Tally's Shutdown Is a Stark Reminder for Growth VCs...Fewer Venture Funds with DPI...WeRide Files For IPO
Plus, AI applications providers are raising big rounds
The Main Item
What Happens When Megafunds’ Growth Bets Don’t Work Out
It took a little while for high interest rates to take their toll on Silicon Valley’s largest startups, but we’re now seeing a stable of dead unicorns.
Private companies valued at more than $1 billion valuations used to be a rare sight, but as rocket-bottom interest rates pushed more money in the venture industry, the number of paper unicorns exploded. There were over 600 unicorns minted globally at the 2021 peak of the funding boom, according to PitchBook.
But now the froth has gone away, with higher rates shifting capital flows in the other direction. Non-traditional late-stage funders are retreating, and valuations are taking a hit across the board, with the possible exception of AI. “There’s a huge overhang from those valuations that the companies can’t really grow into,” said Better Tomorrow Ventures’ Sheel Mohnot.
Fintechs that are in the credit business face a double hit from rate hikes.
The cool-down has also revealed a common feature of bubble moments: fraud.
Many unicorn startups haven’t raised since the days when capital was more free-flowing and are effectively “zombiecorns,” struggling to raise more privately and facing a lack of traditional exit opportunities. The rate of unicorn formation is way down: 2022 saw 358 new billion-dollar startups, while 2023 only had 101.
A duo of recent growth-stage fintech failures, both of which raised capital from a16z, shows how tough the current moment can be even for well-capitalized startups backed by megafunds.
This week the a16z-backed fintech Tally, an almost-unicorn which helped its customers manage and pay off credit card debt, announced via a LinkedIn post that it was unable to raise a new round and was shutting down. The company had raised $172 million in total and was last valued at $855 million; at the end it tried to pivot away from a direct-to-consumer model into a business-facing one, but didn’t end up securing a launch partner. Meanwhile, multiple customers filed complaints with the Better Business Bureau, saying the company had stopped delivering the promised payments to its customers’ credit cards and had raised interest rates on their credit lines.
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Tally’s proposition was lower-interest loans that customers could use to pay off expensive credit card debt, but it’s a model that wasn’t sustainable in the post-ZIRP era without a massive influx of capital, which was not forthcoming because of, well, the post-ZIRP era.
It’s a good illustration of the hazards of venture-backed credit card startups, BCV’s Matt Harris told me in a text.
“When your business model involves renting money, giving it away and hoping you get it back with interest, you’re highly sensitive to increases in the cost of money, limitations on your ability to get repaid or paid interest, as well as your borrowers’ financial health—and a lot of that is subject to forces outside your control,” he said.
Tally’s collapse comes on the heels of the shutdown of a fellow a16z fintech portfolio company, the banking-as-a-service startup Synapse, which acted as middleware between banks and fintechs and had raised over $50 million from investors. The Synapse failure alarmed regulators and customers, exposing the hazards of middlemen who are not FDIC-insured having a big role in money movements. If money gets lost in a ledger mixup, as the court records indicate happened here, customers who end up with their funds missing aren’t insured by the government, though the banks will likely have to make them whole.
“Regulators don’t want layers of abstraction that create true distance between the end users and the underlying bank from a compliance and data perspective,” noted Harris. The Synapse architecture also “prevented banks from fulfilling their money laundering and terrorist financing regulatory monitoring requirements,” he said.
“The next wave of middleware companies will be much more transparent and pass through, but the whole space will be under a cloud for a while,” he said.
Funding to global financial services startups has not cracked $10 billion a quarter for the last five quarters, Crunchbase found.
The trouble isn’t limited to fintech: A scan of the largest startups to close since the beginning of 2023 spans sectors including events-management, energy, healthcare, and social media, and many of Silicon Valley’s largest VC firms had stakes in the biggest unicorn failures.
Here’s a round-up of some of the startups who have fallen the farthest and who was on their cap table:
Moxion Power: Battery manufacturer. Raised over $110 million and was reportedly seeking to land an additional $200 million at a $1.5 billion valuation before furloughing its staff in July 2024 after being unable to close new money. Notable Investors: Y Combinator, Amazon, Microsoft.
InVision: Graphic design tools. Raised over $260 million at a peak valuation of $2 billion before announcing it would shut down in January 2024. InVision will still operate its products through the end of 2024. The company faced increasing competition from rivals like Figma. Before its shutdown, customers complained of stagnating products. Notable Investors: Atlassian, Goldman Sachs Investment Management, Battery Ventures, Spark Capital, Iconiq Growth, Accel, Tiger Global, FirstMark Capital.
Hyperloop One: Transportation. Raised over $450 million at an unreported valuation before shutting down in December 2023. The company faced several personnel scandals with its leadership and failed to win a contract to build a working hyperloop. Notable Investors: Kindred Ventures, Quiet Capital, Richard Branson, Khosla Ventures, 8VC.
Veev: Modular construction. Raised $600 million before shutting down in November 2023. The company was reportedly unable to pay off its debts on properties it had purchased in the US. Notable Investors: BOND, Khosla Ventures.
Convoy: Electric trucking. Raised over $1 billion and valued at $3.8 billion before shutting down in October 2023 after a slowdown in global freight demand. Notable Investors: Y Combinator, CapitalG, Neo, Jeff Bezos, Bill Gates.
Olive AI: AI-powered healthcare revenue tools. Raised over $902 million at a $4 billion valuation before shutting down in October 2023. The company’s rapid growth quickly became unsustainable and the startup was forced to lay off 450 employees in 2022. Notable Investors: Sequoia, Tiger Global, GV, General Catalyst, Khosla Ventures.
Zume: Robotic pizza delivery. Raised $445 million at a $2.25 billion valuation before shutting down in June 2023 after facing increasingly untenable technological problems with the pizza manufacturing and an attempted pivot to sustainable packaging. Notable Investors: SoftBank, Kleiner Perkins, Maveron, SignalFire.
The frothier the market, the higher the risk that startups walk close to the edge of the law, or worse: Founders Fund-backed social media company IRL had to shut down in June last year after the news broke that over 95% of its users were fake profiles or bots. Its founder, Abraham Shafi, was charged with defrauding investors by the SEC at the end of July this year.
Many unicorns fade from relevance long before they truly stop doing business, if they ever truly die at all. British virtual events unicorn Hopin was valued at $7.75 billion in 2021 and backed by tier-one VCs like a16z, Tiger Global, and General Catalyst. This year, it entered liquidation for its UK operations after RingCentral acquired many of its core product offerings last year.
For what it’s worth, the number of new unicorns is back on the rise: the latest unicorn tracker data from Crunchbase shows that 13 new companies reached unicorn status in July, equalling March for the most new unicorns in a month this year.
And while many startups and VCs are resistant to it, raising a down round is no death sentence: fintech unicorn Ramp is a good example of a growth-stage startup that gritted its teeth and raised a down round in 2023, only to come out on the other side and raise an up round less than a year later.
The Fed is signaling that interest rate cuts could come as soon as September, which won’t save the IPO market for the back half of the year but could provide some relief for big startups that need to raise additional capital. Growth stage companies should do their best with the capital they have, if they can sit tight just a little longer. But ultimately your business has to be working.
One Big Chart
Venture Fund Payouts to LPs Slow Dramatically for Recent Vintages
Despite the extraordinary boom of 2021 that drove many startup valuations skyward, venture funds that have launched since 2019 have returned capital to their limited partners at a much slower rate than those which debuted in 2017 and 2018, according to new research from Carta.
The firm’s first-ever venture fund performance report, which analyzed anonymized data from over 1,803 US venture funds on the Carta platform through the end of Q1 2024, shows how the weak IPO market and the slowdown in M&A has crimped payouts to limited partners.
While venture is a long game, the Carta report shows that only 9% of 2021 venture funds have distributed any capital to LPs, a measure known as DPI. By contrast, 16% of 2020 funds and 24% of 2019 funds boasted DPI after 3 years—though as the chart below shows, even the 2019 funds are tracking well below their earlier counterparts in returning cash.
High interest rates and a locked-up exit environment are almost entirely to blame for the distribution slowdown, Carta’s Head of Insights Peter Walker told me. “The performance is very deeply tied into this macro cycle that goes on with startups and venture capital in general, so that suggests that if LPs are committed to the asset class, they probably need to be invested in many different vintages to make sure they’re not missing out on the well-performing ones.”
The macro environment that fund managers are in now is a tough one: tech IPOs have been few and far between as public markets balk at sky-high valuations of the best private companies, and antitrust concerns have helped chill M&A. Neither of those issues is going away in the near term, which is bad news for fund managers with particularly antsy LPs, but Walker is “cautiously optimistic” for 2025 to be a rebound year.