Once-flush start-ups struggle to stay alive as investors get picky

• Eliot Brown
• Eighteen months ago, Beepi was rapidly expanding its online used-car business to 16 US cities where people could buy cut-rate vehicles adorned with giant shiny bows.

Beepi doesn’t exist anymore. After burning through more than $US120 million ($158m) in capital, the start-up failed to raise more cash and shut down in February. Its roughly 270 employees cleared out of the cavernous Mountain View, California, headquarters leaving behind the ping-pong table and putting green.

Beepi’s rapid demise offers a glimpse into the changing fortunes of Silicon Valley start-ups, many of which struggled to adjust as a two-year investment frenzy came to an end.

In 2014 and 2015, mutual funds, hedge funds and others pumped billions into companies that they now see as overvalued, and unlikely to pull off an initial public offering. As venture capitalists became more discerning, investment in US tech start-ups plummeted by 30 per cent in 2016 from a year earlier.

For some, demand is still robust. Much of the money still being invested is pouring into the upper echelon of highly valued start-ups like Airbnb and WeWork or younger ones with clear paths to profit.

“There are companies that everybody wants to invest in and there are a large set of companies that almost nobody wants to invest in,” said venture capitalist Keith Rabois of Khosla Ventures.

Venture capital firms remain flush with cash. They raised $US44 billion last year, the most since the dotcom boom.

But investors are staying away from scores of well-funded start-ups that once looked like relatively safe bets, forcing these companies to fight for survival as they burn through their stockpiles of cash and scramble for new money or buyers.

“They’re like the walking dead,” said David Cowan, a partner at Bessemer Venture Partners, who expects a steady stream of failures.

In 2014 and 2015, more than 5000 US tech start-ups collectively raised about $US75bn, according to Dow Jones VentureSource — the largest amount in a two-year period since the dotcom boom.

Much of that money went to a small share of tech start-ups: 294 such companies raised at least $US50m apiece. Almost three-quarters of those companies — 216 — have neither raised money nor been acquired since the end of 2015. Such companies tend to raise funding every 12 to 18 months.

Seemingly every week lately, a well-funded start-up is slashing jobs or pulling the plug. In recent months, mobile-search start-up Quixey shut down after raising more than $US100m, health-benefits broker Zenefits — which raised more than $US500m — laid off nearly half its staff, and blogging platform Medium cut one-third of its employees after raising $US132m.

Such closures and cutbacks were rare two years ago when venture capitalists encouraged start-ups to expand rapidly to edge out competitors. Then when capital became scarcer, investors urged companies to turn profitable, which isn’t easy.

Take start-up Luxe Valet, whose app lets people summon parking valets in bright-blue track jackets. Founded in 2013, the San Francisco company had by early last year had ploughed into eight markets and raised more than $US70m.

Two competitors shut down. But expensive contracts to park cars in garages in big cities like Boston soaked up Luxe’s cash, according to a person familiar with the finances. The start-up has had to retreat to three markets. Luxe didn’t respond to requests for comment.

“There’s going to be a shake-out” for companies that can’t show a profit, said James Beriker, the chief executive of meal-delivery service Munchery. Mr Beriker joined the company in January after a rocky period that resulted in top executives leaving, including the co-founders.

Munchery, which has spent much of its $US120m in funding, is raising a $US10m lifeline from existing investors. The company is cutting costs and aims to be profitable by year-end.

For Beepi, profitability proved too distant for investors to wait.

Founded in 2013, Beepi caught on in San Francisco by giving people a fail-safe way to sell used cars online. Beepi guaranteed sellers a price, and if it couldn’t find a buyer in 30 days, it purchased the car. Beepi marked up the price and pocketed the difference.

Venture capital poured in, and its valuation surged from $US12m in early 2014 to $US525m by mid-2015. Beepi moved out of its cramped office and into a glassie building where the chief executive zipped around on his own Segway. Staffers enjoyed quinoa salad and turkey meatball lunches and dinners when they often stayed late, and unwound with ping-pong or Nerf guns.

The company’s strategy was a common one: blanketing the US to thwart competitors rather than focusing on a few cities.

Beepi spent a fortune to entice buyers and sellers through radio and Facebook ads, spending an average of $US1730 on advertising per vehicle in most of its markets.

Beepi was whipsawed by cars that sat unsold for a month, and that Beepi therefore had to purchase. Losses on those cars could reach more than $US5000 per high-end car, former employees said.

Revenue for the first half of last year was $US50m, up about 40 per cent from the previous six months. But with little revenue from add-on services like car repair, Beepi was losing up to $US5m a month last year, the documents show. Costs were falling, but profitability wasn’t forecast until 2018.

By mid-2016 CEO Ale Resnik hunted for cash to stanch the losses, but investors were spooked. Most of Beepi’s staff was laid off in December.

Employees say they believed the business would have proved sustainable if they were given more time.

“It was clear to us internally how to get there,” said Tyler Infelise, Beepi’s head of product.

The Wall Street Journal