People in the comments here are falling for the attention grabbing headline. The amount of yearly venture deals is in the thousands if not tens of thousands.
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 also leaves out how many VC funded startups there are. If more and more were funded every year, you’d expect more and more to go bankrupt every year too even if the success rate stayed constant.
Honestly, in my experience (I'm not a VC but an observer - I often get passed pitch decks to either angel-invest or co-invest through my firm), most VC-backed startups are zombie companies. They may show outward progress, like hiring a lot of employees or holding/participating in conferences or showing so many new product "improvements" (that somehow seem to always be following the latest fad), but in the end, what matters is revenue, which they don't have.
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.
The next phase is logically the profitable growth phase - honestly, it's one of the most exciting phases for both the PE firm and the employees of the companies. I don't see that happening to any company in tech or in the startup space these days. I do see that phase in a number of traditional family-owned enterprises employing hundreds or thousands of employees though, but VCs and PEs aren't looking there for the most part (regional PEs are looking at them and finding a lot of success though).
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.
It happens for SAAS, even for large public SAAS. It's called receivables on the balance sheet. That money may or may not show up. It usually does but it is not a guarantee since the customer can renege or default.
Easy enough even for saas: a few big enterprise contracts for services the company uses plus a wage bill that’s less than revenue will sink a company quickly enough.
True, however in many jurisdictions the employer has an obligation not to "crash out" and leave employees without their last month's salary, except when this is due to unforseen circumstances. They should wind down the company in an orderly way before it gets to that point
Workers without deeper financial literacy notoriously underestimate how much capital there is rotting / desperately waiting for any potential investment upside.
"The amount of yearly venture deals is in the thousands if not tens of thousands."
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.
> 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.
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.
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.