Venture Situations: The New Normal in Silicon Valley

Jun 01, 2025

In the ever-evolving landscape of Silicon Valley, a new phenomenon is emerging: the Venture Situation. This hybrid of traditional venture capital and special situations investing is reshaping how we think about startup lifecycles and investment strategies. As the tech industry grows and matures—and faces unprecedented challenges—understanding Venture Situations has become crucial for investors, founders, and industry observers alike.

We've learned about this category firsthand—being an emerging private fund manager investing in many venture opportunities, while having backing from some of the best distressed debt investors in the world. My firm Proof Group has appeared in reporting by the Wall Street Journal (on the restarts of Celsius and FTX) and by Bloomberg a number of times around some of these early public Venture Situations. We have thankfully avoided public limelight on some of the more interesting situations we've been finalist bidders on.

Combining clean-slate optimism and hairy situations is a little unusual. The two flavors together are a bit odd: the sweet and the savory.

Traditional "Special Situations" are best served with great meaty collateral; it's hard to lose money when buying a dollar for less than a dollar, with a margin of safety.

We know we were onto something when great distressed investors thought what we wanted to buy was worthless...and great venture investors thought it was simply too much work.

But today in 2024, the Venture Capital landscape is maturing into a new larger asset class. No longer can all the deals worth doing be done around one table, Arthur Rock style. Silicon Valley is learning—step by step—what a real corporate capital structure is made of.

In this new category of Venture Situation, there's a constant stream of companies facing new problems that the clubby Valley of yore didn't face: companies either worked, and worked spectacularly, or they quietly went away, scrubbed from the Venture Investors wall of logos. The losing companies weren't really worth saving anyway, most of the time.

At the end of 20 years of falling interest rates—and the largest ever vintages of venture funds, fueled by institutional investors' search for yield—we have entire orchard fields of fruits that may not ripen—even if they grew all the way from Seed.

Venture-Backed Firm Situations

For the classic Venture-backed firm Situation, there are now 15 categories and archetypes:

  1. Growth Mismatch: The company is happily growing 20% YoY. But the founder promised investors 100% YoY and an IPO to make the math work. The gap between reality and expectations creates tension and uncertainty.
  2. Preference Stack Issues: Perhaps the company owes enough in the pref stack that a sale after years of growth might not be enough to incentivize the current team, under the current capital structure. The weight of accumulated preferred equity becomes a ball and chain.
  3. Investor Fatigue: The Series A board member is tired of telling their LPs about a promising company sucking time that is flat. VC GPs know how to have investments zero, and know how to talk about wins...the 7-year flat-with-no-liquidity is tough and tiring to explain.
  4. Capital Inefficiency: The company raised too much capital, maybe spent it a little too quickly—and now it's clear the current "plan" needs to be retooled significantly. A slow change would just be riffs upon riffs...something more fundamental is needed.
  5. Leadership Challenges: The founder is getting tired—and it's not clear there's a real bench that can make the transition. Or perhaps the founder left and the promoted-from-within isn't working.
  6. Milestone Delays: The company was delayed reaching a core milestone by a quarter or three—leaving the upward growth slope damaged. Again, the capital structure may no longer serve the people going the distance with the business.
  7. Market Timing Issues: Sometimes, the market moves faster or slower than anticipated. A company might find itself ahead of its time or late to the party, struggling to find product-market fit in a shifting landscape.
  8. Post-Acquisition Struggles: We see great businesses that were acquired by the wrong acquirer—perhaps with their best days ahead. The original risk capital has either been rolled or cashed out—and most spin-outs don't have the ability to raise fresh capital the way a Series B firm might.
  9. Technology or Product Obsolescence: In the fast-paced world of tech, what was cutting-edge yesterday might be outdated today. Companies that fail to innovate or pivot can quickly find themselves in a Venture Situation.
  10. Regulatory Hurdles: Unexpected changes in regulation can turn a promising business model on its head. Compliance costs or outright bans can create sudden Venture Situations.
  11. Competitive Pressures: The emergence of well-funded competitors or a failure to maintain competitive advantage can erode market share and growth prospects, leading to a Venture Situation.
  12. Customer Concentration Risk: Over-reliance on a small number of key customers can create a precarious situation. The loss of a major client can quickly turn a growing company into a Venture Situation.
  13. Talent Retention Issues: In the competitive landscape of Silicon Valley, the inability to attract or retain key talent can severely impact a company's trajectory, potentially leading to a Venture Situation.
  14. International Expansion Challenges: Unsuccessful attempts at global scaling or underestimation of localization costs can drain resources and create Venture Situations for companies that bit off more than they could chew.
  15. Platform Dependency Risks: Companies built on third-party platforms can find themselves in sudden Venture Situations if the platform changes policies or if they're overexposed to a single technology ecosystem.

Special Situations with Venture Potential

While these categories highlight the challenges faced by venture-backed firms, they're not the only players in the Venture Situation landscape. A parallel set of opportunities is emerging in the realm of Special Situations, where venture-style thinking is becoming increasingly valuable:

  1. Overleveraged Tech Buyouts: Technology companies overburdened with debt from PE buyouts. Bondholders find themselves owning a business they're ill-equipped to operate, creating an opportunity for operational expertise coupled with technological vision.
  2. Distressed Bond Opportunities: Tech companies with bonds trading significantly below par, requiring recapitalization. These distressed bonds represent a unique entry point for venture investment in the company's future growth potential—to buy control or material stakes.
  3. Bonds with Equity Kickers: Exploring structured debt solutions that include equity kickers, such as convertible bonds or bonds with attached warrants. This strategy may offer fixed income returns with venture-style upside potential.
  4. DIP Lending with Venture Upside: Providing Debtor-in-Possession (DIP) financing to tech firms to receive venture upside in warrants. This secures a senior position in the capital structure while gaining exposure to potential turnaround or growth.
  5. Preferred Investing Around Potential Breakout Names: Investing in preferred equity of late-stage private companies or recently public ones that haven't yet reached their full potential. This approach secures downside protection while still participating in potential upside.
  6. Public Company Turnarounds: Once-promising public tech companies consistently missing quarterly targets. These situations present opportunities for taking the company private, streamlining operations, and leveraging underlying technological assets—or using as a base to retool using new techniques.
  7. Carve-Out Innovations: Non-core technology divisions divested from large conglomerates. Often these units have promising technology but lacked resources or focus within the larger organization, creating spin-out opportunities that will need traditional venture-style partnership to find success.
  8. Brand Assets in Bankruptcy: Consumer companies in bankruptcy proceedings, where brand equity remains strong. This scenario allows for the acquisition of valuable brand assets to launch net new, digitally-native direct-to-consumer ventures.
  9. Patent Portfolio Plays: Companies with extensive, underutilized patent portfolios facing financial distress. This scenario allows for strategic acquisition of IP to develop new products or licensing opportunities.
  10. Data Asset Monetization: Companies with vast, underutilized data assets facing financial difficulties. These situations present opportunities to acquire and monetize valuable data through AI/ML applications or by creating new data-driven products and services.
  11. Legacy Tech Transformation: Established technology firms struggling to adapt to cloud/AI paradigms. These companies often possess valuable IP and customer bases, presenting opportunities for modernization and business model pivots.
  12. Hardware-to-SaaS Transitions: Hardware companies facing commoditization and margin pressure, but possessing valuable customer relationships and domain expertise. These situations are ripe for pivoting to high-margin SaaS models.
  13. Digital Transformation of Traditional Industries: Identifying old-economy companies with strong market positions but weak digital capabilities. These situations present opportunities to acquire and transform these businesses through technology integration, potentially creating category leaders in emerging "tech-enabled" verticals.
  14. Cybersecurity Turnarounds: Companies that have suffered major breaches often face financial and reputational crises. These situations can present opportunities to acquire valuable security IP and talent, implement best practices, and rebuild trust in the market.
  15. Open Source Commercialization: Identifying popular open-source projects facing sustainability challenges. These situations offer opportunities to build commercial entities around community-driven technology, providing resources for continued development and creating new revenue streams.

Case Studies

To better understand how Venture Situations play out in the real world, let's look at three diverse case studies. These examples illustrate how wide of category Venture Situations can evolved into with all of the market forces at hand.

Evernote's Acquisition by Bending Spoons

Evernote, once a darling of Silicon Valley, found itself struggling to maintain growth and profitability despite its large user base. The company's journey from a high-flying unicorn to a Venture Situation exemplifies the challenges faced by many tech startups.

The still-vacant Evernote headquarters in Redwood City overlooking the 101 freeway serves as a reminder of the expenditures some businesses make when they are told that they will be large, independent software companies...while many eventually become Venture Situations.

Tupperware's Distress and Potential Rebirth

Tupperware, a household name with a long history, represents a Special Situation that likely will really require Venture-style appetite. Its struggle highlights how even established brands can find themselves in need of a venture-style turnaround.

This case demonstrates how distressed debt investors with venture imagination could unlock a brand with impossible-to-buy brand recognition. These brands can be even more powerful without the assets that built them; when paper company CEOs faced questions about Kleenex maker Kimberly Clark's outperformance, one noted "it's not a fair comparison, they sold the paper mills!"

Core Scientific's DIP Lender Success

Core Scientific, a bitcoin mining and hosting company, showcases how Debtor-in-Possession (DIP) lending in a Venture Situation can lead to significant returns while maintaining downside protection.

- Lenders recovered their investment with strong downside protection

- Received generous convertible securities that proved highly profitable

- Core Scientific emerged as a major host of AI infrastructure, benefiting lenders who took a venture-style risk

This case illustrates how traditional distressed investing techniques can be combined with venture-style upside in Venture Situations.

Conclusion: Venture Situations – A New Frontier in Investing

Using the above case studies as simple examples, one can quickly begin to see the outline of a new style of investing. The takeaways from these case studies include:

  1. Creative exits and new ownership can breathe new life into struggling ventures
  2. Brand value or distribution remains an asset even in tough times
  3. Smart structuring can balance risk and reward for new investors
  4. Operational expertise is crucial for turnarounds
  5. Success requires blending optimistic VC thinking with distressed investing skills

Venture Situations are set to become increasingly important in the investment landscape, especially in light of recent data on venture capital performance. According to Carta's latest VC Fund report, very few venture managers are actually able to drive meaningful Distributions to Paid-In capital (DPI). This underscores the growing importance of finding creative ways to monetize assets within a portfolio, making Venture Situations more critical than ever for venture GPs.

As this category evolves, we anticipate increased specialization, with firms developing expertise in both high-growth potential and turnaround strategies. More sophisticated capital and deal structures will likely emerge, balancing upside potential with downside protection. The growth of a secondary market for distressed venture stakes could provide new liquidity options, offering alternative paths to returns for struggling investments.

This shift will demand new skill sets across the industry. Venture capitalists may need to develop restructuring expertise, while private equity firms might try to improve their ability to drive innovation in tech companies. Credit managers may need to learn to value upside. We may see the rise of hybrid funds capable of investing across the entire spectrum and capital structure from early-stage ventures to opportunistic credit situations. As DPI becomes harder to achieve through traditional means, Venture Situations offer a promising avenue for creating value and delivering returns in the venture capital industry.

The evolution of Venture Situations mirrors the early days of Private Equity. As one of the forefathers of PE once shared with me, it wasn't until their fifth or sixth deal in the late 1970s that they truly understood the category they were creating. They had to educate Depression-era bankers on leveraged buyouts, familiarize lenders with mezzanine debt, and identify entirely new sources of equity. Similarly, we're in the early stages of defining and refining the Venture Situations playbook. As we navigate this new territory, we'll undoubtedly face challenges, but the potential for innovation and value creation is immense.

As Silicon Valley continues to evolve, Venture Situations will likely become an integral part of the tech ecosystem. Those who embrace this new category, developing the necessary skills and perspectives, will be well-positioned to thrive in the next chapter of the innovation economy.

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Noah Jessop is the Manager Director of Proof Group, a private investment firm based in Menlo Park California. Previously, he was an investor at Founder Collective, a leading seed-stage VC firm renowned for its founder-first approach and long-term partnerships.

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