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Hello and welcome you are 
listening to Patrick Boyle on 

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Finance, a podcast exploring 
ideas from quantitative finance,

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examining events occurring in 
markets right now and financial 

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history to see what lessons can 
be taken away, including 

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interviews with some of the most
interesting people in the world 

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of finance. 
To learn more about the podcast,

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visit on finance.org. 
Big start-ups are shutting down.

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According to Pitchbook, more 
than 3000 private venture backed

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start-ups failed in the last 
year. 

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Of the start-ups raising money, 
19% were funded at a lower 

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valuation than in prior funding 
rounds, 38% of VCs disappeared 

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from deal making last year, and 
more than 1/4 of a million 

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workers at tech companies were 
laid off over the same period. 

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US corporate bankruptcy filings 
closed out 2023, with the most 

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filing since 2010. 
The year has been described as a

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mass extinction event for 
startups in the press. 

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Hyperloop One, which was 
supposed to reinvent 

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transportation, was shut down 
after wasting $450 million. 

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It's like a tube with an air 
hockey table. 

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Swear it's not that hard. 
Bird, the electric scooter 

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rental company which was also 
supposed to reinvent public 

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transportation, filed for 
Chapter 11 bankruptcy 

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protection. 
It was the fastest startup to 

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ever land a billion dollar 
valuation and at its peak was 

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worth 2 1/2 billion dollars. 
It was delisted from the New 

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York Stock Exchange in September
after failing to maintain a 

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market cap of above $15 million 
for 30 consecutive days. 

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Who would have thought that 
renting scooters to drunk people

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for a dollar who would then 
throw them in a canal on their 

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way home would be a money losing
business? 

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Bird ran up more than $1.6 
billion in net losses from 2018 

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before finally running out of 
money. 

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Smile Direct Club, which was 
supposed to revolutionize the 

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oral care industry by selling 3D
printed clear aligners direct to

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customer, was valued at $8.9 
billion when it went public in 

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2019. 
But the stock fell in value over

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time as the company proved to be
unprofitable year after year. 

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The company shut down last month
$900 million in debt. 

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The health tech startup All of 
AI, which reached a peak 

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valuation of $4 billion in 2020.
Driven by the need for 

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automation in healthcare during 
the pandemic, the company raised

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over $900 million from investors
In 2022. 

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The company began laying off 
staff, citing tough economic 

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conditions. 
The company was allegedly trying

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to raise money when it abruptly 
shut down in November. 

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Going out of business in 2023 
was particularly surprising for 

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a company with AI in its name. 
Zoom, the Robot pizza delivery 

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company, which had raised 
$445,000,000 in VC funding, the 

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majority of which came from 
SoftBank in 2018 at a two and a 

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quarter billion dollar 
valuation, shut down this 

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summer. 
The writing was on the wall for 

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quite some time with Zoom. 
In 2020, they announced that 

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they were shutting down their 
robot pizza delivery business, 

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and we're shifting their focus 
to food packaging, production 

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and delivery systems. 
Who did they think would invest 

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in that? 
Investors want robots making and

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delivering pizza that should be 
obvious to everyone. 

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Yo, I haven't got all day. 
What kind of pizza do you guys 

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want? 
We work who set out to 

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revolutionize office real estate
by having an app which I'm told 

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didn't work very well, and Free 
beer on Tap filed for bankruptcy

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in November. 
Wework and its founder Adam 

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Newman were the poster boys of 
how a blitz scaled business 

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model led by a charismatic 
founder could apply a veneer of 

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technology to an old business 
idea and attract venture capital

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funding to achieve a multi 
billion dollar valuation. 

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At its peak, Wework was valued 
in private markets at $47 

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billion. 
SoftBank alone invested $16 

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billion into the company. 
Masayoshi Son, Softbank's 

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founder, allegedly invested his 
first $4.4 billion in the shared

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office space company after 
Newman gave him a 12 minute tour

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of Wework in 2016. 
With such a short tour, it's 

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unlikely that the free beer even
had an impact. 

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SoftBank, run by Masayoshi Son 
Japan's Kathy Wood, was one of 

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the biggest startup investors in
the last decade. 

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They invested in all sorts of 
non tech companies that were 

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made to look like tech in order 
to attain sky high valuations. 

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According to Bloomberg, the 
SoftBank Vision Fund alone lost 

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$53 billion over the last two 
years on startup investments. 

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So why are startups failing now?
How much money has been lost? 

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Why did people ever invest in 
some of these crazy business 

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models and how might this affect
the broader economy? 

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We've seen a very difficult 
period for startups over the 

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last year or two, but it comes 
in the wake of probably the best

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period for VC backed startups in
decades. 

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During the decade from 2011 to 
2021, VC investment in private 

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startups grew more than 
sevenfold, from $46 billion in 

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2011 to $345 billion in 2021. 
In 2022 when the Federal Reserve

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began hiking interest rates, 
this money began drying up as 

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investors lost their taste for 
unprofitable but high growth 

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investments. 
The flood of money into venture 

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capital over that 10 year boom 
period was driven by two main 

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factors. 
Firstly, low interest rates, 

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which meant that a dollar of 
earnings that was expected to 

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come in 10 years time was worth 
almost as much as a dollar of 

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earnings due to arrive the next 
day. 

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This meant that you could focus 
more on growth than near term 

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cash flows. 
Secondly, a recent history of 

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profitable exits from VC funded 
startups like Facebook, Google, 

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WhatsApp and Snap meant that 
investors were suddenly paying a

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lot of attention to tech 
startups. 

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Hoping to repeat those 
successes. 

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Venture capital went from being 
a small asset class run out of 

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offices on Sandhill Road that 
had burned investorsinthe.com 

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bubble to a massive global asset
class like hedge funds or 

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private equity. 
The big names in VC became 

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household names. 
During the lockdown period of 

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the pandemic, people around the 
world began adopting new 

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technologies at a faster rate 
than ever before, and there was 

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a feeling amongst investors that
a sea change had occurred and 

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that the future belonged to 
working from home companies like

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Zoom and Peloton. 
People were using apps like Uber

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and DoorDash for food delivery 
and booking rentals on Airbnb to

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get out of big cities now that 
they no longer had to turn up in

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the office. 
While the prior wave of 

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profitable high growth tech 
stocks had been one way or 

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another in the advertising space
or businesses like cloud 

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computing, the new wave of 
startups had untested business 

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models. 
Gig economy businesses which 

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attracted a lot of competition 
and might never flip to 

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profitability, or robot made 
pizza which would be cooked on 

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route to a customer's home. 
As it turned out, a lot of these

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new business models didn't 
really work, especially when 

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interest rates started going up 
and investors wanted to see 

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positive cash flows. 
Investors over the period of the

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tech stock bull market had 
started taking a lot of risk. 

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A lot of new investors were 
young and had never seen a 

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rising interest rate environment
and they expected that a lot of 

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the new business ideas that they
saw, including during the 

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pandemic, would continue on 
forever. 

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There was a lot of optimism 
around technology and high 

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growth startups back then 
amongst retail investors who 

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didn't really worry about 
valuation. 

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Startups do fail all the time. 
So what makes these bankruptcies

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any different? 
Well, many of these firms were 

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worth billions of dollars in the
private market until very 

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recently. 
The investors in private markets

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are supposed to be more 
sophisticated than retail 

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investors, but the qualification
to invest in private investments

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like these is just that you have
a lot more money to lose. 

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A lot of the VCs possibly 
believed in many of the 

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questionable investments that 
have since gone bust, but a 

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venture capital fund isn't 
really there to hold on to these

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investments until the underlying
business flips to profitability.

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They invested the idea stage 
with the goal of selling these 

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businesses onto the public when 
the hype is at its peak. 

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They did manage to unload a 
number of the biggest flops, 

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like We work, but not at the 
valuations they were hoping for,

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and have found themselves 
holding the bag on a lot of 

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investments that they bought 
into at peak valuations. 

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Historically, by the time a 
company had reached a billion 

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dollar market cap, having raised
hundreds of millions of dollars 

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in funding, it had mostly sorted
out its business model. 

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If not already profitable, it 
was firmly on the road to 

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profitability. 
This was not necessarily the 

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case for many of the companies 
now failing. 

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The huge valuations many of 
these companies were attaining 

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in the private market may have 
been more of a function of how 

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much money had flowed into the 
private tech startup market 

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since 2011, rather than 
necessarily reflecting the 

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quality of these companies and 
their business models. 

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So how much money has been lost 
in these startups? 

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Well, according to Erin Griffith
at the New York Times, $27.2 

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billion in VC funding had gone 
into the 3200 venture backed 

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companies that went out of 
business in the 1st 11 months of

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2023. 
That number was based on data 

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from Pitch Book, which they put 
together for the New York Times,

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and they said that the data was 
not comprehensive and probably 

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under counts the total because 
an awful lot of companies go out

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of business quietly without any 
big announcement. 

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That $27.2 billion number 
excluded many of the largest 

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startup failures that went 
public like we work, or that 

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found buyers at much lower 
prices than VC investors had 

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invested at. 
Aaron gives the example in her 

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article of hoping. 
I'm hoping I pronounced that 

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correctly. 
A startup that raised more than 

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$1.6 billion in VC funding was 
once valued at $7.6 billion and 

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recently sold its main business 
for just $15 million. 

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That's a big loss and a lot of 
money burned. 

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The hype around AI that we've 
seen in the last year has masked

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a lot of the losses in the tech 
space. 

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Meta was up 178% last year due 
to a combination of AI hype and 

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cost cutting within their core 
business. 

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This covers up the $46.5 billion
lost on the Metaverse, which no 

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one will venture into for fear 
that they'll run into Mark 

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Zuckerberg. 
AI was the only bright spot for 

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startups last year, which 
according to Bloomberg received 

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almost $18 billion in VC 
funding. 

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So should we expect these 
startup shutdowns to affect the 

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broader economy? 
Well, there are job losses 

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associated with these business 
failures. 

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As I mentioned in the intro, 
Bloomberg reports that more than

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1/4 of a million workers at tech
companies were laid off last 

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year. 
But the job losses are happening

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in an economy that's otherwise 
doing just fine. 

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The labor market has been very 
tight, meaning that the people 

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who lose their jobs should find 
replacement jobs easily enough. 

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As bad as the stories of these 
firms shutting down might sound,

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we have to keep in mind that the
stock market is at all time 

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highs right now, with the gains 
driven by mega cap tech stocks 

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like Meta, Microsoft and NVIDIA,
all of whom closed at new all 

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time highs on Friday. 
According to the New York Times,

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some VCs have been encouraging 
founders in their portfolio 

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companies to consider walking 
away from struggling businesses.

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Rather than waste years grinding
away, some of these companies 

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have been able to wind up and 
return some money to their 

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investors. 
One of the negative economic 

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effects of startup shutdowns is 
that in such an environment, it 

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becomes harder for founders with
good business ideas to get 

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funding. 
According to Pitch Book, the 

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number of active investors in US
venture capital, which was 

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defined as firms that made two 
or more deals in the last year, 

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plummeted by 38% in the 1st 3/4 
of 2023 compared to the same 

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period the prior year. 
That translates to 2725 fewer 

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firms making deals. 
According to S&P Global. 

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US corporate bankruptcy filings 
rose last year, hitting the 

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highest level since 2010. the FT
reports that corporate 

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00:14:42,200 --> 00:14:46,000
insolvencies in England and 
Wales climbed to their highest 

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level since the global financial
crisis in the six months to 

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September last year, as 
businesses grappled with high 

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borrowing costs and slowing 
demand. 

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A new paper by Bruno Albuquerque
and Roshan Iyer, The Rise of The

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Walking Dead Zombie Firms around
the World, argues that some of 

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the increase in recent business 
failures is a catch up effect, 

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and that many of the companies 
that failed in the last year 

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were zombie companies that had 
been propped up by low interest 

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rates and pandemic relief 
measures. 

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These were businesses that would
have likely collapsed earlier 

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without the support they 
received, which has now mostly 

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been withdrawn. 
The failure of bad business 

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models is just part of the 
creative destruction of the 

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capitalist system and is 
necessary for a healthy economy.

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The paper defines zombie firms 
as firms that are risky, 

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unproductive and unviable, but 
that managed to avoid immediate 

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default, often thanks to banks, 
investors, or government support

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in light of misaligned 
incentives. 

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Their research shows that the 
share of zombie firms, both 

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listed and private, has steadily
grown over the last 20 years, 

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initially growing in the wake of
the global financial crisis. 

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00:16:10,480 --> 00:16:16,520
After a downtick from 2016 to 
2019, the share of zombie firms 

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resumed its upward trend, likely
driven by the unprecedented 

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policy support and easy 
financing conditions made 

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available to businesses as 
pandemic relief. 

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00:16:28,920 --> 00:16:33,840
The paper finds an increase in 
zombification over the last 20 

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00:16:33,840 --> 00:16:38,320
years for both listed and 
private firms, with zombie firms

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00:16:38,320 --> 00:16:44,880
accounting for over 10% of all 
listed firms in 2021, up from 6%

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00:16:44,880 --> 00:16:48,080
in 2000. 
And for private firms the rise 

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00:16:48,080 --> 00:16:54,280
has been from 1% in 1997 to over
5% in 2020. 

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00:16:54,720 --> 00:16:58,600
The authors find that the 
presence of zombie firms in an 

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00:16:58,600 --> 00:17:03,680
industry dampens investment, 
productivity and employment for 

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00:17:03,680 --> 00:17:06,839
healthy firms. 
They find that healthy firms who

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00:17:06,839 --> 00:17:11,000
find themselves competing with 
zombie firms are less able to 

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00:17:11,000 --> 00:17:15,079
access credit, and that non 
zombie firms in industries 

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00:17:15,079 --> 00:17:19,400
heavily populated with zombie 
firms tend to exit the market at

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00:17:19,400 --> 00:17:24,240
a faster rate than average, and 
that new competitor entry rates 

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00:17:24,240 --> 00:17:27,400
in those industries are 
significantly lower. 

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00:17:28,000 --> 00:17:31,320
The paper argues that the 
policies that led to 

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zombification, while well 
meaning, might delay an 

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00:17:35,040 --> 00:17:38,920
important creative destruction 
in the global economy, harm 

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00:17:38,920 --> 00:17:42,440
healthy firms and have negative 
consequences for long term 

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00:17:42,440 --> 00:17:46,600
productivity growth. 
No one wants to see firms going 

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00:17:46,600 --> 00:17:49,800
out of business, especially 
startups which are often the 

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00:17:49,800 --> 00:17:52,520
most exciting and innovative 
firms. 

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00:17:52,760 --> 00:17:57,160
But if a business model makes no
sense or only works in a zero 

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00:17:57,160 --> 00:18:00,680
interest rate environment, then 
it's disappearance means that 

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capital can again flow in the 
direction of the best 

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00:18:03,800 --> 00:18:06,440
businesses. 
Thanks for tuning into this 

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00:18:06,440 --> 00:18:10,040
week's podcast and a special 
thanks to my supporters on 

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00:18:10,040 --> 00:18:12,800
Patreon who make all of this 
happen. 

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Have a great week and talk to 
you again soon. 

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00:18:15,480 --> 00:18:18,440
Bye. 
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Bye.