American startup struggles with thirst for capital

The number of startups in the US that give up, unable to raise money for their ideas in the face of the downturn in the venture capital market, is increasing.

Starting a business in the US is getting harder and harder. Funding from venture capitalists and banks is increasingly scarce and expensive. IPOs are nearly impossible, and some business models that operated when cash was cheap (low interest rates) are now unsustainable. Venture capital-backed startups are running out of money and facing tough choices, according to the WSJ .

In recent months, a number of startups that once raised significant capital have had to close. Examples include biotech company Goldfinch Bio, wine business Underground Cellar and fintech Plastiq.

Zume, a California-based company that developed a robotic pizza maker and was once valued at $2.25 billion, is moving toward dissolution under the supervision of restructuring firm Sherwood Partners.

Zume's pizza making robot. Photo: AP

"The mass disappearance of startups is happening," said Tom Loverro, IVP Fund Executive Member. None of the startups backed by his fund have closed recently, but Loverro says the wave of startup collapses has just begun. "It's like the whole industry got drunk last night and now suffers the consequences," he said.

Some observers believe the venture capital boom in 2021, as well as government funding of small businesses during the pandemic, has the potential to help startups outlast usual. Now that those funding sources have dried up, the fall has come.

Barry Kalander, president of KallanderGroup, which provides restructuring and dissolution services, said most of the companies they deal with should have been shut down a year or two ago.

Venture capital-backed startups raised $346 billion in 2021, according to a report by PitchBook-NVCA Venture Monitor. Investors and founders say many companies are still surviving on that money to date. Some hope that it will be possible to overcome the current difficulties to wait for the market to recover and find an IPO to tap the mass market.

Venture capital in startups in the US over the quarters. Graphics: WSJ

Meanwhile, the venture capital market is still falling. US startups raised $37 billion in the first quarter, down 55% from the same period in 2022. The longer this market declines, the closer many startups are to bankruptcy.

On December 31, 2022, real estate startup Watson Living had to close, according to Co-founder and former CEO Andrew Firestone. Previously, in 2021, Watson Living raised $2.5 million in a seed round, with a valuation of about $15 million. However, their product is too complicated and not suitable for reality, as admitted by Firestone.

Watson Living therefore closed down and returned less than 10% of the capital to investors. “The market has changed and the time for us to adjust is significantly shortened,” explains Firestone. Now he has started a new business in another industry.

Andrew Firestone, Co-Founder of Watson Living. Photo provided by the character

Historically, data on the number of startups that have gone out of business has been difficult to track accurately, the researchers say, although the number of successful companies is rare. About 45% of the 1,100 startups that raised money in a seed funding round in 2017 never raised a follow-up, according to Carta, a provider of software for investment funds.

Achieving a significant result is even rarer. About 16% of startups are successfully acquired or go public in the seven years since their first venture capital raise, according to data on nearly 5,000 US companies that have raised their first funding from the public. from 1995 to 2013.

This study was conducted by Honggi Lee of the University of New Hampshire, Lia Sheer of Tel Aviv University and Matt Marx of Cornell University. The failure rate can increase during a recession, Lee said. "If startups don't have money, they can't operate," he said.

Samantha Ettus, Founder and CEO of fintech Park Place Payments, which raised $4 million in venture capital, had to act quickly when the biggest investor in the last successful funding round failed money transfer last September.

Ettus cut costs, raised $440,000 in bridging funding from existing investors, and hired an investment bank to put Park Place up for sale. "When I first started the company, we said we would build a billion-dollar company. I never intended to sell so soon," Ettus said. As a result, Logiq acquired Park Place in April in an all-stock deal worth more than $6 million.

Others are looking to pivot, change business models or products. Last year, a capital provider to fintech firm Upfront tightened terms on a pending loan. Marc Escapa, Co-Founder and Co-CEO says the requirements make the business plan unfeasible.

The company had just raised $6 million but could no longer pursue providing auto loans as planned. It pivots and is selling loan origination software under the name Fuse Finance.

Escapa is happy that his startup has found a new business direction that works well. However, experience has also shown that macro trends beyond a company's control can make an idea unviable. "The fundamentals of what you're about to build don't hold true anymore," he said.