Venture Mania Is Drying Up

By Rob Spivey, director of research, Altimetry

The past two years have been a bruising time to be a startup…

In 2023 alone, no less than 3,200 private venture-backed businesses vanished. Those companies had raised $27.2 billion in venture capital (“VC”)… all of which is now is worth zero.

VC mania was one of the best ways to gauge the impact of near-zero interest rates over the past decade. Investors got used to money being “free.”

They bet on companies that could rake in multibillion-dollar profits in the distant future. The odds didn’t matter if it meant a seat at the table of the next Amazon (AMZN)… Alphabet (GOOGL)… or Tesla (TSLA).

But as the Federal Reserve started aggressive interest-rate hikes in 2022, investors started to reconsider the value of those low-probability moonshots. VC firms got far more selective with their cash.

That meant VC-backed startups began to burn through their reserves… before they were able to turn a profit. It’s how we ended up with today’s 3,200-company trash heap.

And one of those companies was none other than coworking “tech” startup WeWork (WEWKQ).

WeWork was built up in the venture-fueled mania of the 2010s… and has been brought down by the cash spigot being shut off.

Today, we’ll dig into how the tough VC environment pushed this business over the edge…

WeWork clawed its way to nosebleed valuations by repackaging an old business model…

Regular readers know we’ve been following the real estate startup closely over the past year. Co-founder Adam Neumann had been marketing it as a “tech” company since WeWork got its start in 2010.

Neumann managed to fool investors for nearly a decade. By the time WeWork tried to go public in 2019, it had reached a lofty $47 billion valuation.

But it all fell apart when investors realized there was nothing special about WeWork. The only differences between this co-working company and its peers were a few more bells and whistles and better branding.

Neumann promised to transform the world of office work through troves of data and new revenue streams. In the end, he lost billions of dollars for investors.

As we wrote in November…

It didn’t matter how hard Neumann pushed the fun tech-firm atmosphere… WeWork was nothing but a real estate business…

Like many other real estate companies, rising interest rates made it much harder for WeWork to operate…

Its interest expenses exploded from $100 million in 2019 to more than $500 million [in 2022]… and its revenue fell by about $200 million.

That was enough to doom the business.

WeWork had previously been able to push off these issues… by raising billions of dollars in cash and debt each year. It couldn’t do that with the funding markets closed.

And without new investment to fuel its losses, WeWork declared bankruptcy in early November.

When the music stopped, WeWork found itself without a seat…

And it won’t be the last company left scrambling as cash runs out.

We previously wrote that WeWork likely kicked off a string of real estate bankruptcies. But the pain won’t be limited to one sector.

Plenty of startups raised a lot of cash in the good years of 2020 and 2021 – and before.

Many of those companies are still operating as “zombies.” They can’t afford the interest on their debt, making them the “walking dead” of the investment world.

Or they’re close to running out of money as venture funding remains closed… with interest rates well above 2021 levels. Even if the Fed cuts rates a few times this year, it won’t be enough to save them.

This isn’t the time to dive into beat-up VC-funded startups. They’ve exhausted their cash… and the usual outlets have all dried up.

If you’re not careful, you could get caught holding the bag for the next WeWork.

Regards,

Rob Spivey
January 10, 2024