Once valued at billions of dollars, more tech startups are failing
ARI SHAPIRO, HOST:
See if you can guess what these tech startups all have in common - the office-sharing company WeWork, the electric scooter maker Bird and the orthodontics company SmileDirectClub. Well, all of them were once valued at billions of dollars and more recently, they collapsed. WeWork filed for bankruptcy. Bird was delisted from the New York Stock Exchange. And those are just the household names. So many tech companies have fallen from great heights lately that some people are calling it a startup mass extinction event. New York Times tech reporter Erin Griffith has been following this closely. Welcome to ALL THINGS CONSIDERED.
ERIN GRIFFITH: Thanks for having me.
SHAPIRO: Startups often fail. That's not new. So what makes this wave of implosions different?
GRIFFITH: Well, the biggest piece of it is that these are unicorns that were worth $1 billion or more in the private market. So usually when a company gets to that size and scale, you kind of think, oh, this is a sure bet. This company is one of the few that's really going to succeed and make it. And so we're seeing some really enormous companies fall from grace. And that's a result of the amount of money that has been flowing into the private tech startup market over the last decade. So, yes, lots of startups fail, but usually you expect those to be the kind of early stage ones that are just figuring out what kind of business they're going to be, not the ones that have gotten to a billion-dollar or more valuation, raise hundreds of millions of dollars in venture funding and, you know, have been predicted to be the future.
SHAPIRO: So what was wrong with all those predictions? Why did everybody invest in these things that turned out to be, if not worthless, certainly not worth all the money they were pouring into it?
GRIFFITH: Well, I think one of the things is, you know, the tech industry got really excited about the potential of some transformative changes happening in the macro environment, which is like, you know, cloud computing in mobile phones. This created enormous business opportunity. And then we saw the huge success of advertising business models like Facebook and Google. The problem is a lot of the new startups were trying new business models that were kind of untested, like the gig economy or a lot of the crypto companies. And as it turned out, a lot of these new business models didn't really work.
And, you know, we're still seeing some of the biggest gig economy companies - they're still publicly traded and doing OK, but they're struggling to turn a profit. So part of it is just questionable business models. And part of it is, I think, a little bit of overoptimism because investors over the last decade were taking a lot of risk and expected that a lot of the changes that we saw - including in the pandemic, when people were adopting tech at a faster rate - would just continue forever. And I think they're just a little bit overoptimistic.
SHAPIRO: We're talking about billions of dollars just vanishing in smoke. That's got to ripple out through the economy, right? Does that have any kind of a larger impact that we should worry about?
GRIFFITH: You know, that's a good question. Venture capital has always been this kind of, like, small cottage industry. It's a very tiny piece of the overall, you know, finance industry. But it has ballooned by eightfold over the last decade. Lots of money managers, you know - the VCs call them tourists - have jumped into the asset class and started saying, oh, I want to bet on the next Facebook or the next Google. You know, a lot of those investors are now kind of licking their wounds and retreating. Overall, yeah, it stinks for the employees who are getting laid off, the good ideas that won't see the light of day, but I think it's relatively contained and still a relatively small part of the overall economy.
SHAPIRO: So to be clear, this is not going to trigger the next recession. This is not like the housing market imploding. The economy is still going to do what it's going to do. The Dow Jones just hit an all-time high.
GRIFFITH: Yeah. Yeah. Exactly. I think you're right there.
SHAPIRO: What do you think the forecast for tech startups in 2024 will be?
GRIFFITH: You know, I think it'll continue to be a kind of two different narratives, where certain companies in AI will be able to attract lots of funding and excitement and hype. And others will continue to be struggling. And I think we're going to see a lot more of these kind of high-profile, surprising failures. Because for the last two years, we've seen companies cutting, doing layoffs. This downturn has been going on for a while now. And a lot of them are doing that to kind of extend runway and avoid having to tap the - or tap the markets to raise more money, because they knew that would be hard. Now, they're starting to hit the end of the road. They're running out of money. They're trying to figure out if they can raise more, trying to get to profitability if they can. And a lot of them are looking around and realizing this might not work. So I think we will probably see a lot more failures.
SHAPIRO: Erin Griffith is a tech reporter at The New York Times. Thanks a lot.
GRIFFITH: Yeah, thank you for having me. Transcript provided by NPR, Copyright NPR.
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