From Unicorns to Zombies: Tech Start-Ups Run Out of Time and Money​​​

WeWork raised more than $11 billion in funding as a private company. Olive AI, a health care start-up, gathered $852 million. Convoy, a freight start-up, raised $900 million. And Veev, a home construction start-up, amassed $647 million. In the last six weeks, they all filed for bankruptcy or shut down, the New York Times reported. They are the most recent failures in a tech start-up collapse that investors say is only beginning. After staving off mass failure by cutting costs over the past two years, many once-promising tech companies are now on the verge of running out of time and money. They face a harsh reality: Investors are no longer interested in promises. Rather, venture capital firms are deciding which young companies are worth saving and urging others to shut down or sell. It has fueled an astonishing cash bonfire. In August, Hopin, a start-up that raised more than $1.6 billion and was once valued at $7.6 billion, sold its main business for just $15 million. Last month, Zeus Living, a real estate start-up that raised $150 million, said it was shutting down. Plastiq, a financial technology start-up that raised $226 million, went bankrupt in May. In September, Bird, an electric scooter company that raised $776 million, was delisted from the New York Stock Exchange because of its low stock price. Its $7 million market capitalization is less than the value of the $22 million Miami mansion that its founder, Travis VanderZanden, bought in 2021. Getting a full picture of the losses is difficult, since private tech companies are not required to disclose when they go out of business or sell. The industry’s gloom also has also been masked by a boom in companies focused on artificial intelligence, which has attracted hype and funding over the last year. But approximately 3,200 private venture-backed U.S. companies have gone out of business this year, according to data compiled for the New York Times by PitchBook, which tracks start-ups. Those companies had raised $27.2 billion in venture funding. PitchBook said the data was not comprehensive and probably undercounts the total, because many companies go out of business quietly. It also excluded many of the largest failures that went public, such as WeWork, or that found buyers, like Hopin.  Read more.

Commentary: Companies Are Going Broke Gradually, Not Suddenly*​​​

With only weeks to go in 2023, neither the recession in the U.S. nor the dramatic post-COVID rebound in China has come to pass. But perhaps the strangest nonevent has been the widely anticipated wave of corporate defaults, according to a Bloomberg commentary. That doesn’t mean that problems aren’t coming. Oleg Melentyev of Bank of America points out that the bankruptcy of WeWork happened “relatively quietly,” even though it was the largest U.S. company to go bust since the global financial crisis (GFC), while Austrian property group Signa, whose assets include a share in New York’s Chrysler Building, last week became Europe’s biggest post-GFC insolvency. A major repricing of the credit markets to account for those awaited defaults has also failed to happen. But if widespread corporate failures did arrive, they might provide just the catalyst to bring along the much-delayed recession. Read more.

*The views expressed in this commentary are from the author/publication cited, are meant for informative purposes only, and are not an official position of ABI.
 

Don't miss the "Predicting Distress and Opportunities in the Health Care Sector" abiLIVE Webinar on Monday!​​​

Gain insights on the essential key indicators, metrics and information required to comprehensively evaluate risk and uncover opportunities across the health care sector on a special abiLIVE webinar on Monday at 12:30 p.m. ET. The "Predicting Distress and Opportunities in the Health Care Sector" panel will also explore the outlooks for key health care subsectors over the next approximately 18 months, providing you with the latest trends and predictions to help you stay ahead in this rapidly evolving landscape. Register for free!

Filings for Jobless Claims Tick Up Modestly, Continuing Claims Fall​​​

U.S. applications for jobless benefits ticked up last week, but the overall number of people in the U.S. collecting unemployment benefits fell after hitting its highest level in two years last week, the Associated Press reported. Unemployment benefits claims rose by 1,000 to 220,000 for the week ending Dec. 2, the Labor Department reported today. About 1.86 million were collecting unemployment benefits the week that ended Nov. 25, 64,000 fewer than the previous week. It's just the second time in 11 weeks that continuing claims have fallen. Labor’s layoffs data Thursday also showed that the four-week moving average of jobless claim applications — which flattens out some of weekly volatility — ticked up by 500 to 220,750.  Read more.

Analysis: The Racial Homeownership Gap Is Widening. New Rules Might Make It Worse​​​

An unusual alliance of big banks and some housing affordability advocates is arguing that a proposal meant to boost the financial stability of banks would make mortgages more expensive for cash-poor home buyers — disproportionately so for people of color, the Washington Post reported. The proposed rule change would force banks to hold on to more capital for residential mortgages with smaller down payments. The logic is that such loans are riskier, so banks should keep more in reserve against defaults. The practical effect of this is that in order to afford that bigger cushion, banks will demand higher mortgage rates for borrowers who can afford only a small down payment. Despite narrowing during the pandemic — helped by low interest rates and government stimulus programs — the racial homeownership gap has been widening more recently and now stands at 29 percentage points, its widest in a decade, according to the National Association of Realtors. And working-class minorities hoping to buy their first home — a critical tool for building wealth that many have been systematically denied — have been facing new obstacles in recent years. Borrowing costs for mortgages have more than doubled over the last two years as the Federal Reserve has battled inflation by hiking interest rates, which hit a 22-year high earlier this year. That has compelled current homeowners to hold off from selling and instead stay put until rates cool — choking off supply and locking in prices that rocketed during a pandemic-fueled buying spree.  Read more.

Commentary: Experts on A.I. Agree that It Needs Regulation. That’s the Easy Part*​​​

The emergence of generative artificial intelligence (AI), such as ChatGPT, signals a radical change in how A.I. will be used in every area of society, but it still must be viewed as a tool that humans can use and control — not as something that controls us. Some sort of regulation of AI is needed, but opinions vary widely on the breadth and enforceability of such rules, according to a New York Times commentary. For the potential of AI to be realized and the risks to be controlled as much as possible, technology companies cannot go it alone. There should be genuine partnerships with other sectors, such as universities and government, according to the commentary. Get seven AI experts together in one room, and there’s a lot of debate about just about everything — from legislation to transparency to best practices. But they could agree on at least one thing: It’s not supernatural. “A.I. is not something that comes from Mars. It’s something that we shape,” said Francesca Rossi, an IBM fellow and IBM AI Ethics Global Leader. While AI has been around for decades, when the company OpenAI released ChatGPT a year ago it immediately became a worldwide phenomenon. These new types of chatbots can communicate in an eerily humanlike manner and in countless languages. And all are in their infancy. While ChatGPT is the best known, there are others, including Google’s Bard and, most recently, Amazon’s Q. “We all know that this particular phase of AI is at the very, very early stages,” said John Roese, president and chief technology officer of Dell Technologies. No one can be complacent or think of AI “just as a commodity.” While AI has taken a giant leap forward — and is evolving so rapidly that it is hard to keep up with the state of play — it is important not to mystify it, said Fei-Fei Li, a professor of computer science at Stanford University and co-director at the university’s Human-Centered A.I. Institute. “Somehow we’re too hyped up by this. It’s a tool. Human civilization starts with tool using and tool invention from fire to stone, to steam to electricity. They get more and more complex, but it’s still a tool-to-human relationship.” Read more.

*The views expressed in this commentary are from the author/publication cited, are meant for informative purposes only, and are not an official position of ABI. 
 

ABI TechBytes Podcast Examines Fiduciary Duties in Cryptocurrency Cases

In this third and final installment of a series of TechBytes podcasts that looks at cryptocurrency and bankruptcy, Patricia K. Burgess of Frost Brown Todd LLP (Nashville, Tenn.), the Special Projects Leader of ABI's Emerging Industries and Technology Committee, talks with John S. Wagster, who leads Frost Brown Todd's Technology Industry Team (Nashville, Tenn.); Jordan S. Blask, the partner-in-charge at Frost Brown Todd's Pittsburgh office; and Jared M. Tully, who is vice chair of Frost Brown Todd's Business Litigation Practice Group and serves as the team leader for the firm’s Community Bank and Financial Institutions Team. They discuss issues surrounding fiduciary duties in cryptocurrency bankruptcy cases. Listen here.
 

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Leading practitioners over the past two weeks examined key issues across the consumer bankruptcy landscape during ABI’s 2023 Consumer Practice Extravaganza (CPEX). Did you miss any of the sessions, including an exclusive “Fireside Chat” with EOUST Director Tara Twomey and deep dives into student loans, technology and the future, subchapter V of chapter 11, tax issues and more? Get access to all replays via a state-of-the-art virtual platform for only $100! All sessions will conveniently remain available until Jan. 31!

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