By Paritosh Bansal
(Reuters) -Things were looking up for Tractiv in January, when the data tracking software startup was on the cusp of a deal with Marvel Studios. Now, it is on the brink, with just enough cash left to make it to Thanksgiving.
The tale of Tractiv's dramatic reversal in fortunes is emblematic of the times. Marvel, a unit of Walt Disney, initially planned to use Tractiv's software in a post-production process, documents show. But layoffs at Disney and the Hollywood strikes threw a wrench in the works.
At the same time, a pullback in venture capital due to higher interest rates meant funding dried up. Drew Orsinger, Tractiv's co-founder and CEO, said he needs $600,000 to $700,000 to keep going for a few more months, time he needs for Hollywood to return to work and for talks with other potential customers to get traction.
He's not sure he will succeed. "We are not throwing in the towel, but we are struggling," said Orsinger, 49.
Disney and Marvel declined to comment.
Tractiv's tribulations are detailed here based on interviews with nearly half a dozen executives and investors familiar with the startup and a review of company documents. They provide rare, sometimes blow-by-blow insight into the hardship facing startups, key drivers of American innovation.
Many of Tractiv's challenges are typical of an early-stage company as well as a consequence of risks it took, such as trying to break into a clubby industry outside its area of expertise. Nevertheless, its experience also shows how a momentous shift over the past year to higher interest rates has left startups more vulnerable to external shocks.
A shakeout in the industry may eventually prove to be cathartic. But for now, more pain is likely, as companies burn through cash, the economy slows and funding remains tight.
Venture capital funding for early-stage companies, called a pre-seed round, has dropped dramatically this year after a post-pandemic boom, with the number of U.S. deals falling to their lowest level in 13 years, PitchBook data shows.
"The bar has been raised for what opportunities they're prepared to put money into," said Mark Almeida, a former senior Moody's executive and director of Tractiv.
BIG BREAK
Orsinger, who has worked as the chief security officer at SpaceX, CME Group and Honeywell, started Tractiv at the height of the pandemic in April 2020 with $600,000 from friends, family and his savings. His idea was to build software that could help companies keep track of data as it moved from point to point -- a long-standing problem in financial services.
In February 2021, Tractiv got a major break when it gave a demonstration of the software to venture capital firms.
Orsinger said Hans Morris, managing partner of venture firm Nyca Partners, called him afterwards. "I don't know exactly where or how your tech will be used, but I'm willing to pay to find out," Orsinger said Morris told him.
Nyca, which manages about $1 billion, invested $2 million in Tractiv for an 18% stake, valuing the company at $11 million in November 2021.
The next few months Tractiv had a series of conversations with major financial services companies, including banks such as JPMorgan Chase. Several showed interest in Tractiv's software but did not buy it.
JPMorgan declined to comment.
Around then, an unexpected avenue started to get traction. A Marvel contact from Orsinger's days at SpaceX had opened a conversation a few months before about possible use of Tractiv in the movie industry.
'IT'S TOUGH' In a memo dated Jan. 30, Marvel's global security and content protection team called Tractiv's software, Traxion, "a next generation content delivery system" that would allow it to trace what happens to its data once it goes to a third party – a boon for an industry that deals with leaks of movie trailers and piracy. They recommended moving toward a contract with Tractiv.
The prospect of the deal persuaded Nyca, which normally sticks to financial technology, to make an additional $500,000 investment in Tractiv at a $20 million valuation. Orsinger also raised $200,000 more from family and friends.
Nyca's Morris said the idea was to give Tractiv time to close on the deal with Marvel and find another investor that understood the media and entertainment industry.
Then it ran into headwinds. On Feb. 9, Disney announced a sweeping restructuring, cutting 7,000 jobs in waves over the ensuing months, making it – as one Marvel executive later explained – "a really challenging time to introduce any new costs to the studio."
Tractiv pressed forward. It applied to become an official Disney vendor, an approval it got in early May, and built features to meet Marvel's needs.
On May 2, the Hollywood writers went on strike, followed by actors in July – the first time both unions had gone on strike since 1960. Production ground to a halt.
Disney continued to be interested through at least mid-August, a document shows. Then, abruptly after a couple of weeks of silence, Orsinger was told that Disney needed to "pause our interaction on the product at this point."
In a bid to conserve cash, Orsinger has reduced staff from 10 to 8 and cut salaries. He and his brother, who also works at Tractiv, have not taken a salary since December. Tractiv is exploring all options -- new investors, sale of the technology and other use cases, such as artificial intelligence.
Asked how he and his family were coping with the uncertainty, Orsinger said, "It's tough. It's kind of like, 'How much longer do we keep doing this?'"
(Reporting by Paritosh Bansal, Editing by Anna Driver)