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VC Galaxy

Silicon Valley's latest favorite: Funding startups that help other startups shut down

May 12, 2024
3 min

Launching a company is thrilling and exciting. Shutting one down? Not so much. It's a complex, painful, and often unrewarding (not to say very unpleasant) process.

Founders understandably prefer to focus on success, but truth is most startups never reach a lucrative exit.

This reality is especially harsh in today's funding climate. The venture capital boom dried up over two years ago, and many startups need to justify their inflated valuations before burning through their cash reserves.

In a twist of irony, investors are now eager to fund startups that help others shut down. With a staggering 90% failure rate, the customer base for these "unwinding" specialists is vast.

Data from PitchBook paints a clear picture: In 2023 alone, roughly 3,200 global venture-backed companies closed their doors (having raised a collective $27.2 billion). The actual number is likely much higher, with many closures happening quietly and escaping official records.

This is why investors are backing startups that assist struggling companies in returning unused capital, selling off assets, or even facilitating complete acquisitions – all with the goal of a smooth shutdown.

Founders versus investors

Venture capitalists (VCs) are no strangers to failed startups – Harvard Business Review reports that roughly two-thirds never deliver positive returns. However, shutting down can create tension between founders and VCs.

Disagreements arise, especially when an investor pushes for closure, and the founder resists.

Investor concerns are valid. VCs listed as company directors want to wind down operations before cash depletion to avoid liability. Technically, a formal dissolution certificate is required to write off their investment.

VCs may gently nudge founders to accept a doomed venture rather than persist for years. Some companies with decent revenue weren't "venture-scale" and required a shutdown.

The Shutdown Process

While deciding to close a startup may be difficult, navigating the shutdown process can be even more complex. From employee severance to intellectual property rights, unwinding a startup takes a lot of effort.

  • Employee Severance: Letting people go is by far the most challenging (painful and emotionally draining) part of the process. Developing fair and compliant severance packages that consider factors like tenure, position, and company performance is key. Whenever it possible, this part should also involve outplacement services to help impacted employees find new opportunities.

  • Customer Contracts: Negotiating termination clauses or transition plans within customer contracts to minimize service interruption. Fulfilling all outstanding obligations ensures customer trust and protects the founders’ reputation.

  • Taxation: Preparing and filing IRS dissolution tax returns accurately and efficiently ensures that all tax liabilities are settled before final closure.

  • Shareholder Liabilities: Identifying and addressing any remaining obligations to shareholders, such as stock buyouts or outstanding dividends. Properly resolving these issues ensures a clean break and avoids future legal entanglements.

  • System Shutdown: Deactivating all internal systems like email, databases, and cloud storage to prevent unauthorized access and potential security breaches. Closing bank accounts eliminates lingering expenses and secures remaining funds.

  • Dissolution Filings: Filing the necessary paperwork with the state of incorporation (often Delaware) and any other registered states to formally dissolve the company as a legal entity. This final step ensures a clean closure on the books.

The Rise of Failed Companies

This isn't a new industry, but a long-overdue shift in perspective. While we've traditionally celebrated success stories and swept failures under the rug, a growing acceptance of losses paves the way for a more open and supportive ecosystem.

A significant challenge, since shutting down a startup is far more intricate than closing a brick-and-mortar store. Unlike tangible assets like buildings and inventory, most startup assets are intangible—think intellectual property (IP) and sensitive user data.

Striking a balance between privacy concerns and proper IP handling necessitates a far more nuanced approach.

This complexity is why traditional wind-down processes historically stretched for months, a burden for weary founders. The new breed of shutdown specialists aims to revolutionize this process.

They claim to expedite the closure to a matter of weeks, alleviating the stress and pain for founders (and allowing them to rebound and pursue new ventures sooner).

Experts view this phenomenon not as a fleeting response to a funding slowdown but as a long-term trend. This niche holds significant innovation potential, offering a chance to fundamentally improve how companies dissolve, ultimately fostering a healthier and more resilient startup ecosystem.

Time for closure

While "shutting down" might be in their name, these companies offer a much wider range of services to struggling startups:

  • Navigating Debt: They assist companies with potentially significant debt by negotiating with creditors to find a favorable resolution.

  • Right-Sizing for Success: Some startups have healthy revenue (ARR) but aren't suitable for the high-growth model that venture capitalists (VCs) expect. These companies help them wind down operations in a controlled manner.

  • Facilitating Asset Sales: They can help founders sell valuable assets like the company's codebase, platform, or even their talented team.

  • Intellectual Property (IP) Transactions: They can guide founders or investors through acquiring or selling the startup's intellectual property.

Companies in this space

Several companies are taking the lead in the space right now, and the trend shows that many more will follow.

These "closure specialists" are revolutionizing how failed ventures wind down, offering a more efficient and frictionless solution.

1. Sunset

Sunset helps you create a personalized plan to shut down your business.

They also store your company records permanently, even after your corporation is gone.

→ Raised: $1.5M

→ Founders: Brendan Mahony and Grant Rheingold

→ Investors: Hustle Fund’s Eric Bahn, Weekend Fund’s Ryan Hoover, Layoffs.FYI, creator Roger Lee and others

2. SimpleClosure

SimpleClosure assists you throughout the shutdown process, from initiating closure procedures to resolving remaining obligations to customers or team members and managing the company’s intellectual property and financial commitments.

→ Raised: $5.5M

→ Founders: Dori Yona

→ Investors: Infinity Ventures, Anthemis Group, Foxe Capital, executives from software companies such as Deel and Intuit, and others

3. Fairsplit

Fairsplit simplifies the process of off-boarding employees and provides peace of mind to employers through escrow management, bond system and tax optimization:

→ Raised: $120K

→ Founders:  Orville Black and Ryon Batson

→ Investors: Techstars

Others: 

Onsen Financial

Onsen Financial offer administrative guidance, asset disposition, and liability mitigation services to help founders compliantly and quickly shut down their startups.

Carta Conclusions

It’s not just new startups getting into the helping companies wind-down game. Equity management startup Carta has launched Carta Conclusions, a service that helps companies in the process of closing (and starting their new journey).

Startups That Shut Down in 2023

2023 was a challenging year for the startup ecosystem, with a number of high-profile companies shutting down operations. A combination of factors, including economic headwinds, tightening investment, and shifting consumer preferences, contributed to these startups' demise.

Let’s take a look:

⚫ WeWork raised more than $11 billion in funding as a private company since its inception in 2010. The company filed for bankruptcy in November 2023 and has begun closing unprofitable sites. Now cofounder Adam Neumann is exploring an offer to buy back the company.

⚫ Hopin, the virtual event unicorn that raised over $1.6 billion and was once valued at $7.6 billion, crashed. After its CEO stepped down they began selling off parts of its business (the flagship one for only $15 million), and is set to hand back investor cash.

⚫ Bird, a scooter company founded in 2017 that raised $776 million, was delisted from the New York Stock Exchange this year because of its low stock price. The company wasn’t able to recover from the impact the Covid lockdowns had on the use of this kind of transportation.

⚫ Braid, a startup founded in 2018 that aimed to make shared wallets more mainstream among consumers and that raised $10 million in funding “over multiple rounds” from Index Ventures, Accel, and others, shut down.

⚫ Fuzzy went through a pretty messed up situation. The pet care telehealth startup, founded in 2016 and that raised *$*80 million, has practically disappeared. In February, the firm reportedly hyped its growth on internal Zoom calls. Within months, the company had closed up shop. Fuzzy’s site was taken down without any warning issued to customers.

Failure is a natural part of any journey, not something that must be swept under the rug.

It's encouraging to finally see that founders now have more options to navigate this unpleasant process in a friendly and supportive manner. Anything that can assist founders go through this draining  part of the road is undoubtedly a valuable contribution to the ecosystem.

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