The Business of Winding Down Startups is Booming

Startup wind-down services are seeing rapid growth as failed startups look for help shutting down. Pitchbook: On the phone with a founder who recently wound down his seed-stage software startup, I asked him what his plan was next. Having laid off all of his employees in autumn of last year, he was the last man standing: tasked with the thankless job of shutting down the company, returning capital, and dealing with tax documents. To handle the bureaucracy, the founder used Sunset, one of the companies that sprung up last year to respond to the burgeoning industry of failed startups.

In a sign of the times, such wind-down startups are growing rapidly. Sunset saw 9x quarter-over-quarter revenue growth and a 65% monthly customer growth rate between November 2023 and January 2024. Competitor SimpleClosure, which closed a $4 million seed round this month led by Infinity Ventures, has passed the $1 million mark in annualized revenue and also recorded a monthly growth rate of over 50% in the same period. Since its public launch in September, the startup's revenue has increased more than 14x.

Even larger startups are interested in the additional help. "We've now had multiple companies that have become customers that have raised tens of millions [in venture funding]," said Dori Yona, co-founder and CEO of SimpleClosure. In early February, equity management platform Carta joined the bandwagon: CEO Henry Ward announced in a blog post a new startup shutdown service, Carta Conclusions. "[T]he work of dissolving a company is exceptionally unpleasant. It is also, by definition, zero-value to the founder, the company, and the world," Ward wrote. Carta's entrance could disrupt its competitors, given its existing relationships with a large customer base of startups and access to internal startup data on cap table management, which could help it to accurately target prospects. Founders never want to think about the possibility of failure, but the vast majority of startups never make it to a successful liquidity event.

"by definition, zero-value"

[TheNameOfNick]

That's a degree of not understanding what any of those words mean that should shoo away anyone who could use the services offered by that business.

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[DarkOx]

No the statement is *mostly* correct. There may be some things like final tax / disability insurance filings, and final disbursements that are of some value to the founder in terms of staying out of jail and avoiding being sued but most of the wind down effort is really about capital preservation so that as much as possible can be returned to lenders and investors.

The 'founder' unless they were really stupid has already extracted a healthy premium over what they put in themselves after a few investor capit

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[packrat0x]

If you, as a founder, bring in a VC (Venture Capitalist) and your business winds down, YOU ARE SCREWED.
That's the fine print in the VC contract. Founders agree to each the losses. All the hours, money, blood, sweat, and
tears goes to VC. Extremely dangerous unless you know that your company is not only going to win, but win big.

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[TheNameOfNick]

If their service provides, by definition, zero value, then literally nobody should hire them, by definition. Anything else is just rhetoric.

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[DarkOx]

The important clause is "to the founder", they do provide value just not (or rather not very much) value to the founder. The creditors and investors get value.

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[TheNameOfNick]

"zero-value to the founder, the company, and the world". Unless you think investors and creditors are out of this world, nobody should hire that company.

All because of section 174

[TriangularSoup]

Congress accidentally passed a placeholder law that forbids startups from claiming development costs on their taxes, so they must pay taxes on all their revenue even while they are operating at a loss. This makes the U.S. one of the worst places in the world to start a company. U.S. companies are letting their Canadian subsidiaries buy them just to get out of the U.S. as fast as possible. Canada is no tax haven. We just fucked up badly enough that it looks like one in comparison. If 174 is not repealed this year, spectacularly dark times are ahead.

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[sinij]

Do you have any links going into more details?

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[Anonymous Coward]

Some rules expired that allowed classifing a bunch of stuff as R&D and deferring tax payments for a time. Essentially a bunch of SI Tech Bros were whingeing because they now have to taxes like anyone else.

If joe Six Pack started a business mowing lawns, he'd be liable for the payroll taxes etc immediately etc, but for some reason if you are doing "R&D" building some phone app like every other stupid phone app out there you got delay payments and maybe doge them entirely if you went belly up.

Re:All because of section 174

[smooth wombat]

Do you have any links going into more details?

I heard about this on NPR a while back, but can't find a link to it. Regardless, here is a (more biased) article [uschamber.com] on what has taken place. In short, in 2022 a tax break expired which allowed companies to immediately deduct 100% of R&D costs. With the expiration, companies have to amortize over five years those same costs.

For a longer article, try this [forbes.com].

Since startup companies classify almost everything as R&D, they now have to pay tax bills they didn't have to before.

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[slack_justyb]

I'll add something else but this is not legal advice.

There are eight states that have non conforming IRC ss174 (that's title 26 for USC folks following along) status. Washington State, Nevada, Wyoming, South Dakota, Indiana, Tennessee, Georgia, and Rhode Island. Additionally, Texas, Ohio, and Massachusetts have much more complicated relationships with the IRC ss280C haircut. You will need to consult a tax lawyer in those states as they have various laws that "modify" the definition of R&D under 26 US

Re: All because of section 174

[TriangularSoup]

https://www.youtube.com/watch?... [youtube.com] https://remotebase.com/blog/se... [remotebase.com] https://blog.pragmaticengineer... [pragmaticengineer.com]

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[MachineShedFred]

With this Congress, the only things they get done are by accident. When they try to do anything on purpose, they publicly fuck it up spectacularly.

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[slack_justyb]

For anyone wondering the section 174 is Title 26 USC, sometimes referred to as Internal Revenue Code (IRC). IRC ss174 was enacted by Congress in 1953 going into effect in 1954. This allows two options, amortize or deduct. In 1981 IRC ss41 was attached to ss174 and those were made permanent in the PATH act of 2015.

The Tax Cuts and Jobs Act of 2017 TCJA was Speaker Ryan's attempt to finalize his idea for the tax code, but since a filibuster in the Senate could not be ruled out, TCJA went under the rules of

Yo dawg, I heard you liked startups

[OverlordQ]

So I made a start-up for your start-up

I guess if...

[LordHighExecutioner]

...among the wind-down companies there are some startups.

it's a growth industry

[Growlley]

which one is the unicron to invest in for 12 months.

Cool

[fahrbot-bot]

I'm going to start a business winding down companies then hire it to wind it down -- perpetual income baby! :-)

Until . . .

[hawk]

that works great, until you realize that these canibalistic startups are all circling one another, waiting to pounce.

"I'm first."
"No, *I'm* first."

and while the argument went on, the third startup unwound them both, all the while unaware of the fourth over its shoulder.

Those who don't remember the past....

[Targon]

With every downward shift in the overall economy, you see periods where there is always the unpleasant task of dealing with failed businesses. Now, we have many different things that have come together in this current cycle to make things unpleasant. We have that after the "great recession", we didn't see a full recovery before Covid hit in 2020, which further hurt people. Now, when there aren't a lot of jobs, or when people have problems getting a job for ANY reason, but when they do have skills, they will often turn to other ways to make money. Starting a business if you have a decent amount of skills yourself isn't a bad approach, nothing stupid about the idea of trying to use your skills, and you may even get a business going and make it profitable if your services are in demand. The problem is when you have problems such as, "let's raise the interest rates", which increases the cost to borrow money just to help a business get through some of the dips that will always hit a business. Some days/weeks/months are very busy, others can be quiet, sometimes, things can be seasonal where certain times of the year will result in more business, and other times, it's really quiet. So, the increase in interest rates hurt small businesses who NEED "cheap" money to survive. Then, what do you do when you are doing well enough to expand, or hire others and then there is a slowdown in the economy? Yep, no loans to help meet payroll, even if you aren't LOSING money overall, some need those loans to take care of expenses until enough comes in to pay those back. Again, right at that, "not losing money but not making a big profit either" stage, just being able to limp along through bad times makes low interest rates helpful. So, we are at that dip point caused by the interest rates going up to "fix inflation", not that it addresses that at all, but these economists can't figure out that raising interest rates doesn't reduce inflation. So, businesses that are on the brink start to fail, and as they fail, the decline in the economy will accelerate. The 2000-2003 period was like that for the tech sector, the startups didn't have access to more venture money to continue operating, so those with a good or interesting product got bought up by larger companies and then shut down. Others got venture money without having a decent product, so their shutdown wasn't unexpected, but, the equipment gets sold off, so now, you have some GOOD equipment out there that can be bought cheap, but that means the equipment manufacturers may see a dip since buying 1-year-old equipment in good condition is a lot cheaper than buying new. If enough small businesses die, then the mid-sized companies start to feel it because their customer base shrinks. This is just the first phase, and let's just hope that the idiots who are running things in government FINALLY figure out that the economists they keep going to don't know how to help the economy, because the teachings from the 1930s don't necessarily work, but all of their teachers in college keep spouting these obsolete theories about how to handle financial problems that only make things worse.

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[wyHunter]

Literacy problems?

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[nsuccorso]

I'd like to buy a paragraph, Pat!

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[Targon]

Sorry for Slashdot not putting in the spaces I had put in there, and now it's too late for me to edit. That will teach me to post while at work instead of waiting until I get home.

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[NotEmmanuelGoldstein]

... raising interest rates doesn't reduce inflation ...

The traditional idea is, raising rates reduces discretionary spending (as it must now be spent on interest fees) or debt-driven investments. The problem is most debt-driven investment nowadays, are operating capital (eg. payroll), thus increasing the cost of employing people and making a profit. The result is, buying decreases because fewer people have jobs, not because people save more. The other problem is, CoViD. caused people to save money, meaning they could afford more expensive items, when they be