Startup Failure

Startup Failure

Elizabeth Pollman

Series number :

Serial Number: 
729/2023

Date posted :

August 21 2023

Last revised :

November 04 2023
SSRN Share

Keywords

  • venture capital • 
  • Startups • 
  • Entrepreneurship • 
  • corporate law • 
  • fiduciary duties • 
  • M&A • 
  • acquisitions • 
  • acqui-hire • 
  • Bankruptcy • 
  • liquidation • 
  • insolvency • 
  • assignment for the benefit of creditors • 
  • Antitrust

Venture-backed startups famously aim for a successful “exit” by going public or selling to another company through an acquisition deal and achieving financial return for all equity holders. A different path, however, is vastly more likely to occur—failure.

Although high-risk innovative ventures fail at exceedingly high rates, no scholarly account systematically explains what happens to these startups at the end of their life cycle.

This Article provides an original theory of startup failure: how law and culture have shaped a system for dealing with the large number of startups that cannot reach an exit that will produce a financial return for all participants. It makes three central contributions. First, the Article explains why bankruptcy law does not fit the needs of most distressed startups and highlights how their capital structures are indeed designed to avoid bankruptcy except in unusual circumstances. Second, and most critically, the Article reveals how dealing with failure through a variety of alternative means serves a vitally important role in making failure acceptable and sustaining the venture capital ecosystem. In particular, soft-landing acquisitions, acqui-hires, and assignments for the benefit of creditors allow entrepreneurs, investors, employees, and creditors to “fail with honor” and redeploy their talent and capital into other ventures. Third, the Article sheds light on rising challenges for dealing with startup failures amid evolving practices and regulatory agendas, with implications for facilitating efficient failure in corporate, antitrust, and insolvency law.

Published in

Published in: 
Description: 
Duke Law Journal, Vol. 73, p. 327, 2023

Authors