As the Emergence London conference on the 28th April 2025 drew to a close, my presentation resonated with the audience. The topic? The incredibly tough choices that hit every investor in the startup world when a promising venture suddenly finds itself in troubled waters. I named my keynote "Sophie's Choice: Navigating the Investor's Dilemma in Startup Turmoil" because sometimes the decisions we face regarding the fate of a portfolio company can lead to “life or death” consequences for the entity (a non-natural person who might otherwise continue its existence indefinitely).

Throughout my professional career, I have been fortunate to have lived, worked, and invested in numerous countries across three continents, including 15 years as an American expat residing in the Nordics, Australia, and Switzerland. This global perspective, built from more than three decades working in a wide variety of roles and seats within the venture finance ecosystem - as a deal lawyer, as a cofounder and business executive, as an in investor, strategic advisor and board member, as educator and coach and mentor to founders and funders - has given me a front-row seat to the complex realities of international startup ecosystems. My aim, both at Emergence London and in the work I do individually and through Aery Advisors, is to offer a clear framework for understanding these dilemmas, empowering investors and other stakeholders to make the best possible choices even when the odds seem stacked against them.

The Startup Graveyard: A Harsh Reality Check

Let's start with some sobering truth: the startup graveyard is, unfortunately, a very crowded place. The statistics, while often a hard pill to swallow, are crucial for setting realistic expectations. Consider the Carta Class of 2018: out of 4,369 companies that subscribed to use its cap table management service (which is a signal that this group of startups were serious about raising money from third parties), a staggering 61.9% had closed by January 1, 2025. Only 56.4% even managed to raise a Seed Round, and a mere 1.1% made it to Series D+. This isn't just data; it's a stark reminder that even well-intended ventures can falter, and a disproportionately small percentage of startups generate the vast majority of returns—a phenomenon known as the "power law."

The volume of startup closures is on the rise, especially in the current economic climate. Between 2023 and 2024, 109 startups closed their doors after raising over $20 million. This includes those that managed to secure substantial VC dollars, proving that even significant funding doesn't guarantee survival. This reality underscores the critical importance of careful financial management and proactive decision-making from day one.

The Investor's Agonizing Choice

This brings us to the very heart of the matter: the "Sophie's Choice" that investors face. No, we're not suggesting you'll literally sacrifice one company for another, but the emotional and financial weight of deciding which ventures to continue supporting – and which to let go – can feel incredibly similar. It’s about navigating the emotional and financial consequences of backing one struggling company over another, constantly grappling with risk and potential regret in the pursuit of growth.

The "In or Out" Playbook: Strategic Options

When a startup in your portfolio begins to struggle, what's your move? At Aery Advisors, we advocate for a clear "in or out" playbook. Your options can range from a Downround or Cramdown to a full Recapitalization, or even considering Bankruptcy or other Non-Bankruptcy Alternatives like a Phoenix Company. Understanding the nuances and implications of each approach is vital.

We constantly monitor key indicators of progress and potential failure. This means scrutinizing crucial financial metrics and qualitative milestones. Identifying red flags early, like a fundamental lack of market need or rapidly depleting cash reserves, is paramount for effective intervention.

The current market environment is particularly challenging, with a significant increase in down rounds. In fact, 2023-2024 was the worst two-year period for down rounds in a decade. We've also observed that companies pursuing extension rounds via SAFEs or Convertible Notes were 10 times less likely to proceed to a Series B compared to those with priced extensions. This signals a more discerning market and reinforces the need for solid financial structuring. The ongoing venture funding pullback, rising interest rates, and persistent inflation are adding new layers of pressure, compelling investors to be even more cautious about where they deploy their limited capital.

The Human Element: Team Dynamics and Trust

Beyond the balance sheets and market trends, the human factor is profoundly impactful. A startup, in many ways, is like a marriage – albeit with more money and (hopefully) less intimacy! So, choosing your co-founders wisely isn't just good advice; it's critical. Your initial investment often hinges on the perceived strength and capability of the founding team. Even when financial metrics falter, the dynamics within the team and the level of trust among stakeholders can dramatically influence a startup's fate. Data clearly shows that losing a co-founder has become more common in recent years.

Interestingly, our data also suggests that founding teams with a 50/50 equity split show a slightly higher success rate in reaching Series B (9.6%) compared to those with non-50/50 splits (8.7%). This subtle difference underscores the importance of equitable partnerships for long-term resilience.

Navigating Your Path Forward with Aery Advisors

In conclusion, the startup journey is rarely a straight line. There will be exhilarating highs and challenging lows. The key to successful long-term investing is to be prepared, to have a strategic playbook, and to make informed, albeit difficult, decisions. Remember: investing in angel and VC-backed startups with a 75% failure rate is like cheering for a baseball player who strikes out three out of every four times at bat. While legends like Ted Williams had a career batting average of .344 over 19 seasons, most of your startup picks will likely also be swinging for the fences but might end up short!

As founders gear up for Q2, which is typically a heavy deal season, it's crucial to be prepared. At Aery Advisors, we specialize in helping investors like you navigate these complex dilemmas. We offer a comprehensive suite of services, from advising on over 200 angel and venture capital financings to supporting 50+ mergers and acquisitions, and even guiding more than 10 public offerings. If you're facing a particular challenge with a portfolio company or simply want to strengthen your strategic approach to managing troubled investments, we invite you to connect with us.