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The business of winding down startups is booming

From digital media startup The Messenger to “Uber for freight” company Convoy, the skeletons of startups-past haunt founders and investors alike.

On the phone with a founder who recently wound down his seed-stage software startup, I asked him what his plan was next.

Having laid off all of his employees in autumn of last year, he was the last man standing: tasked with the thankless job of shutting down the company, returning capital, and dealing with tax documents.

“I suspect I’ll start another company again, but not for a while. I need a break,” he told me.

To handle the bureaucracy, the founder used Sunset, one of the companies that sprung up last year to respond to the burgeoning industry of failed startups.

In a sign of the times, such wind-down startups are growing rapidly. Sunset saw 9x quarter-over-quarter revenue growth and a 65% monthly customer growth rate between November 2023 and January 2024.

Competitor SimpleClosure, which closed a $4 million seed round this month led by Infinity Ventures, has passed the $1 million mark in annualized revenue and also recorded a monthly growth rate of over 50% in the same period. Since its public launch in September, the startup’s revenue has increased more than 14x.

Even larger startups are interested in the additional help. “We’ve now had multiple companies that have become customers that have raised tens of millions [in venture funding],” said Dori Yona, co-founder and CEO of SimpleClosure.

In early February, equity management platform Carta joined the bandwagon: CEO Henry Ward announced in a blog post a new startup shutdown service, Carta Conclusions. “[T]he work of dissolving a company is exceptionally unpleasant. It is also, by definition, zero-value to the founder, the company, and the world,” Ward wrote.

Carta’s entrance could disrupt its competitors, given its existing relationships with a large customer base of startups and access to internal startup data on cap table management, which could help it to accurately target prospects.

Founders never want to think about the possibility of failure, but the vast majority of startups never make it to a successful liquidity event.

That reality has never been more apparent for many founders. The startup dealmaking spree ended more than two years ago. Many companies’ runways are nearly depleted and they still haven’t been able to grow into their lofty valuations.

In the first two months of 2024, startup collapses have hit digital media company The Messenger, which raised $50 million, and motorbike startup Cake, which raised $74 million. Even huge operations like Indian edtech Byju’s are teetering on the edge.

Roughly 55% of US startups that raised a round between 2020 and 2021 have yet to exit or raise a new round, according to PitchBook data, and many will be facing a cash crunch. The median time between rounds for VC-backed companies jumped from 1.27 years in 2022 to 1.51 in 2023.

Zero-sum game

Venture investors are no stranger to shutdowns: Some two-thirds of all startups never show a positive return to investors, according to the Harvard Business Review.

Still, startups shutting down can be a huge source of friction between founders and investors. “Sometimes the investor wants to shut down and the founder doesn’t,” said Brendan Mahony, founder and CEO of Sunset.

If an investor is listed as a director of the company, they want to ensure that the company winds down before it runs out of cash, to avoid potential liabilities. Without getting an official certificate of dissolution, a venture firm cannot technically write off its investment.

For a typical enterprise software company, Mahony recommends that startups have between $30,000 and $50,000 in the bank at a minimum to wind down. “Some founders believe they can run it to zero,” Mahony said. Shutting down a startup can involve significant bureaucratic and legal challenges, especially in a remote-first world if employees are registered in multiple US states.

And as investors are having to write to zero more holdings than ever, more founders are feeling the pressure from investors to return capital as soon as possible. Yona said he’s also seeing more startups shutting down even with many months of runway still in the bank.

“We are seeing more and more companies that have realized that they can only do a significant down round, have significant capital in the bank, and have made a conscious decision to shut down,” Yona said.

Featured image by Megan Woodard/PitchBook News

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