American startups struggle in times of capital shortage

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

Starting a business in the U.S. is getting harder. Venture capital and bank funding are scarce and expensive. IPOs are nearly impossible, and some business models that worked when cash was cheap are now unsustainable. Venture-backed startups are running out of money and facing tough choices, according to the WSJ .

In recent months, several startups that raised significant funding have shut down, including biotech company Goldfinch Bio, wine company Underground Cellar and fintech Plastiq.

Zume, a California-based company that develops 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 extinction of startups is happening,” said Tom Loverro, managing partner at IVP. None of his fund’s startups have shut down recently, but Loverro said the wave of failures is just beginning. “It’s like the entire industry got drunk last night and is now suffering the consequences,” he said.

Some observers believe that the 2021 venture capital boom, as well as government funding for small businesses during the pandemic, could have helped startups survive longer than usual. Now that those funding sources have dried up, the crash is coming.

Barry Kalander, chairman of KallanderGroup, a company that provides corporate restructuring and liquidation services, said most of the companies they deal with should have ceased operations a year or two ago.

Venture-backed startups raised $346 billion in 2021, according to the PitchBook-NVCA Venture Monitor. Investors and founders say many companies are still surviving on that money so far. Some hope they can ride out the current downturn, wait for the market to recover, and seek an IPO to tap the public markets.

Venture capital investment in US startups by quarter. Graphics: WSJ

Meanwhile, the venture capital market is still in decline. U.S. startups raised $37 billion in the first quarter, down 55% from the same period in 2022. The longer the market remains depressed, the closer many startups will come to bankruptcy.

On December 31, 2022, real estate startup Watson Living shut down, according to co-founder and former CEO Andrew Firestone. Watson Living raised a $2.5 million seed round in 2021 at a valuation of about $15 million. However, their product was too complex and impractical, Firestone admitted.

Watson Living closed its doors and returned less than 10% of its capital to investors. “The market changed and our time to adjust was significantly shorter,” Firestone explains. He has since started a new business in another industry.

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

Historically, data on how many startups have died has been difficult to track accurately, while successful companies are rare, researchers say. About 45% of the 1,100 startups that raised seed funding in 2017 never raised a follow-on round, according to Carta, a software provider for venture capital firms.

Achieving a significant outcome is even rarer. About 16% of startups are successfully acquired or go public within seven years of raising their first venture capital, according to data on nearly 5,000 U.S. companies that raised initial capital between 1995 and 2013.

The study was conducted by Honggi Lee of the University of New Hampshire, Lia Sheer of Tel Aviv University and Matt Marx of Cornell University. Lee said failure rates can increase during recessions. "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 largest investor in its most recent successful round failed to send money last September.

Ettus cut costs, raised $440,000 in bridge financing from existing investors, and hired an investment bank to sell Park Place. “When I started the company, we said we were going to build a billion-dollar company. I never intended to sell so early,” Ettus said. As a result, Logiq acquired Park Place in April in an all-stock deal worth more than $6 million.

Other startups are looking to pivot, changing their business models or products. Last year, a fintech company Upfront’s lender tightened the terms of a pending loan. Co-founder and co-CEO Marc Escapa said the requirements made the business plan unviable.

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

Escapa is happy that his startup has found a new business direction that works well. But experience has also shown that macro trends beyond a company’s control can make an idea unviable. “The fundamentals of what you’re building are no longer true,” he says.

Phien An ( according to WSJ )

Source link: https://vnexpress.net/startup-my-chat-vat-thoi-khat-von-4616076.html