cliff. For all of their resources, if they can't change course, I wonder if they're really who they think they are, or just another arm of the status quo. I really hope I'm wrong, because I love most of what they're doing, but I can't shake the feeling that something's off. Edit: after writing this, I realized that it's aligned with academia, where successful alumni pay into a trust/endowment whose interest/dividends pay for future students' education, even at the most exclusive schools like Harvard. NASA maybe follows this model somewhat, using government funding to invent solutions used by the public. So maybe the private sector simply can't do this, and our resources might be better invested somewhere else where they can help the collective good.
naillo 3y ago
54 sounds so little, I assumed way more VC backed companies were failing per year than that.
- mritchie712 3y ago
  This article is lazy. Not a single chart or table and they are projecting the number they're using for their headline: > At that rate, 108 VC-backed startups will fail by year’s end, besting the 95 that failed during 2010. It might not even be worse then 2010, not to mention there are more startups today then in 2010 (higher base).
dismalpedigree 3y ago
This wont change VC/PE at all. It fits right into the playbook. 1. Take on as much debt as possible. 2. Extract as much of that cash in the form of management fees as possible. 3. Flip to next phase within 3-5 years. If there is meat left on the bone, give it to another VC/PE. If not, try to IPO and leave the public and pensioners holding the bag. If its so garbage you can’t IPO then declare bankruptcy and move on to the next victim… erhm company. Yes I know PE and VC are different. However, they both follow this basic playbook with some nuances.
- jasode 3y ago
  >Yes I know PE and VC are different. However, they both follow this basic playbook No, they don't follow the same basic playbook and I think you misunderstand how different they actually are. VCs do not have their portfolio companies take on debt to pay dividends back to VCs. That's because the typical startup companies that they invest in don't have positive cashflow to service any debt payments to a bank. The banks won't lend to startups because they don't have the cashflow to pay back the debt. The startups at the early stage of VC money don't have cashflow because they don't have meaningful revenue. PE's invest in mature companies instead of startups. PE's target established companies with real revenue and cashflow. That's where the debt playbook and financial manipulation happens. VCs and PEs are the "same" in the sense that they both structured as funds with "limited partners".
  - TrackerFF 3y ago
    But it should be mentioned that lot more (VC-funded) startups are being purchased by PE firms, compared to 10-20 years ago. Which makes one wonder - how "organic" are these companies? In the sense that they can stand on their own feet, without being funded by debt throughout their whole lives.
    - fakedang 3y ago
      Because the traditional PE model of debt-fuelled dividends is not feasible anymore. Back in the day it was really feasible to issue debt on the cheap, since you'd find takers, but with equity outpacing debt in returns, that model became infeasible. After '08, my old firm (mega PE) went on a spree away from the PE play book, simply because they had the dry powder but not enough opportunities. Commercial and residential real estate, biotech, tech, etc.
lordnacho 3y ago
Why exactly is it that there seems to be only the unicorn strategy? What happened to the investor who just wants to make a few x by investing in firms that are founded by experienced people with connections in their industry? My suspicion is that a lot of agents, and that what they mostly are, simply don't know how to evaluate businesses. A unicorn strategy has some desirable properties: - You don't have to win many times. You can go years without a hit, and this is crucial in managing expectations versus customers. - You can forget all the investments that merely do OK. In fact, you can push them to try to unicorn themselves, that way when they either die or you get a unicorn. - When you find a winner, you can push the founders to take more and more money, raising ambitions to stratospheric levels. Again something that goes back to expectations management. You want to be able to say you funded Facebook. - There's a degree to which unicorn business plans depend only on risk taking. That's what you're there to do. What I mean is, there are business ideas that naturally require a huge amount of capital, and only a few groups in the world will be able to find it and try it. Other concerns are real but when capital is your main issue all the players who find it will do similar things: expand into other markets, spend heavily on tech, try to monopolize. By contrast, just making some nice businesses with a good ROI has some issues: - The fund that funds ordinary businesses needs to show results pretty soon. After all you're saying most of your shops will do fine. - Businesses that aren't burning cash like a sailor on leave need to make industry specific decisions that require specific knowledge. Not just spend a bunch of money in the hope of getting a monopoly, but spend wisely. - You need more staff to manage a bunch of businesses in a variety of industries - Some mittelstand business that's doing just fine will be totally unknown to your investors. They won't be thinking of you as "that guy who helped build that new ball bearing factory".
- pas 3y ago
  there's a "race to the bottom" problem too. if one VC starts pouring money into a sector they'll - temporarily - crowd out the small firms. hence all funds are incentivized to "go big or go home".
  - lordnacho 3y ago
    This is a good point too, more to the ecosystem. I'm not sure there will ever be a mitigation to that.
tinco 3y ago
People in the comments here are falling for the attention grabbing headline. The amount of yearly venture deals is in the thousands if not tens of thousands. That only 108 of them file for bankruptcy in any given year, means that the bankruptcy rate of VC backed companies is on the order of 1%. That means you can't make any significant statement about VC general practices based on this number, except this: Generally the math for VC's is that 25% of the companies they back fail (to return on investment). If the amount of bankruptcies is only on the order 1% that means that usually VC backed companies don't take on debt (because debt is what makes you file for bankruptcy). This makes sense since the whole idea of VC backing is that they provide you with capital when traditional banking institutions won't. The usual way for VC backed companies to fail is they either get sold for pennies on the dollar to PE or a competitor, or they wind down, fire their employees, shut down their cloud instances and either become little restaurants on the web, zombies or simply cease to be. If this statistic of bankruptcies is anything at all, it's a leading indicator that things aren't going very well for startups/scale-ups. Either they're losing revenue, or they never had enough revenue and are not getting runway extensions, or both. And that's also what this (very short 1 minute read) article is about.
- mattmaroon 3y ago
  It also leaves out how many VC funded startups there are. If more and more were funded every year, you’d expect more and more to go bankrupt every year too even if the success rate stayed constant. It is a bad article
  - fakedang 3y ago
    Honestly, in my experience (I'm not a VC but an observer - I often get passed pitch decks to either angel-invest or co-invest through my firm), most VC-backed startups are zombie companies. They may show outward progress, like hiring a lot of employees or holding/participating in conferences or showing so many new product "improvements" (that somehow seem to always be following the latest fad), but in the end, what matters is revenue, which they don't have. On the dark side, one will find dwindling revenue, enterprise contracts getting dissolved, a high attrition rate and a piss-poor management of finances. They'll have runway for years to come though, because of their cash piles, but nothing to justify the valuations they got from the flush era.
DueDilligence 3y ago
[dead]
deleted 3y ago
[deleted]
ceautery 3y ago
The math in this article is wrong. Assuming companies file for bankruptcy at the same pace throughout the year, this article is simply multiplying the number of current startup bankruptcies by 2, but it was filed on August 4, day 216 of the year. 54 * 365 / 216 = 91.25, less than the 2010 value of 95. Plus, companies tend to file for bankruptcy in the first quarter, so we should expect the value to be even less than 91 by the end of the year. I'd throw in something about FastCompany's lack of journalism, but this seems to be just a "the sky is falling" puff piece to drive engagement.
jaynate 3y ago
The more interesting metric would be the number of Vc-backed companies are sold to their next owner for less than the total amount raised.
- dehrmann 3y ago
  Or down rounds. I got an unsolicited email from a broker looking for buy shares of a company I used to work for. The offer price was below the price in 2018, but still up from the round before that. This company is a real business with real customers, is at least theoretically profitable, and I assume there's a little room to negotiate the offer price up. At the same time, the company is in a competitive space, it benefited from the crypto boom (it isn't a crypto company), and a competitor had a very disappointing IPO.
meow_mix 3y ago
Fastcompany - ahh always quality journalism on HN
tschellenbach 3y ago
This is just math, lots of companies raised at very high rates, market changes destroyed growth, they can't raise again and many can't reach profitability. The companies that can run profitably, will take over many markets.
tschellenbach 3y ago
There is a weird bias where VC doesn't seem to care much about market defensibility and unit economics. Growth is good, but companies without solid unit economics or poor defensibility can get to 100m in revenue and still not be worth anything.
pedalpete 3y ago
How many Venture backed companies fail without entering Chapter 11? I think this article is looking at the completely wrong metric, and then even still, the number is so small as to have no meaning.
iancmceachern 3y ago
It's because borrowing money isn't free anymore, investors need to see a return again. When interest rates are as low as they were it forced investors to have a different attitude than the present rate. Not being able to get more vc funds, and not getting to profitability with the funds they have, lead to this.

180 points by rustoo 3y ago

Era of easy money is over...for now. Grow the old fashioned way. It's harder and slower but at least you won't be beholden to the big bad banker or mr money bags.

leetrout 3y ago
it never felt "natural" to chase these big, over inflated values and exits to me.
- malablaster 3y ago
  An appeal-to-nature fallacy is even more silly than usual when used in the context of venture capitalism.
- lacrimacida 3y ago
  Do you think what comes next is going to be more sane?
  - mlinhares 3y ago
    For a little bit, but it will eventually devolve into the same Unicorn or bust scheme once the interest rates go low enough again.
  - linster 3y ago
    What comes next?
    - freitzkriesler2 3y ago
      Era of organic growth and modest teams.
reilly3000 3y ago
There’s at least a generation who haven’t experienced the old ways and really lack a mental model for it. Engineering in cash-constrained settings brings out creativity. Growth at any cost engenders numbness to reality.

xg15 3y ago

Also if this resulted in the "grow at any cost - monopolize - enshittify" playbook finally dying, I think it would in fact make the world a better place by a significant margin.

raincole 3y ago
It's a good strategy until everyone is doing it. Kinda like technical analysis.
- iamacyborg 3y ago
  I don’t think technical analysis has ever been a good strategy
- JumpinJack_Cash 3y ago
  Technical analysis only works if everyone is doing it.
- gopher_space 3y ago
  What does technical analysis mean in this context?
api 3y ago
That will only die when people start seeing “free” as a negative or a red flag, especially when it’s on a highly polished piece of software or a service that costs money to run. Until then it’s impossible to bootstrap because you’ll be eaten alive by someone with funding dumping on the market.
- phkahler 3y ago
  That will only die when people start seeing “free” as a negative or a red flag, especially when it’s on a highly polished piece of software or a service that costs money to run. August 1st Facebook shut down the servers for EchoVR, a formerly popular VR game. The announced it months ago. In the days leading up to the shutdown, people were still making fun of those who paid for optional items. You know, supported the game we were all going to miss. I said maybe if more people paid they might not shut it down. I think one kid actually had a bit of an epiphany.

tjrgergw 3y ago

You only find out who is swimming naked when the tide goes out - Warren Buffet

Banwarmintros 3y ago

This phenomenon is largely due to the inability or perhaps unwillingness of venture capitalists to identify outlier businesses. The recent generation of startup investors turned the industry into a rent-extraction scheme by chasing growth and paper markups over identifying valuable businesses. And research now shows that most of the popular heuristics VCs' use to select startups are negatively correlated with returns. One solution is simply to disendow large VC funds, and change the processes limited partners use to select investors. https://www.wired.com/story/to-save-the-innovation-economy-break-big-venture-capital/ https://www.wired.com/story/to-save-the-innovation-economy-b... https://www.theinformation.com/articles/venture-capital-isnt-the-problem-its-venture-capitalists?rc=ovijbh https://www.theinformation.com/articles/venture-capital-isnt...

zackmorris 3y ago
Thank you for formally describing what's been bothering me about the VC system. To me, we're living in a bizarro reality that's the opposite of the original 90s vision of the web. The idea then was that geeks living in their parents' basements could build stuff like Netscape, eBay, PayPal, etc on a shoestring budget in the low $10,000s and disrupt established monopolies/evil-corps (Microsoft at that time) in the status quo. But today that's been replaced by VC gatekeeping, so now we have to live where the "network" is, San Francisco or wherever, and rub shoulders with someone who knows a VC and has access to the millions of dollars needed to start a startup and hire programmers for $150k per year or more. Maybe we build SAAS products and need a network of salespeople too. And advertising isn't enough, now we have to find an influencer to endorse our product because merit isn't enough. This is how meritocracy becomes illusion. I mean that's cool and everything, it's fun to make money, but we're still under the yoke like any other job. The dream of real independence is all but dead. We find ourselves locked into a mature and successful model whose main product is a failure rate so high that many of us haven't had a win in our entire careers. We just try to rescue project after project, fail, and our work gets thrown away. For every winner, there are 10, 100, 1000 or more losers who tried to build the exact same thing and got beaten to the finish line. I would propose that a better system looks like the opposite of all this. Rather than putting all of our eggs in one basket with unicorns, we should be casting a wide net. I still believe that nearly every programmer would work for room and board if it meant total control of their creative vision. Small teams paying perhaps $24k or $36k per year to each developer, with enough runway to last at least 2-3 years. Focusing on getting real work done above all. And most importantly, creating a pay-it-forward culture with a broad goal like providing UBI within our lifetimes to free people from servitude. Meaning something like a tech guild where members take an oath to pay some portion of their earnings into a pot shared by everyone. 1% of a successful billion dollar exit is $10 million, enough to materially change the lives of perhaps 100-1000 other developers at $10-$100k each. Imagine what could be done with 10%, or 50%.. instead of having 1 trillionaire who owns the world with all of us becoming renters. This voluntary wealth redistribution is a soft form of (cough) socialism. The inevitable conclusion of this line of thought is that our current crony capitalist system is not compatible with a benevolent future for tech workers. Currently every innovation enriches a handful of key players at the expense of everyone else. We feel this everywhere, in the long hours, lack of pay raises, ever-increasing rents, loss of personal autonomy. And soon in our unemployment as AI solves the last challenge of computer science, programming itself. This is why I've been disappointed with HN lately, for not anticipating these eventualities. I'm saddened that it's abandoned its original vision of handing out life-changing grants to a large number of promising developers and projects. And worry now that maybe its participation in the doubling-down on winner-take-all capitalism is speeding us faster towards the looming cliff. For all of their resources, if they can't change course, I wonder if they're really who they think they are, or just another arm of the status quo. I really hope I'm wrong, because I love most of what they're doing, but I can't shake the feeling that something's off. Edit: after writing this, I realized that it's aligned with academia, where successful alumni pay into a trust/endowment whose interest/dividends pay for future students' education, even at the most exclusive schools like Harvard. NASA maybe follows this model somewhat, using government funding to invent solutions used by the public. So maybe the private sector simply can't do this, and our resources might be better invested somewhere else where they can help the collective good.

naillo 3y ago

54 sounds so little, I assumed way more VC backed companies were failing per year than that.

mritchie712 3y ago
This article is lazy. Not a single chart or table and they are projecting the number they're using for their headline: > At that rate, 108 VC-backed startups will fail by year’s end, besting the 95 that failed during 2010. It might not even be worse then 2010, not to mention there are more startups today then in 2010 (higher base).

dismalpedigree 3y ago

This wont change VC/PE at all. It fits right into the playbook. 1. Take on as much debt as possible. 2. Extract as much of that cash in the form of management fees as possible. 3. Flip to next phase within 3-5 years. If there is meat left on the bone, give it to another VC/PE. If not, try to IPO and leave the public and pensioners holding the bag. If its so garbage you can’t IPO then declare bankruptcy and move on to the next victim… erhm company. Yes I know PE and VC are different. However, they both follow this basic playbook with some nuances.

jasode 3y ago
>Yes I know PE and VC are different. However, they both follow this basic playbook No, they don't follow the same basic playbook and I think you misunderstand how different they actually are. VCs do not have their portfolio companies take on debt to pay dividends back to VCs. That's because the typical startup companies that they invest in don't have positive cashflow to service any debt payments to a bank. The banks won't lend to startups because they don't have the cashflow to pay back the debt. The startups at the early stage of VC money don't have cashflow because they don't have meaningful revenue. PE's invest in mature companies instead of startups. PE's target established companies with real revenue and cashflow. That's where the debt playbook and financial manipulation happens. VCs and PEs are the "same" in the sense that they both structured as funds with "limited partners".
- TrackerFF 3y ago
  But it should be mentioned that lot more (VC-funded) startups are being purchased by PE firms, compared to 10-20 years ago. Which makes one wonder - how "organic" are these companies? In the sense that they can stand on their own feet, without being funded by debt throughout their whole lives.
  - fakedang 3y ago
    Because the traditional PE model of debt-fuelled dividends is not feasible anymore. Back in the day it was really feasible to issue debt on the cheap, since you'd find takers, but with equity outpacing debt in returns, that model became infeasible. After '08, my old firm (mega PE) went on a spree away from the PE play book, simply because they had the dry powder but not enough opportunities. Commercial and residential real estate, biotech, tech, etc.

lordnacho 3y ago

Why exactly is it that there seems to be only the unicorn strategy? What happened to the investor who just wants to make a few x by investing in firms that are founded by experienced people with connections in their industry? My suspicion is that a lot of agents, and that what they mostly are, simply don't know how to evaluate businesses. A unicorn strategy has some desirable properties: - You don't have to win many times. You can go years without a hit, and this is crucial in managing expectations versus customers. - You can forget all the investments that merely do OK. In fact, you can push them to try to unicorn themselves, that way when they either die or you get a unicorn. - When you find a winner, you can push the founders to take more and more money, raising ambitions to stratospheric levels. Again something that goes back to expectations management. You want to be able to say you funded Facebook. - There's a degree to which unicorn business plans depend only on risk taking. That's what you're there to do. What I mean is, there are business ideas that naturally require a huge amount of capital, and only a few groups in the world will be able to find it and try it. Other concerns are real but when capital is your main issue all the players who find it will do similar things: expand into other markets, spend heavily on tech, try to monopolize. By contrast, just making some nice businesses with a good ROI has some issues: - The fund that funds ordinary businesses needs to show results pretty soon. After all you're saying most of your shops will do fine. - Businesses that aren't burning cash like a sailor on leave need to make industry specific decisions that require specific knowledge. Not just spend a bunch of money in the hope of getting a monopoly, but spend wisely. - You need more staff to manage a bunch of businesses in a variety of industries - Some mittelstand business that's doing just fine will be totally unknown to your investors. They won't be thinking of you as "that guy who helped build that new ball bearing factory".

pas 3y ago
there's a "race to the bottom" problem too. if one VC starts pouring money into a sector they'll - temporarily - crowd out the small firms. hence all funds are incentivized to "go big or go home".
- lordnacho 3y ago
  This is a good point too, more to the ecosystem. I'm not sure there will ever be a mitigation to that.

tinco 3y ago

People in the comments here are falling for the attention grabbing headline. The amount of yearly venture deals is in the thousands if not tens of thousands. That only 108 of them file for bankruptcy in any given year, means that the bankruptcy rate of VC backed companies is on the order of 1%. That means you can't make any significant statement about VC general practices based on this number, except this: Generally the math for VC's is that 25% of the companies they back fail (to return on investment). If the amount of bankruptcies is only on the order 1% that means that usually VC backed companies don't take on debt (because debt is what makes you file for bankruptcy). This makes sense since the whole idea of VC backing is that they provide you with capital when traditional banking institutions won't. The usual way for VC backed companies to fail is they either get sold for pennies on the dollar to PE or a competitor, or they wind down, fire their employees, shut down their cloud instances and either become little restaurants on the web, zombies or simply cease to be. If this statistic of bankruptcies is anything at all, it's a leading indicator that things aren't going very well for startups/scale-ups. Either they're losing revenue, or they never had enough revenue and are not getting runway extensions, or both. And that's also what this (very short 1 minute read) article is about.

mattmaroon 3y ago
It also leaves out how many VC funded startups there are. If more and more were funded every year, you’d expect more and more to go bankrupt every year too even if the success rate stayed constant. It is a bad article
- fakedang 3y ago
  Honestly, in my experience (I'm not a VC but an observer - I often get passed pitch decks to either angel-invest or co-invest through my firm), most VC-backed startups are zombie companies. They may show outward progress, like hiring a lot of employees or holding/participating in conferences or showing so many new product "improvements" (that somehow seem to always be following the latest fad), but in the end, what matters is revenue, which they don't have. On the dark side, one will find dwindling revenue, enterprise contracts getting dissolved, a high attrition rate and a piss-poor management of finances. They'll have runway for years to come though, because of their cash piles, but nothing to justify the valuations they got from the flush era.

DueDilligence 3y ago

[dead]

deleted 3y ago

[deleted]

ceautery 3y ago

The math in this article is wrong. Assuming companies file for bankruptcy at the same pace throughout the year, this article is simply multiplying the number of current startup bankruptcies by 2, but it was filed on August 4, day 216 of the year. 54 * 365 / 216 = 91.25, less than the 2010 value of 95. Plus, companies tend to file for bankruptcy in the first quarter, so we should expect the value to be even less than 91 by the end of the year. I'd throw in something about FastCompany's lack of journalism, but this seems to be just a "the sky is falling" puff piece to drive engagement.

jaynate 3y ago

The more interesting metric would be the number of Vc-backed companies are sold to their next owner for less than the total amount raised.

dehrmann 3y ago
Or down rounds. I got an unsolicited email from a broker looking for buy shares of a company I used to work for. The offer price was below the price in 2018, but still up from the round before that. This company is a real business with real customers, is at least theoretically profitable, and I assume there's a little room to negotiate the offer price up. At the same time, the company is in a competitive space, it benefited from the crypto boom (it isn't a crypto company), and a competitor had a very disappointing IPO.

meow_mix 3y ago

Fastcompany - ahh always quality journalism on HN

tschellenbach 3y ago

This is just math, lots of companies raised at very high rates, market changes destroyed growth, they can't raise again and many can't reach profitability. The companies that can run profitably, will take over many markets.

tschellenbach 3y ago

There is a weird bias where VC doesn't seem to care much about market defensibility and unit economics. Growth is good, but companies without solid unit economics or poor defensibility can get to 100m in revenue and still not be worth anything.

pedalpete 3y ago

How many Venture backed companies fail without entering Chapter 11? I think this article is looking at the completely wrong metric, and then even still, the number is so small as to have no meaning.

iancmceachern 3y ago

It's because borrowing money isn't free anymore, investors need to see a return again. When interest rates are as low as they were it forced investors to have a different attitude than the present rate. Not being able to get more vc funds, and not getting to profitability with the funds they have, lead to this.