The Biden recession and other trends made 2023 a horrible year for startups.
“Big startups are shutting down. According to PitchBook, more than 3,000 private venture backed startups failed in the last year.”
“Of the startups raising money, 19% were funded at a lower valuation than in prior funding rounds.”
“38% of VCs disappeared from dealmaking last year and more than a quarter of a million workers at tech companies were laid off over the same period.”
“US corporate bankruptcy filings closed out 2023 with the most filings since 2010. The year has been described as a mass extinction event for startups in the press.”
Some of the startup failures Boyle namechecks (Hyperloop, Bird) seemed like stupid ideas from the git-go. “Bird the electric scooter rental company—which was also supposed to reinvent public transportation—filed for chapter 11 bankruptcy protection. It was the fastest startup to ever land a billion-dollar valuation, and at its peak was worth two and a half billion dollars. It was delisted from the New York Stock Exchange in September after failing to maintain a market cap of above $15 million dollars for 30 consecutive days.”
“Who would have thought that renting scooters to drunk people for a dollar (who would then throw them in a canal on their way home) would be a money losing business? Bird ran up more than $1.6bn in net losses since 2018 before finally running out of money.”
Smile Direct Club: $8.9 billion valuation at 2019 IPO. “The stock fell in value over time as the company proved to be unprofitable year after year. The company shut down last month $900 million dollars in debt.”
One I never heard of: “The health tech startup Olive AI which reached a peak valuation of $4 billion dollars in 2020 driven by the need for automation in healthcare during the pandemic. The company raised over 900 million dollars from investors. In 2022 the company began laying off staff citing ‘tough economic conditions.’ The company was allegedly trying to raise money when it abruptly shut down in November. Going out of business in 2023 was particularly surprising for a company with AI in its name.” Indeed, AI seems to be the current space where stupid money goes to die.
Another one I never heard of: Zume.
No.
“Zume – the robot pizza delivery company which had raised $445 million dollars in VC funding, the majority of which came from SoftBank in 2018 at a two and a quarter billion-dollar valuation, shut down this summer.” Stupid, but at least I can see why California companies would invest heavily in food automation with that $16 (and rising) minimum wage.
WeWork “set out to revolutionize office real estate – by having an app – which I’m told didn’t work very well, and free beer on tap filed for bankruptcy in November.” I’ve covered WeWork previously.
“WeWork and its founder Adam Neumann were the poster boys of how a blitzscaled business model led by a charismatic founder could apply a veneer of technology to an old business idea and attract venture capital funding to achieve a multibillion dollar valuation.”
“At its peak, WeWork was valued in private markets at $47 billion dollars. Softbank alone invested 16 billion dollars into the company. Masayoshi Son, SoftBank’s founder, allegedly invested his first $4.4 billion dollars in the shared office space company after Neumann gave him a 12-minute tour of a WeWork in 2016. With such a short tour, it’s unlikely that the free beer even had an impact.”
“Softbank – run by Masayoshi Son (Japan’s Cathie Wood) was one of the biggest startup investors in the last decade. They invested in all sorts of non tech companies that were made to look like tech in order to attain a sky-high valuation. According to Bloomberg, the SoftBank Vision Fund alone lost $53 billion dollars over the last two years on startup investments.”
“We have seen a very difficult period for startups over the last year or two, but it comes in the wake of probably the best period for VC backed startups in decades. During the decade from 2011 to 2021 VC investment in private start-ups grew more than sevenfold, from 46 billion dollars in 2011 to $345 billion dollars in 2021.”
“In 2022 when the federal reserve began hiking interest rates, this money began drying up as investors lost their taste for unprofitable, but high growth, investments.”
That investment boom was driven by two things: Low interest rates and “a recent history of profitable exits from VC funded startups like Facebook, Google, Whatsapp and Snap meant that investors were suddenly paying a lot of attention to tech startups – hoping to repeat those successes.”
“Venture capital went from being a small asset class run out of offices on Sand Hill Road that had burned investors in the dot com bubble to a massive global asset class like hedge funds or private equity.”
The Flu Manchu lockdowns brought investment from “‘working from home’ companies like Zoom and Peloton.” I always thought of Peloton as a lifestyle luxury brand.
“People were using apps like Uber and DoorDash for food delivery, and booking rentals on Airbnb to get out of big cities now that they no longer had to turn up in the office.”
“While the prior wave of profitable high growth tech stocks had been (one way or another) in the advertising space, or in businesses like cloud computing, the new wave of startups had untested business models—gig economy businesses which attracted a lot of competition and might never flip to profitability—or robot-made pizza which would be cooked on route to a customer’s home.”
“A lot of the VC’s possibly believed in many of the questionable investments that have since gone bust, but a venture capital fund isn’t really there to hold on to these investments until the underlying business flips to profitability. They invest at the idea stage with the goal of selling these businesses on to the public when the hype is at its peak.”
“They did manage to unload a number of the biggest flops like WeWork – but not at the valuations they were hoping for, and have found themselves holding the bag on a lot of investments that they bought into at peak valuation.”
“The huge valuations many of these companies were attaining in the private market may have been more of a function of how much money had flowed into the private tech startup market since 2011 rather than necessarily reflecting the quality of these companies and their business models.”
“According to Erin Griffith at The New York Times, $27.2 billion dollars in VC funding had gone into the 3,200 venture-backed companies that went out of business in the first 11 months of 2023.” And that’s just the firms trackable on PitchBook. The true total is almost certainly higher.
“That 27.2 billion dollar number excluded many of the largest startup failures that went public, like WeWork, or that found buyers at much lower prices than VC investors had invested at.”
“The hype around AI that we have seen in the last year has masked a lot of the losses in the tech space.”
“Meta was up 178 percent last year due to a combination of AI hype and cost cutting within their core business. This covers up the 46.5 billion dollars lost on the Metaverse – which no one will venture into, for fear that they run into Mark Zuckerberg.” I strongly suspect that a lot of those VR losses are actually money siphoned off for something else.
Despite this, stocks like Meta, Microsoft and Nvidia have hit all-time highs.
“One of the negative economic effects of startup shutdowns is that in such an environment it becomes harder for founders with good business ideas to get funding.”
“According to PitchBook, the number of active investors in US Venture Capital, which was defined as firms that made two or more deals in the last year, plummeted by 38% in the first three quarters of 2023 compared to the same period the prior year.”
Many of the startup failures were zombie companies, those that should have failed earlier but were kept alive by VC money and low interest rates.
“No one wants to see firms going out of business, especially startups which are often the most exciting and innovative firms, but if a business model makes no sense, or only works in a zero-interest rate environment, then its disappearance means that capital can again flow in the direction of the best businesses.”
The startup bust has direct negative effects on me personally, as I’m still between technical writing positions, and a lot of the jobs I’ve gotten over the past two decades have been with startups.
This entry was posted on Thursday, January 25th, 2024 at 9:55 AM and is filed under Economics, video. You can follow any responses to this entry through the RSS 2.0 feed.
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13 Responses to ““A Mass Extinction Event For Startups””
Let’s be brutally honest here: Most of these companies were based on really bad ideas and would never get funding in a sane economy. The only way they got funding here-and-now was because of the criminally low interest rates they’ve had for years and years, which led to poorly-disciplined economic decision-making by all concerned.
There really aren’t all that many “good ideas” out there at any given moment, that will turn into real money-making propositions. This is a sad fact of life; human “genius” is as much a constrained resource as anything else is.
Most of these start-up companies are like those late-night alcohol-infused sessions that you have with your peers during your youth, when you solve the world’s problems; they look great at the time, but when you go to look at the genius you wrote down on the cocktail napkins the next morning, amidst the hangover? You’re left with “What the hell were we thinking…?”
Reminds me of the dot-com bust circa 2000-2001. Anyone remember toiletpaper.com or similar startups?
I was in E-commerce at the time and looking to find another job because the company I was working for was likely to close at the end of FY2001 because that’s when their government contract expired. I remember looking at the website of one e-commerce company in Austin. Instead of talking about their product in their careers section they talked all the neat benefits employees had – a company skidoo you could use at lunchtime (they were on the river in Austin), employee parties every Friday afternoon, free beer, and things like that.
My reaction was to conclude they were not a serious company – just frat boys trying to stretch out college. Did not apply with them. When I checked the website a year later it was gone. I wasn’t surprised.
This is no different. The kids of the people who created the dot-com bust have grown up and are emulating their ‘rents.
[…] IS GOING SWIMMINGLY: ‘A Mass Extinction Event For Startups.’ “Big startups are shutting down. According to PitchBook, more than 3,000 private venture backed […]
“[B]ut if a business model makes no sense, or only works in a zero-interest rate environment, then its disappearance means that capital can again flow in the direction of the best businesses.”
Time preference ratios, better known as interest rates, signal the willingness of investors to forego x-consumption today for the prospect of x+1-consumption tomorrow. If there is zero return to capital (ZIRP) there is no incentive to forego consumption today. In effect, ZIRP signals to the capital markets that there are ZERO investment opportunities.
But if there are zero investment opportunities, what is the necessity of venture capital operations? Therefore, they are losing vast sums of money and their activities have begun to contract.
Interest rates will have to find a new, higher equilibrium if economic output is to be optimized. Absent a willingness to severely restrict deficit spending, the use of newly created money by the Federal Reserve to buy US Treasure obligations will continue to artificially suppress interest rates. These low rates will discourage savings.
Absent incentives to save money, the capital markets will dry up. The central bank must now chose between an expanding economy and expanded government obligations because you can’t have your cake and it, too.
A local startup (Bitwise) with a fuzzily defined business model went belly up suddenly last year when they blew through their funding and apparently had been engaging in flat out fraud for some time, misrepresenting their financial position to their investors to paper over the fact that they weren’t making money. 1 part mini-Wework, 1 part coding bootcamp, 1 part tech incubator and a whole lot of feel good DEI marketing speak. Mitch Kapor invested a nice chunk of change and it went poof.
“‘working from home’ companies like Zoom and Peloton.” I always thought of Peloton as a lifestyle luxury brand”
Working from home is a lifestyle luxury brand.
Well, working from home full-time is, anyway. It means you don’t have to do any significant physical labor, and you don’t have to show up to your customers’ locations on a regular basis. My employees get to work from home sometimes, but it’s more an exception than a rule.
I’m looking for a job advising VCs, I’ll use my vast reading of Science Fiction and my experience in knowing a huge number of dumb*sses to warn them about all the things I can see going wrong in a new startup.
“I’m looking for a job advising VCs, I’ll use my vast reading of Science Fiction and my experience in knowing a huge number of dumb*sses to warn them about all the things I can see going wrong in a new startup.”
The problem with that idea is that the sort of people who would have the pragmatism to both employ someone like that, and listen to them? They don’t need your services. The people who do? Would never have the common sense to hire someone in that capacity in the first place…
I mean, it’s a great idea, but…
Ah, well. I think it’d be great to have a job as a “harbinger of failure” or “anti-influencer”, but I’m also certain that the sort of people who need such services also lack the intrinsic self-awareness to ever make use of them…
For risk capital investors, the whole game is “the exit” – IPO, or sale of the company; that’s when they get return on their investment (as do the limited partners in the fund(s) they set up). If they think that’s a reasonably-likely outcome, that’s what makes an investment seem viable.
A bad side-effect of the dot-com boom of the late 1990s is that this went a bit silly – venture investors could put a few hundred $k into some web start-up in April and have a nine-figure blowout IPO in October… this was able to go on as long as the dogs (the equity markets and/or the big outfits who might buy start-ups) were eating the dogfood (the shares of the start-ups); once the dogs realized that it was dogfood, the bubble popped. But it turned Sand Hill Road into a get-rich-quick scheme, and we continue to suffer for the lack of real investment in solid new companies – as well as the “we want the ‘good old days’ back” mindset that still infests SHR.
Lawrence, if you want to look into another bubble that no one is talking much about… we all know about the “EV” bubble slowly bursting now. But there is also a bunch of start-ups out there playing around with electric-powered aircraft *(particularly the VTOL wishes). Like car-EVs, they’ve been mucking about with this idea for 5+ years now, and they just can’t make these things work, so unless they can get Boeing (!!) or similar to buy them up, numerous billions of dollars are going to be seen as having been flushed down that particular toilet…
Honestly, it wouldn’t shock me to see a few of the VTOL/EV startups succeed. The energy density is there for light aircraft, the price points are significantly higher for private aircraft than cars, the more occasional use means the battery discharge life cycle problem shouldn’t be nearly as big an issue as with a daily driver, and some companies already have working prototypes and orders.
Plus the Russo-Ukrainian war is producing a whole lot of drone data that might be useful for the VTOL market.
Aaaannnnd… You just put your finger on the reason why there will never, ever be a VTOL/EV market.
What, pray tell, would you do about a flying VBIED? Surround all your facilities with automated air defenses, nation- and world-wide?
Never mind the “random idiot factor” of the average operator flying his VTOL into your house through sheer misadventure.
These things aren’t ever going to get mass-marketed, and the minute that someone in deep denial does it? The insurance companies are going to go nuts shutting it all down. The liability alone…
On the other hand, there will be a tremendous new market for underground government facilities and homes… In a world with random VTOL “sky-falls”, there will be a lot of attraction in things that can’t be damaged by them. Lots and lots of that…
I honestly have to wonder, sometimes. Does nobody else ever think about second- and third-order effects? I mean, seriously: You’re a Secret Service planner: What do you do about Joe or Jill Blow flying the family Flying Truckster too close to the President? Shoot them down? How’s that going to look, optics-wise? What are you going to do about there being ten thousand random hijackable huge flying drones out there in every community, ready to be loaded down with high explosives and flown into your Presidential limo, on the ground or in the air itself? And, that’s just the big-ticket items; imagine the nightmare world of air traffic control when everyone owns one of these things… You think you’ve got a drunk-driving problem now? Even with automated controls on everything, there will still have to be some aspect of human operation, if only to punch in a destination. What happens when Joe Random decides (or, does it accidentally…) to punch in for some restricted area and then manages to override whatever safety protocol you have in place?
Liability law alone means these things are never going to go on the market in a developed economy like ours. Maybe in some frontier environment like Siberia or Alaska? With heavy restrictions on operation over settled areas? Maybe. But… Is the market big enough to justify the cost?
There’s already legislature that mandates all new cars be equip with speed limiter that cops can use to shut the vehicle down. I foresee this will be mandated on EVERYTHING.
Let’s be brutally honest here: Most of these companies were based on really bad ideas and would never get funding in a sane economy. The only way they got funding here-and-now was because of the criminally low interest rates they’ve had for years and years, which led to poorly-disciplined economic decision-making by all concerned.
There really aren’t all that many “good ideas” out there at any given moment, that will turn into real money-making propositions. This is a sad fact of life; human “genius” is as much a constrained resource as anything else is.
Most of these start-up companies are like those late-night alcohol-infused sessions that you have with your peers during your youth, when you solve the world’s problems; they look great at the time, but when you go to look at the genius you wrote down on the cocktail napkins the next morning, amidst the hangover? You’re left with “What the hell were we thinking…?”
Reminds me of the dot-com bust circa 2000-2001. Anyone remember toiletpaper.com or similar startups?
I was in E-commerce at the time and looking to find another job because the company I was working for was likely to close at the end of FY2001 because that’s when their government contract expired. I remember looking at the website of one e-commerce company in Austin. Instead of talking about their product in their careers section they talked all the neat benefits employees had – a company skidoo you could use at lunchtime (they were on the river in Austin), employee parties every Friday afternoon, free beer, and things like that.
My reaction was to conclude they were not a serious company – just frat boys trying to stretch out college. Did not apply with them. When I checked the website a year later it was gone. I wasn’t surprised.
This is no different. The kids of the people who created the dot-com bust have grown up and are emulating their ‘rents.
[…] IS GOING SWIMMINGLY: ‘A Mass Extinction Event For Startups.’ “Big startups are shutting down. According to PitchBook, more than 3,000 private venture backed […]
“[B]ut if a business model makes no sense, or only works in a zero-interest rate environment, then its disappearance means that capital can again flow in the direction of the best businesses.”
Time preference ratios, better known as interest rates, signal the willingness of investors to forego x-consumption today for the prospect of x+1-consumption tomorrow. If there is zero return to capital (ZIRP) there is no incentive to forego consumption today. In effect, ZIRP signals to the capital markets that there are ZERO investment opportunities.
But if there are zero investment opportunities, what is the necessity of venture capital operations? Therefore, they are losing vast sums of money and their activities have begun to contract.
Interest rates will have to find a new, higher equilibrium if economic output is to be optimized. Absent a willingness to severely restrict deficit spending, the use of newly created money by the Federal Reserve to buy US Treasure obligations will continue to artificially suppress interest rates. These low rates will discourage savings.
Absent incentives to save money, the capital markets will dry up. The central bank must now chose between an expanding economy and expanded government obligations because you can’t have your cake and it, too.
A local startup (Bitwise) with a fuzzily defined business model went belly up suddenly last year when they blew through their funding and apparently had been engaging in flat out fraud for some time, misrepresenting their financial position to their investors to paper over the fact that they weren’t making money. 1 part mini-Wework, 1 part coding bootcamp, 1 part tech incubator and a whole lot of feel good DEI marketing speak. Mitch Kapor invested a nice chunk of change and it went poof.
“‘working from home’ companies like Zoom and Peloton.” I always thought of Peloton as a lifestyle luxury brand”
Working from home is a lifestyle luxury brand.
Well, working from home full-time is, anyway. It means you don’t have to do any significant physical labor, and you don’t have to show up to your customers’ locations on a regular basis. My employees get to work from home sometimes, but it’s more an exception than a rule.
I’m looking for a job advising VCs, I’ll use my vast reading of Science Fiction and my experience in knowing a huge number of dumb*sses to warn them about all the things I can see going wrong in a new startup.
Jorg X McKie said:
“I’m looking for a job advising VCs, I’ll use my vast reading of Science Fiction and my experience in knowing a huge number of dumb*sses to warn them about all the things I can see going wrong in a new startup.”
The problem with that idea is that the sort of people who would have the pragmatism to both employ someone like that, and listen to them? They don’t need your services. The people who do? Would never have the common sense to hire someone in that capacity in the first place…
I mean, it’s a great idea, but…
Ah, well. I think it’d be great to have a job as a “harbinger of failure” or “anti-influencer”, but I’m also certain that the sort of people who need such services also lack the intrinsic self-awareness to ever make use of them…
To “Jorg X McKie”:
Have you considered trying it as a start-up?
For risk capital investors, the whole game is “the exit” – IPO, or sale of the company; that’s when they get return on their investment (as do the limited partners in the fund(s) they set up). If they think that’s a reasonably-likely outcome, that’s what makes an investment seem viable.
A bad side-effect of the dot-com boom of the late 1990s is that this went a bit silly – venture investors could put a few hundred $k into some web start-up in April and have a nine-figure blowout IPO in October… this was able to go on as long as the dogs (the equity markets and/or the big outfits who might buy start-ups) were eating the dogfood (the shares of the start-ups); once the dogs realized that it was dogfood, the bubble popped. But it turned Sand Hill Road into a get-rich-quick scheme, and we continue to suffer for the lack of real investment in solid new companies – as well as the “we want the ‘good old days’ back” mindset that still infests SHR.
Lawrence, if you want to look into another bubble that no one is talking much about… we all know about the “EV” bubble slowly bursting now. But there is also a bunch of start-ups out there playing around with electric-powered aircraft *(particularly the VTOL wishes). Like car-EVs, they’ve been mucking about with this idea for 5+ years now, and they just can’t make these things work, so unless they can get Boeing (!!) or similar to buy them up, numerous billions of dollars are going to be seen as having been flushed down that particular toilet…
Honestly, it wouldn’t shock me to see a few of the VTOL/EV startups succeed. The energy density is there for light aircraft, the price points are significantly higher for private aircraft than cars, the more occasional use means the battery discharge life cycle problem shouldn’t be nearly as big an issue as with a daily driver, and some companies already have working prototypes and orders.
Plus the Russo-Ukrainian war is producing a whole lot of drone data that might be useful for the VTOL market.
Aaaannnnd… You just put your finger on the reason why there will never, ever be a VTOL/EV market.
What, pray tell, would you do about a flying VBIED? Surround all your facilities with automated air defenses, nation- and world-wide?
Never mind the “random idiot factor” of the average operator flying his VTOL into your house through sheer misadventure.
These things aren’t ever going to get mass-marketed, and the minute that someone in deep denial does it? The insurance companies are going to go nuts shutting it all down. The liability alone…
On the other hand, there will be a tremendous new market for underground government facilities and homes… In a world with random VTOL “sky-falls”, there will be a lot of attraction in things that can’t be damaged by them. Lots and lots of that…
I honestly have to wonder, sometimes. Does nobody else ever think about second- and third-order effects? I mean, seriously: You’re a Secret Service planner: What do you do about Joe or Jill Blow flying the family Flying Truckster too close to the President? Shoot them down? How’s that going to look, optics-wise? What are you going to do about there being ten thousand random hijackable huge flying drones out there in every community, ready to be loaded down with high explosives and flown into your Presidential limo, on the ground or in the air itself? And, that’s just the big-ticket items; imagine the nightmare world of air traffic control when everyone owns one of these things… You think you’ve got a drunk-driving problem now? Even with automated controls on everything, there will still have to be some aspect of human operation, if only to punch in a destination. What happens when Joe Random decides (or, does it accidentally…) to punch in for some restricted area and then manages to override whatever safety protocol you have in place?
Liability law alone means these things are never going to go on the market in a developed economy like ours. Maybe in some frontier environment like Siberia or Alaska? With heavy restrictions on operation over settled areas? Maybe. But… Is the market big enough to justify the cost?
re: Kirk
There’s already legislature that mandates all new cars be equip with speed limiter that cops can use to shut the vehicle down. I foresee this will be mandated on EVERYTHING.