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Venture capital firms lose billions in start-up winter

Venture capital (VC) is a high-risk, high-reward game.

The VC firms and angel investors who picked Apple, Intel, and Amazon early have profited handsomely.

However, the start-up winter is in full swing and hundreds of billions of dollars are being flushed down the toilet.

Some prominent examples of equity-wiped start-ups include WeWork, Olive AI, Convoy, Hopin, Plastiq and Bird, the New York Times reports.

The businesses have either gone bust — or are now comparatively almost worthless.

The numbers are staggering. Altogether about $32 billion has been thrown on the cash bonfire.

WeWork

The coworking space provider WeWork is a prime example. Founded by Adam Neumann and others, the company grew quickly at first and was once worth about $70 billion ($US47 billion).

VCs and investors included Goldman Sachs and Softbank.

Things started to turn sour when the company filed documents for an IPO and investors began to get nervous about its corporate governance structure and business model.

Then came the Covid-19 pandemic, which softened demand for flexile workspaces.

The company finally went public in 2021 through an SPAC merger. But it’s now only worth a paltry $25 million ($US16.5 million).

Hopin

Another tale of woe is the fate of British group Hopin, a start-up spruiking digital gatherings.

The start-up was in a good position when the Covid-19 pandemic hit, with the company offering an alternative to in-person events as lockdowns roiled the world.

Australian-born Founder Johnny Boufarhat once cited there were “more than 15,000 monthly events” on the company’s platform, the Financial Times reported.

The start-up raised billions and was at one point valued at about $11 billion ($US8 billion). However after a turn of fortunes, Hopin sold its main business to RingCentral for about $22 million ($US15 million) in August, the New York Times reports.

Olive AI

Healthcare automation company Olive AI was once worth about $6 billion ($US4 billion).

It also went on a big spending spree, fuelled by about $900 billion in “easy” cash from VCs.

The company lacked focus, grew too quickly and lost track of its raison d’etre, according to one analysis.

In 2022 the company announced it had laid off 450 workers and its CEO Sean Lane admitted “missteps”.

The company sold its key units in November, and the rest of the business was wound down.

Start-up winter

Another victim of the start-up winter is Plastiq. The lending and payments start-up was once valued at $1.4 billion ($US940 million) and filed for Chapter 11 bankruptcy in May.

Scooter company Bird was delisted from the New York Stock Exchange in September because it was unable to keep its market capitalisation above $15 million for 30 consecutive days. It was once worth about $1.1 billion ($US776 million).

Bucking the trend

As borrowing costs rise and VCs turn the screws on start-ups, some businesses have still been able defy the winter chill and fundraise billions — particularly the trendy AI firms.

Generative AI start-ups.

While overall funding for start-ups in 2023 has plunged about 65 per cent as compared to 2021 (a drop from $US655 billion to $US224 billion), funding for Generative AI is up 110 per cent.

GlobalData reports that venture capital funding for Generative AI hit a new record high of $US10 billion, up from $US4.7 billion in 2021.

Adarsh Jain, CFA, Director of Financial Markets team at GlobalData said: “The slowdown in start-up funding over the last couple of years, dubbed ‘start-up winter’, was driven by rising interest rates, recessionary risks and overall tough macro environment.

“Despite these challenges, GenAI start-ups raising record sums underscores the breakthrough nature of the technology, its widespread applicability, and its power to transform entire sectors and industries.”