Going Out of Business?

Going Out of Business?
Platform: SimpleClosure’s team, back row from left: Nimrod Ram; Gili Shiloni; Harris Thompson; Synclair Wang. Front row from left: Jessica Pedraza and Dori Yona.

Whether the economy is seeing a tech winter or tech boom, it’s difficult to run and maintain a successful company. Case in point: about 20% of small businesses fail in their first year, according to the Bureau of Labor Statistics.

For the companies that don’t make it, the next steps are a bit more complicated than meets the eye, and SimpleClosure Inc. wants to help. Closing a company involves tasks such as filing dissolution documents, canceling an employer identification number, resolving financial obligations to vendors and customers and paying employees their final wages.

SimpleClosure works with businesses that are shutting down operations, helping entrepreneurs and owners avoid undue complications or miss important steps. In a sign of its growth, the Santa Monica-based technology platform closed a $4 million seed fund last month after launching from stealth in September with $1.5 million of pre-seed funding. SimpleClosure’s recent $4 million seed round exceeds what other startups have been seeing in the last year: according to Crunchbase, the median seed round for a U.S. company in the first quarter of last year was $2.3 million.

Aiming for clean closures

The founding of SimpleClosure came when Dori Yona, now chief executive of the company, faced the prospect of shutting down a financial technology business he had founded called Earny Inc. While Santa Monica-based Earny was eventually acquired and didn’t wind up closing, he was at a loss when working to create a shutdown analysis for investors. Yona said he was unable to find guidance online or through the Earny’s lawyers to evaluate liabilities, set up a timeline, organize projected severance packages or any other necessary tasks.

“One of the biggest issues that we’ve seen companies and businesses have is that they think they shut down, (but) they haven’t shut down properly,” Yona said. “We go and search across public state databases in order to really make sure there’s no stones left unturned, there’s no skeletons in the closet, and we don’t only rely on information that the company provides. We take that and we aggregate it with the data that we found across public databases, and then our platform puts together a personalized shutdown plan that is tailored to your company.”

SimpleClosure’s seed round was led by Infinity Ventures with participation from Foxe Capital and existing investors. SimpleClosure declined to disclose how many companies it has worked with to date but stated that its customer base has increased by more than 600% since its launch in September. Previous customers include Lance Global Inc. and telehealth company Peak Health.

Options other than SimpleClosure to close a business include a liquidation company, accounting firm, law firm and filing for bankruptcy. Yona emphasized that SimpleClosure is not a legal or accounting firm and does not provide legal advice.

Some businesses can keep their operations afloat after going through an acquisition or filing for bankruptcy – Marvel Comics, General Motors Co. and Texaco Inc. all filed for Chapter 11 bankruptcy protection in the past and have since recovered tremendously.

One concern for a company that’s going under is that there may not be sufficient funds to spend on a service such as SimpleClosure. However, SimpleClosure said that traditional firms can charge upwards of $75,000 and take as long as a year to complete the process, while its services, it claims, can provide a shutdown analysis plan in “days or weeks.” 

SimpleClosure charges businesses a flat fee through a sliding scale depending on the size of the business, number of employees and amount of assistance needed to generate a shutdown plan. The company declined to disclose exact pricing, but said it’s a “fraction of the cost” of traditional dissolution services.

“I think we’re coming in and offering a value proposition that is very appealing, that is very price sensitive,” Yona said. “In some cases, when the company is out of money, we see investors paying for this. Investors have a mutual interest that (the company) is stripped down properly, and a lot of times directors are on the hook. If certain things are not paid, it could pierce the corporate veil, and then directors (and investors) could be personally liable for that.”

Yona said that, after onboarding and providing company information about employees and finances, most of the work conducted by users of the platform comes down to signing documents. The documents generated by the platform and the resulting shutdown analysis plans are “modifiable,” meaning that customers can take them to an external legal agency for review if desired.

Another prominent step in winding down a company includes the sale or dissolution of assets. These could include subsidiaries, property, digital assets or physical items such as office furniture. Yona said that while his company does not currently offer liquidation services to manage and sell physical assets, it does assist with the sale of digital assets and intellectual property.

“There’s parts of (liquidation) that we already support, but the overall big picture is we’re going to continue focusing on building technology that helps automate and makes it even easier and more efficient,” he said.

Is there a ‘tech winter?’

Yona said that SimpleClosure is heavily focused on the tech startup ecosystem but has started to get client interest from more “traditional” businesses, such as small consulting firms or corporations. He said that most companies come to SimpleClosure with about $1 million to $5 million of funding and about 10% of their runway left. However, the company has also seen series venture capital companies that have raised up to $40 million or $50 million approach SimpleClosure for assistance. 

Across tech industries including social media, gaming and software development, many companies faced economic challenges last year that led to layoffs and asset sales. In the local economy, Pasadena-based consumer data company Near Intelligence Inc. and Long Beach-based space launch company Virgin Orbit both filed for bankruptcy in 2023, though neither used SimpleClosure’s services. SimpleClosure previously helped Mar Vista-based social marketplace Krispy Cut Inc. and Manhattan Beach-based financial technology Carbon Payments Technologies LLC, which did business as ZenBill Inc. 

While a “tech winter,” or period of economic downturn or reduced investment in tech, was widely discussed in 2022 and early 2023, Yona said that the closure rate that small businesses and startups face has remained consistent over the last decade. The U.S. Small Business Administration reported that, between March 2021 and March 2022, nine businesses closed for every 14 that opened. In the same period between 2020 and 2021, about eight businesses closed for every 10 that opened.

“If you look at the graph of total growth and market in terms of (small businesses) across the United States, it’s been almost flat for the last decade (because) there’s this constant cycle of companies starting off and incorporating companies shutting down,” Yona said. “When I started to look at the incorporation market, I said, ‘wow, there’s so many companies that help you incorporate, why is there no one helping you shut down?’” 

Mike Jones, co-founder and managing director of Santa Monica-based investment firm and incubator Science Inc., agreed that startups have always been vulnerable, and that the last year has been no different. Jones said that companies need to plan for longer fundraising cycles and be prepared for the realities of securing investment in a competitive market environment.

“It is always ‘tech winter,’” Jones said. “There’s always an element of a constant state of uncertainty for startups, fueled by market fluctuations and competitive pressures, which underscores the need for startups to continuously adapt and innovate to thrive – which is exactly what successful startups do.” 

Yona agreed that that the idea of a recent tech winter ignores the consistent ratio of company openings to company closures and dissolutions. 

“Right now, the shutdowns are getting more awareness due to the slowdown in fundings, but companies shut down in every economy,” Yona said. “It’s just a part of entrepreneurship that hasn’t been talked about openly until now.”

He added that the companies he sees struggling the most include those that launched during Covid-19 and built on “pandemic behavior.” Jones stressed that industries with low- or negative-margin businesses, such as food delivery or ridesharing, are particularly vulnerable due to their reliance on venture capital subsidies for consumer costs. However, Yona said that, agnostic of industry, it’s a very hard time to be in technology, particularly when unit economics don’t make sense.

“You used to be able to raise without revenue, thinking (it will) come later, but that’s becoming almost impossible right now,” Yona said. “You have to show profitable growth, you can’t just grow without revenue. I think there’s a lot of companies that were built on (the assumption that), ‘we don’t have revenue, but we’ll figure revenue out down the line’ that are vulnerable.”

Funding for the future

Yona said the company’s plans for the new funds is to “grow, grow, grow.”

“We’re focused on two things, one is growing the product and evolving the product,” Yona said. “There’s so much to build and we’re going to invest a lot in research development, which means growing the team’s engineers and product designers,” Yona said. “The second focus is on go-to-markets. We’ve been very fortunate to grow very aggressively with literally zero marketing, and it’s all been word of mouth, just because I think we’re really solving a pain point here. The goal is now to put funding behind it.”

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