What happens when a school security startup fails?

90% of tech startups go bankrupt so who is responsible for services when schools have multi-year contracts for threat reporting apps, panic buttons, visitor management, or CCTV monitoring?

Imagine this: you are a superintendent and a startup company pitches an AI-powered software system that will integrate all of your systems—attendance, grades, teacher reports, student assignments, disciplinary records, cameras, access control—and can identify a student who poses a threat with 99.9% accuracy. The company just got $50M from a venture capital fund and as an early customer, your school can sign a 5-year contract for only $1M per year.

This sounds like an amazing service and great price, so your school district signs the 5-year contract. The company comes in, integrates all of your systems (also getting access to all your data), and launches the software. Everything is great and your staff think the service works very well. But what you didn’t know is the cost of doing all this integration, data processing, storage, and monitoring is $5M per month. Even with your new contract, this company is going to run out of money in less than a year. To be viable, the start-up needs to have 60 schools under contract in the first year. If they get 30 schools, maybe the venture fund will give them another round of funding but with each round of funding, the terms get worse as the risk of bankruptcy gets higher (worse terms means each funding round takes a bigger share of the company for less money).

The big difference in venture capital versus regular businesses is venture investments are all about taking big risks for the chance at big rewards. The average venture fund counts on 90% of investments going bankrupt. It’s the one big winner that makes the entire portfolio worthwhile. For a school district, signing a multi-year contract with a venture-backed startup means taking a huge gamble (~1/10 chance) that the security company will still be operating by the end of the contract term.

This isn’t hypothetical. Tech startups fail every day and while most of the startup companies providing school security services are new, most of them will fail too. And unlike public companies, startups don’t need to disclose their financial status so a school district might sign a $5M contract while the CEO knows the company is going bankrupt within months.

Difference Between Venture-Backed and “Normal” Companies

A traditional small business in the security space (e.g., locksmith, alarm installer, or family-owned camera company), usually grows slowly, spends cautiously, and builds a financial strategy around long-term service and customer retention. If they fail, it’s often after years of decline which gives customers time to transition, or another company in the same market buys them.

Venture-backed startups play a different game. Their lifeblood is “runway” which is how many months of operation remain before they burn through investor cash. The goal of venture-backed companies isn’t steady service, it’s hyper-growth to return on the high risk investment. This means that a security startup needs to land as many school contracts as possible—even if the contracts are at a loss—just to show enough viability to get the next funding before the bank account hits zero. For security startups, venture investors don’t care about how many threats were detected or how well the software works, they only care about how many new contracts were signed. This is why many venture-funded startups spend far more money on a huge sales team, conference booths, and advertising instead of improving their core product.

This rapid grow-at-all-costs model works right up until it doesn’t. When investors stop writing checks, the company doesn’t have years to wind down. A startup that had $50M in funding might go from fully operational to closed within days.

When the Runway Runs Out

The collapse of a venture-backed startup is abrupt because when the $50M venture check runs out and the product is operating at a loss, there is not enough money to cover operating costs. For example, to sign as many customers as possible, a company might only charge $10/camera for monitoring services even when the actual cost is $50/camera with equipment and labor. That growth model works when you have a giant venture check to float the difference, but it collapses if you don’t get another funding round.

Even if a school has a multi-year contract, when the venture money runs out, customer support disappears and servers go offline without notice. If a school has an access control and visitor management system that was working on Monday morning, when the company running it crashes, suddenly the app to open the doors (or lockdown the school) won’t open.

When the runway runs out, there is nobody working in the monitoring center.

Unlike buying desks or textbooks, a school can’t stockpile digital security tools. If your panic button app goes dark, it’s gone. If your visitor management kiosks can’t connect to their servers, they become expensive paperweights.

When companies fail, a third party immediately comes in to secure assets and liquidate as quickly as possible. Office chairs, laptops, and software licenses get sold off to satisfy creditors. In the case of school security companies, what counts as an “asset” often includes personal information and sensitive data. For a school district, what happens to all your valuable data the startup had access to? Think about:

• Visitor Management Systems: These collect driver’s licenses, home addresses, photos, and sometimes criminal background check results of every parent, delivery driver, and contractor who entered the school.

• CCTV and Access Control: Cloud-based surveillance companies store video footage of students, staff, and visitors, and log entry/exit records tied to ID badges.

• Threat Reporting Tools: Apps designed for students to report bullying, self-harm, or violence may contain detailed messages and sensitive student disclosures.

In liquidation, these databases are valuable. Right now, there is a huge legal challenge over what happens to DNA samples/user data following the 23 and Me bankruptcy. Student data might be sold to competitors—or worse, to third-party buyers with little oversight. There’s no guarantee your students’ information remains protected when the company holding it ceases to exist.

Schools Rarely Get Their Money Back

Schools usually prepay contracts annually based on the procurement cycle. To use up federal COVID Relief funding, schools signed multi-year contracts before the funds had to be returned. If your district signed a five-year deal with a panic button vendor and they go under in year one, the money is gone because bankruptcy courts don’t prioritize customers over primary creditors.

From the Bloomberg Odd Lots podcast: So how do you wind down a bankrupt startup company? David Johnson of Resolution Financial Advisors specializes in exactly that. Because the formal bankruptcy process is very expensive, many companies look for some way to salvage value by doing an asset fire sale.

You can file a claim, but by the time lawyers and banks take their share, pennies remain. For a cash-strapped district, that’s money that will never return and meanwhile, you still need to find a replacement system.

Even worse, the closure of a startup often leaves no clear entity to hold accountable. Once the corporation dissolves and the executives move on, even if negligence seems obvious—like a company abruptly cuts off the app your school depends on for access control—there may be no one left with legal liability.