🎅A Wave of Filings Crash the Holidays🎅

🤖Are There More #BustedTech Bankruptcies Coming?🤖

The recent bankruptcies of Fusion Connect (which just confirmed a plan swapping ~$270mm of debt for equity), Clover Technologies, uBiome (which just sold for a small fraction of its valuation), Loot Crate Inc., Juno Inc., Munchery, and Vector Launch Inc. — combined with the recent negative news surrounding WeWork (of course), Faraday Future (founder already in BK), Proteus Digital Health and Wag — signal that restructuring professionals shouldn’t sleep on “tech.” The sector has been surprisingly active in 2019 and there’s likely more to come in 2020 (e.g., RentPath?).

In the wake of the WeWork debacle, there has been a lot of talk about the end of “growth at all costs” thinking and a newfound emphasis on business fundamentals, i.e., unit economics. Indeed, post-WeWork, funding in startups immediately slowed down … for like a second … and people took measure; likewise, in the public markets, many recently IPO’d companies with questionable fundamentals have performed poorly. Time will tell, then, whether WeWork was just a blip on the radar screen or the canary in the coal mine. There are more signs of the former — this week it seems like 8,292,029 companies announced new raises — but might Vector Launch be validation of the latter? Who knows.

As we’ve argued in the past — obviously VERY prematurely — tech “startups” are more mature at earlier stages now than they used to be which very well may require them to sidestep the assignment for the benefit of creditors and launch headfirst into a bankruptcy court — if and when folks again get scared. With the private markets having become the new public markets over the last decade, there are a ton of private tech companies that are well-developed (read: “unicorns”); that have intellectual property (e.g., actual patents as well as brands); that have valuable contracts/leases; that have investors that seek releases. What they don’t appear to have are viable business models. When the tide goes out (read: the money scares), we’ll see who is wearing clothes.

The question is: what would be the catalyst? With interest rates steady or declining, there’s no reason to suspect the end is near for “yield baby yield” psychology and, therefore, the deployment of endless quantities of capital in alternative asset classes. That should bode well for tech.

And, yet, people are fearful. First Round Capital recently released its “State of Startups 2019” and if some of the fears come true, indeed, there will be more action as noted above:

Founders fear the bubble — concerns are at a 4-year high.

This year, over two-thirds of founders who ventured a guess think we are in a bubble for technology companies. It’s the highest number we’ve seen since 2015 — up 12% from 2018 and 25% from 2017.

Spoiler alert:

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📦Nerds Lament: Subscription Box Company Goes BK📦

We’re old enough to remember when subscription boxes were all the rage. The e-commerce trend became so explosive that the Washington Post estimated in 2014 that there were anywhere between 400 and 600 different subscription box services out there. We reckon that — given the the arguably-successful-because-it-got-to-an-IPO-but-then-atrocious-public-foray by Blue Apron Inc. ($APRN) — the number today is on the lower end of the range (if not even lower) as many businesses failed to prove out the business model and manage shipping expense.

And so it was only a matter of time before one of them declared bankruptcy.

Earlier this morning, Loot Crate Inc., a Los Angeles-based subscription service which provides monthly boxes of geek- and gaming-related merchandise (“Comic-con in a box,” including toys, clothing, books and comics tied to big pop culture and geek franchises) filed for bankruptcy in the District of Delaware.* According to a press release, the company intends to use the chapter 11 process to effectuate a 363 sale of substantially all of its assets to a newly-formed buyer, Loot Crate Acquisition LLC. The company secured a $10mm DIP credit facility to fund the cases from Money Chest LLC, an investor in the business. The company started in 2012.

Speaking of investors in the business, this one got a $18.5mm round of venture financingfrom the likes of Upfront Ventures, Sterling.VC (the venture arm of Sterling Equities, the owner of the New York Mets), and Downey Ventures, the venture arm of none other than Iron Man himself, Robert Downey Jr. At one point, this investment appeared to be a smashing success: the company reportedly had over 600k subscribers and more than $100mm in annualized revenue. It delivered to 35 countries. Inc Magazine ranked it #1 on its “Fastest Growing Private Companies” list. Deloitte had it listed first in its 2016 Technology Fast 500 Winners list. Loot Crate must have had one kicka$$ PR person!

But life comes at you fast.

By 2018, the wheels were already coming off. Mark Suster, a well-known and prolific VC from Upfront Ventures, stepped off the board along with two other directors. The company hired Dendera Advisory LLC, a boutique merchant bank, for a capital raise.** As we pointed out in early ‘18, apparently nobody was willing to put a new equity check into this thing, despite all of the accolades. Of course, allegations of sexual harassment don’t exactly help. Ultimately, the company had no choice but to go the debt route: in August 2018, it secured $23mm in new financing from Atalaya Capital Management LP. Per the company announcement:

This financing, led by Atalaya Capital Management LP ("Atalaya") and supported by several new investors (including longstanding commercial partners, NECA and Bioworld Merchandising), will enable Loot Crate to bolster its existing subscription lines and improve the overall customer experience, while also enabling new product launches, growth in new product lines and the establishment of new distribution channels.

Shortly thereafter, it began selling its boxes on Amazon Inc. ($AMZN). When a DTC e-commerce business suddenly starts relying on Amazon for distribution and relinquishes control of the customer relationship, one has to start to wonder. 🤔

And, so, now it is basically being sold for parts. Per the company announcement:

"During the sale process we will have the financial resources to purchase the goods and services necessary to fulfill our Looters' needs and continue the high-quality service and support they have come to expect from the Loot Crate team," Mr. Davis said.

That’s a pretty curious statement considering the Better Business Bureau opened an investigation into the company back in late 2018. Per the BBB website:

According to BBB files, consumers allege not receiving the purchases they paid for. Furthermore consumers allege not being able to get a response with the details of their orders or refunds. On September 4, 2018 the BBB contacted the company in regards to our concerns about the amount and pattern of complaints we have received. On October 30, 2018 the company responded stating "Loot Crate implemented a Shipping Status page to resolve any issues with delays here: http://loot.cr/shippingstatus[.]

In fact, go on Twitter and you’ll see a lot of recent complaints:

Have you ever considered a Loot Crate subscription? (Don’t.) I’m still waiting on my tees for April, May, June, and July. I won’t be renewing my subscription. @lootcrate needs to get it together. pic.twitter.com/BqqScs9jQR

— Randi ☕️📚🌊🌈❤️ (@biblionoceros) August 11, 2019

Which past crates because I've been waiting for a replacement for a crate that never showed up for 2 months and a crate I ordered last October still hasn't shipped yet this company is ridiculous

— Krystle Bogerman (@Krys_theawesome) August 12, 2019

@lootcrate I would love to know where my loot crate is that was supposed to arrive IN MAY. Not making people want to buy more crates when the ones we've already ordered are still MIA after 3 MONTHS

— Oldworldromance (@Oldworldromanc1) August 12, 2019

High quality service, huh? Riiiiiiight. These angry customers are likely to learn the definition of “unsecured creditor.”

@lootcrate So, Chapter 11, huh? I guess that's another way of telling everyone with a late crate or Loot Wear item that they're well and truly screwed?

— Mike Guerrero (@thesporq) August 12, 2019

Good luck getting those refunds, folks. The purchase price obviously won’t clear the $23mm in debt which means that general unsecured creditors (i.e., customers, among other groups) and equity investors will be wiped out.***

Sadly, this is another tale about a once-high-flying startup that apparently got too close to the sun. And, unfortunately, a number of people will lose their jobs as a result.

Seeing all my friends at Loot Crate losing their jobs makes me ill. I’m sending you all love. This company is a shell of what it once was, & it breaks my heart. There were over 20 customer support agents at one time. They ALL cared about customers. All those jobs got outsourced. https://t.co/vxJx7ymumG

— Bookitty (@B00kitty) August 10, 2019

I'm trembling out of anger from the amount of bullshit in this statement..

I feel so goddamn angry that I am scared I'm going to pass out at my desk.https://t.co/BvBr8Ww3Kv

— CΛΠDICE ❤️S YOU! (@CandiceLikesYou) August 12, 2019

Market froth has helped a number of these companies survive. When things do eventually turn, we will, unfortunately, see a lot more companies that once featured prominently in rankings and magazine covers fall by the wayside.

*We previously wrote about Loot Crate here, back in February 2018.

**Dendera, while not a well-known firm in restructuring circles, has been making its presence known in recent chapter 11 filings; it apparently had a role in Eastern Mountain Sports and Energy XXI.

***The full details of the bankruptcy filing aren’t out yet but this seems like a pretty obvious result.

Busted Tech (Short Influencers, Data Scientists & Fraudulent Founders)

Congratulations to Beme for being an Inception-like failure within a failure. Little more than a year ago, the ubiquitous Casey Neistat (of "Bike Lanes" fame (video)) sold his company Beme to CNN for $25mm in what, to those who track these things, was very clearly an acqui-hire rather than a legit acquisition. Neistat and his team were meant to be a boost of steroids for CNN's burgeoning digital content plans. Instead, he's gone and Beme is officially toast. Perhaps the shortest acqui-hire of all time. 

But at least Beme wasn't a $100mm bust. So, there's that. In contrast, Primary Data, a California-based data virtualization startup crashed and burned this week after 4 years of hype, $80mm in venture capital, $20mm in venture debt, and (practically) zero minutes of actual product delivery. Apple's Steve Wozniak was the company's data scientist. Notable VCs include Litespeed Venture Partners and Accel Partners.

And then there is Loot Crate, a monthly subscription service that sends video games and other nerdy gear to customers. Per Reuters, the company is a cesspool of controversy: it is the defendant in a sexual harassment lawsuit; and it had three non-exec Board members resign in recent weeks (including the high profile Mark Suster of Upfront Ventures). Consequently, it has hired Dendera Advisory LLC, a merchant bank of sorts, to raise new funds. We guess that means that, after $18.5mm of venture capital funding and Suster running for the exits, VC is no longer an option. Meanwhile, Dendera is apparently no stranger to distressed situations; it advised Sports Direct International in its purchase of Eastern Mountain Sports and invested in Performance Sports Group. 

Getting us progressively closer - but not quite in - to bankruptcy court, is Outcome Health, a medical advertising company that deploys technology (read: uh, tv screens) to doctor's offices. The company has (apparently) avoided a chapter 11 filing after settling fraud allegations Goldman Sachs and Google Capital lobbed at the company's founders. Jones Day, Rothschild and FTI Consulting were all reportedly laying in wait for a potential bankruptcy filing. The company has several million dollars of debt. As part of the settlement, the defendants and others will infuse the company with additional liquidity.

And, finally, further busting the everybody-gets-rich-off-of-tech narrative, Practice Fusion, a medical records startup, has sold for $100mm to AllScripts Healthcare Solutions Inc. ($MDRX) at a mere fraction of the once-heralded $1.5b valuation the company reportedly enjoyed. While management - including a General Counsel making $2.2mm - are getting enriched, employees taxed on earlier exercised stock options are getting shafted hard. It's a rough story. Peter Thiel (of Gawker fame) and Kleiner Perkins Caufield & Byers were large investors. 

PETITION NOTE: Startups fail all of the time. We note it only because, eventually, interest rates will rise, the bubble will burst, venture capital money will dry up, and EVEN MORE startups and tech companies will go "bust." A number of these companies - unbeknownst to many who don't follow tech - actually have venture debt (like Primary Data above) and valuable IP. Stay tuned. And imagine how long this section will be when that all that happens.