Why We’re Heading Into the “Perfect Storm” of Startup Closures.

How many cliched comparisons can I bundle into a single blog post? We’re about to find out…

WSJ’s Berber Jin asked me for some comments around startups closing their doors, as part of a trend story trying to assess the health of the market. Failure is always part of our business – one might go so far as to say it’s the ‘natural state’ of a startup – they are likely to fail until they prove they can succeed. Jin’s resulting article “Startups Are Dying, and Venture Investors Aren’t Saving Them” includes a portion of what I shared with him (Cliched Comparison #1: Perfect Storm):

Hunter Walk, an early investor in Toolchain, said that as the market changed, investors wanted to see evidence of dollars over user traction, making it difficult for the company to raise money. The investing mania that ended early last year has added to the pile of startups that are now shutting down as fundraising prospects dwindle, he said. 
“What we have right now is a perfect storm resulting in more than usual shutdowns,” he said.

Let’s unpack this a bit because there are three distinct cohorts of shutdowns occurring, which is some ways remind me of the ghosts from A Christmas Carol (Cliched Comparison #2). Yes, it’s the ghosts of Startups Past, Startups Present and Startups Future, all visiting us during a tortured night’s sleep.

Startups Past: the boom of the last decade kicked forward and delayed a bunch of closures. These seed companies raised enough capital to persist longer than normal and/or weaker companies in hot verticals received follow-on financings that wouldn’t normally be granted to them in a tougher environment. Now as the market turns there’s no more checks coming for them, no matter how much dry powder is on the sidelines. So think of it this way, we’ve got startups shutting down in 2022-24 that shouldn’t necessarily have made it this far – they’re 2017-2021’s normal failures clustered into current times.

Startups Current: Companies funded during the last few years that didn’t accomplish their necessary milestones for incremental capital, exacerbated by a challenging environment that decreases the chances of a bridge round, leaves some of their current investors without new funds to deploy, and (most annoyingly to founders) moving goalposts on what they’re supposed to achieve.

Startups Future: These companies have capital left but not necessarily a clear path forward, or enough team/executive/investor momentum to continue together. Founders and VCs are working together to help these startups find the right solution – usually some combination of returning capital; pivoting into new corporate entities to explore fully different directions; selling off portions of the startup; leaving the IP with the founders and eliminating the preference stack through a buyout; and so on. The impact is we’re pulling forward 2024-2025 “cash out” dates into the current day because the opportunity cost of people’s time and investors’ capital is sufficient to resolve many of the situations today.

Startups can be amazing, wonderful, inspiring opportunities and participating in one can often be the right decision, even if the outcome doesn’t go the way you had hoped. So let’s finish up with a hopeful (?) reminder: while the magnitude and reasons behind the spike in company closures is certainly disruptive and painful, it’s part of the regenerative cycle in our community, like how a forest fire allows for new growth to emerge (Cliche #3). Keep making good decisions (smart teams, important problems) and you will have good outcomes.

And if needed, many Homebrew portfolio companies are hiring!