It is a well-accepted fact in the world of venture financing that a majority of startups fail[1]. The traditional approach among venture capital (VC) and venture debt funds has been to focus on the companies that succeed and cut their losses with the ones that don’t.

In the past decade, however, the amount of funding raised by individual startups has increased, particularly in later stage rounds[2], meaning large, failed startups could cost investors tens of billions of euros or dollars. In 2023 alone, around 3,200 VC-backed companies went out of business globally, having raised more than $27 billion between them in venture funding[3].

Many startups fail because they are unable to fully develop their original idea; or simply because their product or service struggled to get market traction. Without generating significant revenue, their downfall became inevitable. 

Nevertheless, a growing number of startups, despite falling short of their initial business goals, manage to build a loyal customer base and establish a relevant market presence for their innovative products or services. In many cases, their core intellectual property (IP) still holds significant value.

For these businesses, there is an opportunity for stakeholders and strategic buyers to extract value from a business that venture investors once saw a spark in. It is also a chance to preserve the business activity and innovation these startups have introduced to the market, with benefits for the wider economy. 

In our experience, these startups tend to have a large structure built on ambitious projections that are unlikely to be realized, a scenario that offers huge potential to streamline operations. Also, they may no longer be viable as standalone entities yet could thrive as part of a larger group or platform, thus becoming strong M&A targets for larger ventures or corporate conglomerates. 

The goal in restructuring distressed or failing startups is not to turn them into unicorns or successful listings, which may have been the original ambitions of startup founders and their early investors, but something more pragmatic: value preservation. By deploying the right solution, mindset and experts, venture financiers can identify and preserve the attractive parts of the business with a view to sell and obtain maximum value from their investment. Meanwhile, startups get a second chance to succeed in the steady hands of more established players.

Growth vs Profitability

Many venture-backed startups expand rapidly in the years following funding, anticipating a massive ramp-up in revenue. A majority, however, do not get to the profitability stage. It is estimated that 75% or more startups fail.

They often remain unprofitable due to over-expansion, either geographically or spread too thin with too many offerings, rather than a core one that distinguishes them from competitors. Or they may have been slow to react to market changes or not done enough risk management in predicting big market changes.

For example, quick commerce platforms saw a huge spike in investor interest during the pandemic, raising significant capital[4]. Yet many never achieved profitability, struggling to survive as consumers trends normalized after periods of lockdown and growth slowed significantly, often just as companies had spent large amounts of funding in anticipation of large expansion and accelerated growth.

Several large startups with billions in funding have collapsed due to a lack of focus and strategic direction, despite generating significant amounts of revenue. In such cases, when the startups go bankrupt, their innovation and potential value will be lost. Restructuring can help preserve this value by streamlining operations and optimizing costs. By focusing on core innovation, while fixing financial and operational troubles, restructuring can also help technologies or products find a better home in the market by turning struggling startups into healthy, attractive propositions for industry players to acquire.

Throwing Good Money After Bad

When startups begin to face distress, VCs may be reluctant to throw good money after bad, preferring to take the hit instead when the company folds. Restructuring can help preserve and extract value in these situations, but this may be difficult to achieve in-house. Founders can often be too emotionally invested in their original vision, too attached to ideas or find it hard to let go of failing, to take the necessary action required.

Restructuring calls for fresh thinking, different skill sets and leadership. In these situations, VCs can bring in specialist firms like A&M, which possess the expertise to apply proven principles and implement the necessary steps. A&M’s strong heritage in restructuring and breadth of expertise, combined with strong industry connections, makes us a valuable partner in driving this process forward.

How A&M Can Help

The main goal in restructuring a failing startup is to make it as lean and efficient as possible, giving it a second chance and avoiding bankruptcy. Some startups can overcome the rough patches and still have a promising future as a standalone entity. In other cases, the aim is to make it attractive as an M&A target for larger groups, rather than focusing on its viability as an independent business entity.

A&M’s Turnaround & Restructuring team brings a distinct mindset and technical expertise to support stakeholders in these situations. Our team combines a unique blend of financial and business management expertise, strong negotiation abilities, organizational acumen, perseverance in execution, and a comprehensive understanding of different insolvency legislations and the applicable tools within those frameworks. We embrace a collaborative approach that prioritizes rebuilding trust with key stakeholders and employees, fostering a culture of innovation and adaptability that helps not only stabilize the business during turbulent times but position it for long-term success.

In the cases where A&M has been involved, the primary focus has been on cash management and efficiency measures in core value areas. Some of the key actions taken included:

• Effective cash management and optimization, incorporating cash-enhancing measures and reliable cash forecasts.
   
• Stabilizing finances by eliminating non-essential expenses and implementing cost-cutting measures such as layoffs, outsourcing, reducing operating expenses, and improving efficiency.
   
• Exiting non-performing markets and segments to focus on core and existing business.
   
• Streamlining and optimizing operations, applying the latest tools and technology such as artificial intelligence (AI) where necessary.
   
• Restructuring the company's capital structure, refinancing existing debt, or renegotiating contracts with creditors to stabilize the financial situation and provide the necessary liquidity to continue operations.
   
• Selling non-essential assets to generate immediate cash, including equipment, real estate, or other investments that are not critical to the core business operation.
   
• Bringing in new management talent or replacing key executives to provide fresh perspectives and leadership to guide the company through its turnaround.
   
• Identifying synergies for other industry players, particularly those with a proven track record of growing through acquisitions. A&M’s wide network of clients places us in a position of strength in identifying and establishing a line of connection with such potential buyers.
   
• Creating an exit strategy by removing the “distress” elements and making the company attractive to corporate buyers who prefer lower-risk, cleaned-up businesses rather than dealing with financial troubles, layoffs and potentially regulatory scrutiny.

Conclusion

As large venture-backed startups fall into distress, there is a significant opportunity to preserve value and make the company appealing to strategic buyers who prefer lower-risk acquisitions. By deploying the right expertise to identify core innovation and IP, cut costs and streamline operations, venture capitalists and venture debt investors can retrieve maximum value from their investments.