How many startups shut down last year compared to the year before? A lot. | Equity Podcast

This episode is presented by invest Puerto Rico if you believe your business Can go anywhere Puerto Rico is the [Music] Place hello and welcome back to equity a Podcast about the business of startups Where we unpack the numbers and Nuance Behind the headlines I'm Maryann aavo And this is our interview show where we Sit down with a guest think about their Work and unpack the rest today we're Talking to angel investor creator of Layoffs fi and co-founder of Comprehensive. and human interest Roger Lee Roger welcome back to the show so Happy to have you here thanks for having Me again yeah we're super excited Roger Joined us on the show last year in the Wake of 2022 Tech layoffs but today We're focusing on the business of Shutting down and why investors are Lining up to back startups in this space Listeners may recall our coverage of Sunset and simple closure two companies That recently raised Capital to help Other startups wind down so we not only Be talking about that we'll also touch On recent layoff numbers and the outlook For the rest of the year when it comes To both shutdowns and layoffs so to Start Roger you invested in Sunset they Just raised capital I believe it was About 1.4 million in funding mostly for Mel investors simple closure also raised

Money and CA recently announced that is Entering the space with its own offering I was curious how did you hear about This company what Drew you to invest in It and why do you think the space is one That is worth investing in overall well I've always been excited about Businesses that help automate very Manual and tedious processes dating back From my time at human interest doing That for 401ks to what I'm not doing now At comprehensive in terms of helping Companies automate compensation Management so when I heard about sunset And how they can help Tech startups wind Down and automate all of the tedious Legal compliance tax and HR work Associated with winding down a business I was very excited about that it's very Timely because unfortunately the reality Of the current environment is that there Are more companies shutdowns happening Coinciding with more layoffs in general Which I'm very in tuned to based on my Work at layoffs.fyi and so I thought That that Sunset was a great service That could help automate these really Tedious wind down processes at a time When it's very stressful for Founders in General you know think about how tough It is just to have to wind down a Startup even pouring Your Blood Sweat And Tears into and even after you've Decided to shut down the business now

You realize you have to do months of Work to actually formally wind down the Entity so right s ability to automate That is uh you know really really Interesting yeah I know it seems like a Lot of people think oh there's so much Work in founding a startup getting one Off the ground they don't really think About all the work and time money that Could go into it when it doesn't work Out and historically actually I saw a Statistic that about 91% of startups Actually fail which means only about one Out of 10 succeed now we don't Necessarily hear about all the startups That don't make it so I know that what's Reported in the media is far less than What actually happens now in tracking Closures and layoffs on layoffs.fyi have You seen numbers go up in the past Couple of years you know we've had a Definitely a challenging fundraising Environment it's been harder for Companies to raise so my guess is you Did see numbers go up in 2023 compared To 2022 and 2021 but I'd be curious to Hear what your data shows yeah based on What Leia has tracked company closures Just go reped on have gone up by 70% From 2022 to 2023 wow and that's a lot Are on Pace to do something similar if Not exceed that in 2024 and then I know there is a stat That pitchbook put out recently that

They were they estimate 3,200 Venture back startups were shut Down in 2023 and they think that even that is Likely an underestimate so we're talking You know thousands of companies just in The venture space that are shutting down On an annual basis if you look at just Sort of businesses in general not just The VCB startups it's something close to A million businesses that get shut down Every year right right I I saw that Statistic out there as well I think it Was like 700,000 to a million per year Of businesses but in the startup world I Mean I have to wonder though I mean 70% Is a huge jump like that's a lot but Also 2020 2021 we had you know the frenzy of Capital flying everywhere and there were A lot of startups born so I also have to Wonder is that number just Proportionately higher because we saw More startups born during that period You know does that make sense would you Agree with that likely the shutdowns of Course are gonna fluctuate based on the Environment in general so it's not Surprising that as layoffs have gone up Over the past two or three years so have Company shutdowns but what was eye Openening to me when I was learning About space is that these company Dissolutions these kind of painful wind

Down processes don't only happen when a Company gets shut down most Acquisitions Actually also resolves in the entity Being dissolved anyway because it's Structured as asset purchase sales where The aquire isn't actually buying the Entire corporate entity and all the Liabilities that come with it but just Selectively buying you know the IP the Team things like that right just parts Of the business exactly which means the Original Company still has to be wound Down um even in even in an acquisition So just goes to speak that even though There's you know going to be some Fluctuations on how many companies get Shut down this activity is always Happening either due to shutdowns or Even due to Acquisitions and just saw Something that's been talked about very Often you know I think kind of like with Playoffs company shutdowns have sort of Been this keep quiet hush hushing you Know most folks don't like to talk about It it's not reported on the news it kind Of just goes away quietly which is why It this interesting opportunity because Now I think there is a little more Transparency about it now you're kind of Seeing some Founders actually become More vocal and transparent about their Companies shutting down talk through Sort of the learnings from it use it as A way to kind of give advice to other

Founders who have a lot of exposure now About what it's like to start a business But not what it's like to actually wind One down so I think comes with an Interesting time when you know it's Becoming more transparent folks are Talking about it more and the pain of Winding company down is becoming more Obvious to folks who might not have Realized just what goes involved in it Before yeah you raised a couple of good Points I think one is that there's this Sort of misconception then when we talk About having to wind down that it Strictly means a company has maybe Failed and that's it they have to just Shut down but in reality it could mean a Couple of other different things it may Mean for example in Brendon who I talked To the co-founder of sunset pointing This out that a lot of the companies That they work with are actually doing Pretty well Revenue wise but they're Just not necessarily what you would Describe as Venture scale businesses so They realized okay rather than just keep Trying like on this wheel of raising Capital and and trying to maybe one day Exit or or go public let's just kind of Cut our losses maybe sell off parts of The business sell off IP do an aqua hire With another company that sort of thing So it's not necessarily oh wow this Company just failed it ran out of money

They had a terrible business model That's not necessarily the case in some Cases they are actually pretty viable Businesses but where Founders just Decided not to keep going for one reason Or another yeah that's exactly right you Know I think one thing that most folks Don't realize even Founders is just Exactly what goes on having to to wind Down the entity and why is it even that If they go through an AO hire or go Through an asset purchase sale they Still get stuck with all this work to Wind down you know it's sort of all the Things that you do when you start up the Company you now have to obviously do the Reverse of it so instead of the Incorporation process now you have to Generate a plan of dissolution to Actually wind down the entity of course There's the kind of all the IP what do You do with that if that's not part of The sale you know what do you do do you Assign it do you try to sell it to Someone else do you auction it do you Throw it away to open source it and so On there's kind of all the tax stuff so Following the final tax return there's Oftentimes kind of state level Withdrawals that you have to do to Formally kind of close your entity in Each a different stat stes then of Course there's kind of all the vendor Contracts you signed what do you do

About that right if you have investors Or creditors you know with the money That you have left in the entity how do You distribute that so just you know all All this stuff and and it's kind of the Last thing that Founders want to deal With if they've shut down or sold their Company is to now be stuck with all this You know laborious work that often takes Kind of weeks or months to kind of fully Wind down and so if they've sold their Business or got aquah haired they want To move on to the next thing right and Same if they shut it down they want to Figure what's next for them that's what Founders want to spend their time on not On all this sort of legal and tax and And compliance stuff but it's important To get right because it's you know Oftentimes a legal requirement and so Services um like the ones that are Popping up now are going to help make That a lot smoother for Founders and Help them kind of get back on the feeder Little the next thing yeah Infinity Ventures co-founder and managing partner Jeremy joner also pointed out a very Similar thing his firm invested in Simple closure which is also in the Space and he said hey look these Startups raised at pretty robust Valuations they maybe haven't grown at The metrics necessary to raise an upu so Some of them are saying rather than

Raising down round or you know totally Selling they might just sell off parts Of the business but anyway he did also Make that point of okay whatever we can Do to help these Founders move on faster The better for everybody involved so it Sounds like that's a similar narrative That I'm hearing also one thing I found Interesting about Sunset is that they Opted to mostly raise Angel money as Opposed to venture capital because of The reason that it saw many of these Other startups choosing to wind down Because they didn't want to be in that Same position of okay we have a good Business model we're making money but Not at the rate that these VCS might Want us to so they decided to go the Angel route and another kind of unique Thing I think about what they did was That they have this referral structure I Think with investors that each time you Refer a company to Sunset you get a Greater share in the company can you Talk a little bit about that yeah Exactly um I do think it was smart from Them to raise capital from angos Primarily and not bcas because it does Give them that optionality where they're Not going to have to sell their business Just because it doesn't generate you Know sort of the The Venture level Expectations of growth they can if they Want to go down that path but if they

Have a viable business they can still Keep going without having to have set up For kind of these Great Expectations and speaking kind of of That Equity incentive program I thought That was really unique too as an angel Investor in Sunset is that the way I Understand it works is that as investors Refer companies and customers to Sunset Then they can earn more equity in Sunset As essentially a referral bonus and it Really kind of helps align the Incentives for investors to actually Help and provide value to Sunset even After they invest you know as a Founder Myself I know that most investors pit Themselves as being value added Investors where they say hey we're going To give you money but we're also going To help in all these ways after we Invest and the reality ends up being That that's true to some extent and Maybe less true in others and you never Know quite know in advance you know Which investors will actually follow Through on that promise and and which Ones won't and so what sunset's done is They've kind of given this extra Incentive where hey you know if an Investor just invests their their money And doesn't refer customers that's okay But if they do want to add value to Sunset and and refer customers to them Then they can get extra equity in the

Company and that rewards investors who Really do help out and refer customers To them so I thought that was been Interesting way to reward the investors Who who end up helping lot post Investment and and kind of help a line Incentives so since you have created Layoffs.fyi you're also I think in kind Of this unique position of maybe seeing Firsthand which companies are shutting Down so but I guess I guess one thing That popped into my mind with this Though is it is it in a way creating I Don't want to say a negative incentive But would an investor would be less Likely to work with a company to help it Succeed if they think to themselves oh Well I don't think this is going to work Out I'll just refer them to Sunset and Let them move on I mean or is that just Like I know I guess worst case scenario Or hopefully most investors going to act Honorably and not do so unless they Really think that there's just no better Alternative that's right that's right And you know in the end investors are Going to financially benefit the most if Their portfolio companies succeed in Spite of any referral incentive that Sunset provides but of course you know Especially you know with the angel Investors and and Seed investors that Sunset raised from the sad reality is Kind of like the stat that you shared

Most of those startups will end up going Out of business or going through some Sort of acoh hire or asset purchase sale And so the reality is that these Investors are just naturally going to End up seeing a lot of the portfolio Companies having to go through the Windown process you know with of course The consent of the founder often times The founder is reaching out to the Investor saying hey we're going to have To shut this down and so when the Founders kind of made that decision Already but now they're left with this Mountain of of months of work to have to Wind down that the entity you know if The investor can recommend that company To Sunset that could be a win-win win Where now that the founders are are able To automate the wind down process and The investor can potentially get some Incentive out of it how long have you Been Angel Investing Roger I've done off And on Angel Investing dating back to You know even before I started human Interest so 2013 2014 I wouldn't say I'm I'm an active Angel investor by any means I kind of do It particularly kind of in tech Companies that I know well where I know The founders well or in spaces that I Know well and most of the time I'm busy Running my startups but I do like to Kind of help support other Founders in

Ecosystem and and try to be helpful Where I can especially if it's Founders Or spaces that I know Well what's next in Tech that's not the The right question it's where Puerto Rico more than just a Tropical Paradise It's an Innovations Paradise where Startups and Global players coexist in a Vast and vibrant ecosystem where Talent Runs deep highly skilled and bilingual Plus the island offers the most Competitive tax incentives in the US if You believe your business can go Anywhere Puerto Rico is the place find Out more at invest pr.org Runch one other question that I have so Obviously you know you're tracking Closures you're tracking layoffs what Industries are you seeing more shutdowns In than others I mean obviously I I Cover fintech quite a lot so that's the One I'm most familiar with and I know That we've seen a lot for example and You alluded to this earlier about how This has been sort of a taboo topic that People always I don't know like there Was some kind of Shame around and now It's like a little more acceptable to be Open about it when your startup shuts Down and talk about why it happened for Example braid a fintech that shut down Last year the co-founder she put out a Really lengthy blog post that I thought Was awesome because she detailed very

Specifically what happened she owned up To some mistakes she felt like she made That may have led to the company not Succeeding and I thought how helpful for Other Founders right so to your point I Do feel like it is getting to be a Little bit less taboo but anyway my Original question is are you seeing more Shutdowns in certain industries than Others you know it's interesting you Know I started L off I in 2020 when the First wave of you know covid shutdown Related layoffs started happening and Back in 2020 you did see very clear Industry Trends where the most common Industries within Tech were Transportation travel and Retail and That makes sense because those are the Ones who be most affected by Co shutdown Workings but now fast forward to kind of This most recent wave what I call kind Of like the layoff wave related to Interest rate hikes that started in 2022 And and it's still comping today it's Really affected all Industries in Tech There's kind of no one industry that's Been disproportionately affected you Know the top ones are consumer retail Hardware Finance health care and so on But that's that's essentially all the Major sub industries of tech in the First place right so you're kind of just Seeing it all over the place in all sub Industries of tech of course you know

There are certain ones like Finance in Real estate might be disfor affected Just because those are the most interest Rate sensitive but to be honest it's It's kind of hammered all areas of tech So there there's not really that kind of Industry concentration the way that There was in 2020 with the the co Shutdown layoffs that's really Interesting how does that correlate with The actual layoffs you've been tracking Is it similar also I'm just curious did We see a lot more layoffs in 2023 versus The previous years and if so how much More yeah definitely so there were like I mentioned two main waves the first wor Was in 2020 as a result of covid and so We saw about 81,000 employees laid off In 2020 wow then 2021 went down a lot Only 16,000 oh my goodness know 2021 I Didn't realize that much less yeah a lot Less you know Tech was booming interest Rates were low everything was great 16,000 only in 2021 then fast forward 2022 more than 10x jump now at 165 oh Goodness so that's double 2020 yeah even Higher than the covid related shutdowns Um and the 20122 layoffs of course Spawned by the fed's beginning of Interest rate hikes 2023 actually was even worse 263,000 Employees in 23 which compared to 22 was You know about 60% more than the

Previous year so that year even worse Than the previous year worst one on Record the recent years way higher than The co wave which we all thought was Really bad when it happened I I didn't I Didn't realize it was that bad like I Knew there were a lot more layoffs last Year but I didn't realize it was there Was that many more layoffs that's pretty Dramatic yeah yeah yeah 3X what we saw In 2020 and even 60% more than 2022 and That is because a lot of hiring happen In the meantime so you know it is large Numbers for sure but if you kind of put It in the context of just like how much Especially big Tech hired during the Pandemic era surge they hired a lot you Know between 2020 and 2022 so you know When they were cutting there were just a Lot more employees to cut from and that Partially explains why the 2022 and 2023 Layoff numbers are so high and then of Course now we're in 2024 and only two Months in but you know already about 50,000 employees in the first two months Of 2024 so wow 50,000 in the first two Months alone compared to 81,000 in all Of 2020 so it was been a bad start of The Year things are calming down though We have seen this pattern last year and This year where layoffs spike in January And to a lesser extent February because It turns out that at least among the big Tech companies or the public tech

Companies have theyve been doing layoffs Kind of on this every January every February cycle uh likely related to Annual budgeting and planning so Companies like Google and Microsoft Amazon have announced layoffs exactly One year apart you know January 2023 and Then again in janary 2024 so so we do Have this kind of seasonality effect Related to annual planning where last Year the layoffs did start dying down in Q2 and Q3 and I'm hopeful that that will Happen this time around as well Especially with with uh interest rate Decreases potentially on the horizon end Of this year so what do you project will We be lower or higher than 2023 it's always tough to play both Shutdowns and layoffs with both of those It's tough to play the forecasting game But so far it does seem like this year As bad as it's been so far has been on a Pace that's lower than that of last year So I am hoping that 2024 will finally See a lower year after two years of Increases and that will be true for both Playoffs and shutdowns so since last Year we saw 70% bump and shutdowns Compared to the year before like this Year do you expect then it'll be less Than last year overall fewer shutdowns I Think so okay I think so that's good Fingers scops you know hopefully uh I Think it just depends on again what

Happens with the fed and that's kind of Been the game over the past couple of Years so if the FED is done raising Rates for real inflation keeps coming Down and interest rates start going down It's expected later this year I do think That will finally kind of see layoffs And shutdowns decrease in leveling Compared to previous two years but if There's surprises and hey the interest Rate declines don't happen or inflation Becomes you know more persistent than Expected then unfortunately I think We're going to see more pain if that if That ends up being the the case Ironically AI I believe could play a Role in both helping to grow jobs and Startup formation and also contribute to Layoffs and startup shutdowns what are Your thoughts on the role of AI here Yeah it's been interesting to track from A layoffs perspective because I have Been seeing companies increasingly site AI as a reason for layoffs and it comes In kind of two forms one is you know There are certain companies that are Being disrupted by Ai and so they have To you know lay off employees because Their business model is threatened Example for this is is a CH the Education technology company and then Maybe the more common reason is just Companies speculating that they might Not need as many employees because AI

Can make their teams more efficient and Also trimming down their non-ai staff Can help them double down and shift Resources to focus more on AI Talent Even as companies eliminate jobs Elsewhere in their organization and um Companies like Dropbox and meta have Alluded to this reason in their offs and Of course you know final example you Know I think we saw the headlines Recently of Kaa that the fintech company Mentioned that AI was potentially able To take the place of 700 customer Support agents and now they don't need As many customer support people because AI can automate all of that and that 700 Number was notable because they actually Several months earlier had laid off 700 Employees they L clarified that that Number was not related but it did raise Arbr at the time right you're kind of Seeing this chatter of hey you know Companies laying off employees because AI can do their jobs or or because AI Can just make their teams more efficient Or or just to help them clear a budget To hire an AI and that does you know Come with more AI hiring demands so on The other side of things there is of Course increasing demand from a hiring Perspective we at comprehensive are Tracking salary Trends very closely um Since we deal with all things Compensation and are seeing that even

Though the salar and Tech have have Largely stayed stagnant over the past Two years you know AI is one area where It's not staying stagnant and you're Kind of seeing quarterly increases of a Horse of 10% in AI salaries just because The demand for talent there especially On the technical side is is so strong Yeah as I had mentioned in the beginning Of the show for those who are not Familiar Roger did co-found a couple of Companies one is human interest it's a 401k provider mainly aimed at smaller to Medium-sized businesses and I it was in January of last year that that company Ended up getting a minority Black Rock Ended up getting a minor minority stake In that company um after it had reached Unicorn status comprehensive I covered That company as well that you started And as you mentioned it's trying to help Other companies figure out employee Compensation which can be a difficult Task so where are you now I think last Year when we talked to you you had just Launched beta where are things now with Comprehensive yeah we've made a ton of Progress on that business and you know We we've now fully launched the Compensation management product which Helps companies get out of spreadsheets For things like their compensation Review cycles and managing their pay Ranges as well as communicate

Compensation to employees and also Benchmark data on seeing where employees Fit relative to the market all of which Is the you know helping companies up Level how they do compensation Management to make sure that they're pay Is fair consistent and Equitable which Is just a huge Trend these days of Course compensation is the biggest Expense by far for most companies and Also the number one driver of employee Recruiting and retention outcomes so a Hugely strategic part of a business yet Most companies are still managing Compensation and spreadsheets and Via ad Hoc processes so we've been building Comprehensive software platform to kind Of help companies get out of Spreadsheets and you know be able to Move to the cloud which they've now done For almost every other major workflow Like Performance Management and Recruiting payroll benefits are at this Point all done in software and so Compensation is the next one to follow And so we've been seeing more and more Interest now from companies wanting to Ditch their spreadsheets and and move Into our software to finally make that Process really streamlined and efficient And uh making sure that they valuable Compensation Are being deployed effectively yeah so Um I realized we're just about out of

Time Roger it's been so much fun having You on the show I as always really enjoy Catching up with you talking to you you Have so much fascinating data to share So I really appreciate your sharing that With me and our listeners how can our Listeners find you on social media yep So I am on Twitter my handout is Roger Lee you can check out websites Layoffs.fyi for for a Tracker of all the Tech layoffs and Comprehensive. for the latest pay data Great thanks Roger thanks Maran and if You want more from Equity you can check Us out on X and threads at Equity pod I Can be found on X at Bay Area Rider Don't forget to check back in with us on Monday until then have a great Weekend Equity is hosted by myself Editor and chief of Tech runch Plus Alex Wilhelm and Tech runch senior reporter Mary and AZ aeto we are produced by Teresa loans solo with editing by Kell Bryce Durban is our illustrator and a Big thank you to the audience Development team and Henry pette who Manages Tech wrench audio products thank You so much for listening and we'll talk To you next Time