Every year, hundreds of venture-backed companies run out of money. Most of them — the vast majority — do not have to. Not because they are inevitably destined to succeed, but because the decision to bury them is made prematurely, by people with the wrong tools, often before anyone with the right expertise has even looked at the situation.
This is one of the most expensive systematic failures in the American innovation economy, and it is almost entirely preventable.
The Default Path and Why It Exists
When a VC-backed company runs low on cash and cannot raise its next round, the default path is well-worn: the board convenes, the company's attorneys recommend an Assignment for the Benefit of Creditors (ABC), a liquidating agent is retained, and within weeks, the company ceases to exist. Assets are sold for pennies. Employees are let go. The IP — often years in development — goes to the highest bidder at a distressed auction, which is frequently a competitor or a patent troll.
The ABC is not inherently a bad tool. But it is a terminal tool. Once a company assigns its assets, there is no restructuring, no pivot, no going-concern sale at a premium. There is only liquidation — and the recoveries that come with it, which are almost always dramatically lower than what a going-concern exit would have produced.
Why does the default path exist? Several reasons, none of them flattering to the industry.
First, VC fund economics create perverse incentives when portfolio companies become distressed. Managing a workout or restructuring is time-consuming, expensive, and emotionally taxing. The carried interest that a fund manager earns on a turnaround is the same as the carried interest on a fund that was otherwise performing — meaning the incremental effort of a workout produces no incremental financial benefit to the GP. The path of least resistance is to accept the loss and move on.
Second, most VC fund managers are not restructuring professionals. They are skilled at identifying and investing in early-stage companies. They are not skilled at the specific, highly technical disciplines of creditor negotiation, forbearance agreement drafting, runway extension, or going-concern sale process management. When they encounter a distressed portfolio company, they reach for the tools they know — which generally means attorneys who recommend ABCs.
Third, the advisors who are called in are often the wrong ones. Traditional restructuring firms — built around Chapter 11 practice for middle-market and large-cap companies — bring heavy process and high fees to situations that often require nimble, low-overhead intervention. A startup with $800,000 in liabilities and a promising AI platform does not need a $500/hour Chapter 11 filing. It needs someone who can make three phone calls, negotiate a forbearance agreement with its landlord and two trade creditors, and create enough runway for a going-concern sale to close.
The Anatomy of a Recoverable Situation
CRAGSI has seen hundreds of distressed startup situations. Our experience is that a significant portion of the companies that receive ABCs — we estimate conservatively 30–40% — have one or more of the following characteristics that make them candidates for a better outcome:
- Viable underlying technology or IP that has strategic value to an acquirer, even if the current business model is not working
- A customer base or recurring revenue stream that makes the company worth more as a going concern than as a collection of liquidated assets
- A team that an acquirer would pay a meaningful premium to retain — an "acqui-hire" situation that is never explored because no one runs the process
- Liability obligations that are negotiable — landlords, trade creditors, and lenders who would agree to significant reductions or deferrals if asked by someone who knows how to ask
- A runway gap that is smaller than it appears — where the difference between "we have two months of cash" and "we have eight months of cash" is three or four creditor negotiations that no one has attempted
In each of these situations, the right intervention is not an ABC. It is a rapid triage, a frank assessment of what is and isn't viable, and aggressive execution of the best available alternative.
The CRAGSI Triage Framework
When CRAGSI engages a distressed VC-backed company, our first task is always the same: a rapid triage that answers four questions.
1. Is the core business viable? Not in its current form — in any form. Is there a version of this company, with a different cost structure, a different product focus, or a different go-to-market, that can generate enough cash to survive? If the answer is yes, we pursue a restructuring or operational turnaround. If the answer is no, we focus on maximizing asset recovery.
2. What are the company's real liabilities? Most distressed startups present their liability situation as fixed and immovable. It almost never is. Leases can be negotiated. Trade creditors will often accept 30–50 cents on the dollar to avoid the alternative. Secured lenders can be persuaded to forbear. The gap between the company's stated liabilities and its actual, negotiated obligations is often significant — and it directly determines how much runway is available.
3. What are the company's assets worth as a going concern vs. in liquidation? This is the fundamental question that most advisors skip. A company's IP, customer relationships, team, and brand are often worth multiples of their liquidation value in a going-concern sale. Quantifying this gap — and building a sale process around it — is the core of our advisory work in distressed VC situations.
4. Who are the potential acquirers, and how long do we have to reach them? Going-concern sale processes take time. If a company has two months of runway, there may not be enough time to run a proper process. If it has six months, there is. The answer to this question determines whether a runway extension effort is worth pursuing — and how aggressively we need to move.
What We Have Actually Achieved
CRAGSI's track record in distressed VC situations is built on specific, measurable outcomes — not general assertions about expertise.
In one engagement, we extended a synthetic biology company's runway by seven months — without new equity capital — through a combination of reduction in force, lease restructuring from $100,000 to $6,500 per month, and forbearance agreements with trade creditors. That runway extension enabled the company to close a Series B financing round and execute a strategic pivot to an AI platform — a company that went on to be named a TIME Magazine Best Invention of 2024 and a World Economic Forum Top 100 Global Startup.
In other engagements, we have settled liabilities representing $30 million in total obligations at an average of six to nine cents on the dollar — a 90%+ reduction — and achieved 100% follow-on funding success in the situations where a going-concern exit was the objective.
These are not exceptional outcomes. They are the result of applying the right tools, by the right people, at the right time — which is exactly what is missing from the current ecosystem.
What Boards and Fund Managers Should Do Differently
The most actionable takeaway from this analysis is simple: call for help earlier.
The single most common mistake that boards and fund managers make with distressed portfolio companies is waiting too long. By the time most companies reach CRAGSI, they have six weeks of runway and a stack of unpaid invoices. The options at that point are real — but they are meaningfully worse than the options that would have existed six months earlier.
A company with six months of runway has time to run a proper going-concern sale process. A company with six weeks does not.
The second takeaway is equally important: the advisors you call matter enormously. Not all restructuring advisors are equipped to handle VC-specific distress. The tools, the stakeholder dynamics, the capital structure, and the success metrics are all different. Engaging a team that has spent decades managing institutional special situations assets — and that has hands-on experience with the specific dynamics of VC-backed company distress — produces materially different outcomes than engaging a conventional restructuring firm.
CRAGSI exists because that combination is genuinely rare. We built it on purpose — because we saw the gap and understood what it was costing the innovation economy.
If you are a VC fund manager or board member with a distressed portfolio company, we offer a free, confidential triage consultation. We will tell you honestly what we think the options are — and whether CRAGSI is the right firm for the situation. We don't take on what we don't believe we can execute and win.