Venture-backed startups are failing at record rates
fastcompany.com
fastcompany.com
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.
It is a bad article
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.
This is true, but taking on debt, as in, borrowing money, is not the only way to end up with more debts than you can pay. For example, I worked at a startup which ended up having a bunch of debts to retailers, because they sold physical product via retailers and retailers always put the risk on the vendor.
Of course, your typical SAAS won't end up there, but VCs do fund other business models.
A lot of those companies are excluded from the data:
public companies or private companies with public debt where either assets or liabilities at the time of bankruptcy filing are greater than or equal to $2 million or to private companies where either assets or liabilities at the time of bankruptcy filing are greater than or equal to $10 million.
https://www.spglobal.com/marketintelligence/en/news-insights...
So if you get a loan and fail, and the business isn't worth taking over by the creditors to operate or sell, you wind down, fire employees, shut down the cloud instances, sell off the furniture. If The VC's investment terms allow for a clawback of capital, the exact same thing happens but we don't call it a bankruptcy, they just don't lose their full investment and the bankruptcy stats look great.
Until then it’s impossible to bootstrap because you’ll be eaten alive by someone with funding dumping on the market.
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.
I've seen some other games too where people felt compelled to throw money at them because they feared that otherwise development would be halted and the servers shut down, and it has always been indicative of a game in a bad state (since it typically means that the players are seeing the player count on Steam etc and realizing that the game is likely financially unsustainable).
There are a lot of things I don't buy (both online and off) because I'm not willing to pay what they're sold for--which may or may not be what they cost. I don't have an unlimited pile of money.
And most things end eventually although if they're commoditized enough they may end up continuing to be offered by somebody/somebodies at some price.
My point was that people not only don't pay if they don't have to, they ridicule those who do, even while enjoying the benefit provided by those who do. It's a weird disconnect rooted in selfishness.
I’m quite happy with the products where you just directly pay them and receive a service. Fastmail monatizes their users and doesn’t have to do it in a shitty way.
Which by and large doesn't work but staves off the inevitable for a while.
A lot of news has been in this boat for a while. More obnoxious patterns trying to get you to subscribe. More ads. While cutting staff to the bone and more. (And that's not even VCs for the most part.)
A lot of things that people want, not enough are willing to actually pay for.
Except in a capitalistic system, owners will not be satisfied with ANY price because the number has to keep going up.
<https://www.theatlantic.com/magazine/archive/2021/11/alden-g...>
<https://www.nytimes.com/2023/07/11/business/media/maine-news...>
I’m the same way, but we’re a strong minority of users. I love that I can simply pay for YouTube Premium and not have ads, but that’s generally not a workable business model for many types of tech companies. In fact, I’m a bit surprised Google hasn’t done away with that yet, because I worked at a different tech company that frequently assessed the feasibility of subscription payments vs ad revenue, and the math just never worked out. There simply aren’t enough people willing to pay an amount that would offset the ad revenue loss. It’s the difference between stated preference and observed preference in consumer behavior.
Why?
I'm not sure about that, either way. I feel like I've seen cases where this is true, and cases where it isn't.
For YouTube, for example, I'd guess this could be true, now. It depends on hours and type of content watched, yes? While the charge to advertisers per ad impression is very low, and low enough for click-throughs / other categories that might be considered 'hits' in advertisers' search for customers*, it is presumably carefully metered to ensure solidly net positive "monies"** to Google. YouTube premium is billed at a flat rate - hence, its worth likely varies rather inversely by "hours watched" as compared to ad-supported viewing, right? I.e., the best "premium" customer, strictly from the POV of max direct revenue / profit should be one who pays and doesn't watch even a second of YouTube content in a given month.
Obviously, I'm simplifying all of this a bit, and, also, not really getting to the point efficiently - Sunday morning blah blah. So, to wrap, it's all about distributions. Oftentimes, when companies introduce plans like "premium", the heaviest users immediately sign up. The distribution is often heavily skewed, initially. Over time, "non-addicts" and such do accrete ... distribution shifts a bit. That's basically why it's not so clear to me - on the one hand, YT premium charges quite a lot, AFAIK, compared to $ / ad ... but, at some number of hours viewed, that stat flips. I.e., YT makes less money (directly, at least) from Premium. Now, that's probably a quite high # of hours. But, I just have no sense of what it might be and what the metrics look like.
And, ultimately, this ended up also being a long-winded way of saying my brain still isn't fully online and I'm too dull / lazy to try and pull up Google's / Alphabet's 10-Ks etc. ... but not too dull / lazy to let the world read a big ol' pile of words! Ugh... Almost as bad as drunk texting.....
* I.e., "more money" - https://youtu.be/aN8wxQDqfRk
The whole idea Doctorow was pointing at is that startups could use massive amounts of VC funding to attract a large base of users, often by dumping their services on the market in order to kill competitors (what was once rebranded "blitzscaling" so we wouldn't notice it was at its core an illegal business practice).
Then, once that user base was attached (and ideally stuck due to barriers like network effects or the lack of any viable competitors in the space), you start milking them by "enshittifying" the service.
But if VC money becomes more scarce, that stops working. Companies will have to generate revenue much earlier, and compete on quality of service instead of who can raise the largest VC war chest to subsidize their operations. And they won't be able to wait until that user base is built and attached before they start monetizing. They'll have to create a revenue generating service that's also good to the user because otherwise the users just won't show up.
For the existing services? Yup, you're right, the masks will start to come off (and in many cases already have).
But long-term I would expect a much healthier internet to emerge.
That's what is missing in these cases
one that I dont listen to
I’ve only seen that word on Hackernews
How are you all influenced to repeat that word? Which “thought leader” hooked you?
its surprising how the data brokers haven't gotten me stuck in this algorithm based echo chamber. Its like his works must get shared around FAANG company chats, or a mailing list that all YC applicants get subscribed to out of prerequisite.
I was never into Boing Boing but it was really shared a lot back in the day.
I would say its a very niche group thats out of touch, but actually maybe Cory is on to something modern, he needed to become relevant to everyone that wasn't still reporting capital loss carryovers from 1999
mission accomplished
Not quite the John Brunner of the late 90s but in the same neighborhood.
does it seem sensible to go around asking crowds why you should care about trends?
if you get it, fine; join up.
if you don't get it, fine; you're not going to conform to that one, brag about it to your friends.
the third option, your option, of trying to convince the crowd that the trend is stupid/ridiculous/worthless/whatever is ineffective and perceived as kind of an anti-social contrarian thing to do by a lot of people.
for what it's worth , I hate the phrase too. I think it takes impact away from the actual vulgar word, and it reduces the impact of all vulgarity all together by foisting the word into the common language lexicon, but it's a trend and chances are good that it'll be gone by tomorrow.
Cory Doctorow is a pretty decent fiction writer, he's worked with wired, he's worked with the FSF/GNU/EFF in the past, has spoken publicly about a lot of perceived 'issues' that are somehow related to 'tech' as a sector and has been extraordinarily visible to the tech crowds within the United States and likely the rest of the English speaking world.
When my gut instinct says “people 30 years older than me acting like children specifically because they found someone to validate their yelling at clouds” and thats…. exactly what it is? and the only reason I see that word only here?
I feel like thats out of character for hackernews, unsubstantive except for being relatable to the moderation here as well
The fact that it is an extremely stupid word only serves to make it more valuable proof.
Aristotle complained about some dude corning the market in Olive Presses back in 300ish BC.
I wouldn't bet on humans changing any time soon.
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".
That exists but then on average you'll be losing money due to the normally expected rate of failure. That can still be a valid strategy, but then you're just not in it for the money, but for the social impact. And some of these funds, once they get good at it do turn into serious moneymakers which in turn allows them to go for the evergreen strategy. This is the holy grail for social impact investing. A good example of such a fund is GIMV from Belgium, but there are many more.
Only if you cannot actually deliver on the promise of being a good investor. If you knew how to pick businesses you'd get fewer failures and more winners.
Now baseball is shifting away from moneyball back to base hitters because they made their product super boring and stale. I think enshittification is a similar process in Silicon Valley, which might cause investors to have to look at more “base hitters” and not count on unicorn home runs
There are plenty of those firms. They are called "Growth Equity" and "Private Equity."
Whereas the unicorn-strategy firms are called "Venture Capitalists."
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It's all math.
If you invest in a low-risk (established) companies, you don't require high returns.
If you invest in a high-risk (new) companies, you require high returns.
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.
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".
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.
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.
But it should be the opposite no?
PE firms acquires company, installs a new CEO and instructs them to knock on each and every bank lender for business loans taking advantage of the low interest rate environment.
Or even mortgages if the company needs to expand its physical footprint.
PE retains the equity and bank finances the business growth as per the intention of the Fed monetary policy 2008-2021...and maybe 2024-????
The low interest rate environment could have been utilized by PEs like you mentioned, but there were other industries where the same play book could be used for much higher returns - like real estate, tech acquisitions, etc. Why bother with a leveraged buyout of a family owned business for 10% returns when a debt-fuelled real estate purchase will give you 25-30%?
They also attract similar types of investors and are similarly affected by interest rates.
VCs can engage in 'buy and build' strategies, where they roll up multiple players in a market by doing one big investment in a company that they think has the best chance to become market leader and then to make that happy by funding this company to take over the competition. This doesn't always pan out either but when it does the pay-off is usually well worth the investment.
PE and VC are sufficiently different that the LPs of those funds see them as different risk baskets with PE getting the lions share of the allocation because it is considered to be reasonably safe and VC looked at as lottery tickets.
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.
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-b...
https://www.theinformation.com/articles/venture-capital-isnt...
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.
This doesn't sounds like a goopd system to encourage developers to work on business problems - which are often boring and require painful work such as talking to people.
Sounds like this would be a good system to have a bunch of idealistic developers work on business problems - which are often boring and require painful work such as talking to people.
This doesn't sound like a good system to encourage developers to work on pet tech projects.
You've articulated the main criticism of the status quo. That by its nature de-prioritizes the idealism that produces unicorns. Never mind the effects of that on dreamers who find it difficult to subsist in a stifling world that wasn't designed for them. This is why I feel that this is a dark future at odds with the original spirit of the web. But hey, it makes some people billions of dollars and all it cost us was the life we might have had.
I feel like you misunderstand startups. Startups aren't machines designed to let engineers do whatever they want. Startups are businesses that attempt to find and exploit oppertunities in the market. Since technology is new, and poorly adopted in many indistries, it tends to be used to do this.
Or to flip it around - you're entirely welcome to spend as much time as you'd like building 'idealistic' software that challenges the 'status quo'. Nothing is going to 'stifle' that.
However, if you want other people to spend thier time and thier resources supporting and helping you, then you need to find a way to convince them. Startups are one way to do that, but businesses are full of compromise and you may not find it suits the idealism you desire.
> 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).
- Warren Buffet
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.
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.
Not being able to get more vc funds, and not getting to profitability with the funds they have, lead to this.
The companies that can run profitably, will take over many markets.
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.