Startup failures in the US have jumped 60 percent in the past year as founders run out of money raised during the 2021-22 tech boom, threatening millions of jobs at venture-backed companies and risking spillover into the broader economy. .
Start-up shutdowns are rising sharply even as billions of dollars of venture capital pour into artificial intelligence outfits, according to figures from Carta, which provides services to private companies.
Carta said 254 of its venture-backed customers went bust in the first quarter of this year. In 2019, when CARTA began tracking failures, the number of insolvencies increased sevenfold.
Last week, financial technology company Tally became the latest casualty. The nine-year-old credit management tools provider was valued at $855mn in a 2022 funding round and has raised more than $170mn from large VCs including Andreessen Horowitz and Kleiner Perkins.
Tally founder Jason Brown said in a LinkedIn post that the San Francisco-based company was “unable to obtain the necessary funding to continue our operations.”
This adds to the list of high-profile company shutdowns in the past year. They include live-streaming website Caffeine, which has raised more than $250mn from investors including Fox Corp, an arm of Saudi Arabia’s sovereign wealth fund, Andreessen and Sanabil Investments; healthcare start-up Olive, last valued at $4bn in 2021; and trucking company Convoy, valued at $3.8bn in 2022.
Desk rental company WeWork, which had raised about $16 billion in debt and equity from SoftBank and its Vision Fund, closed in November after going public in 2021.
The declines are part of a painful adjustment for start-ups triggered by interest rate hikes in 2022. VC investment into early-stage companies has fallen, while venture lending has dwindled since the collapse of Silicon Valley Bank last year, leaving many startups stranded. .
During the boom years, VCs encourage founders to take on bigger and bigger investments, increasing valuations, according to Healy Jones, vice president of Cruise Consulting, an accountant for hundreds of venture-backed start-ups. It’s a “crazy fundraising environment,” he said, in which “VC and founder incentives don’t always align.”
The founders are now dealing with a hangover. Analysts at Morgan Stanley said in a recent note to clients that the jump in bankruptcies was due to an “abnormally large number of companies raising abnormally large amounts of cash during 2021-2022.”
Morgan Stanley said that VC-backed firms employ 4 million people in the US, creating “spillover risks to the rest of the economy” if the rise in bankruptcies fails to slow.
Peter Walker, head of insights at Carta, said there had been a “big drop” in the number of companies able to raise money again in the two years since their last funding round.
This is especially exciting for start-ups who have cut costs to survive in the last two years, sacrificing growth in the process. “Advice changed. . . VCs used to say (grow at all costs, then be profitable tomorrow),” Walker said. “If you’re curtailing your growth with cuts it’s probably not a VC business.”
According to Jones, Cruise clients that have successfully raised a second round of funding this year are growing their revenue by an average of 600 percent annually.
Even for strong companies, public listings have dried up and M&A activity has slowed. It prevented VCs from returning capital to institutional investors, a necessary precursor to future fundraising.
According to CARTA, only 9 percent of venture funds raised in 2021 returned any capital to their end investors. In comparison, a quarter of funds in 2017 returned capital at the same level.
Both Jones and Walker said the fund’s activity is picking up after a two-year hiatus.
The investment goes to startups working on artificial intelligence enormously. Jones said Cruise’s customers raised $2bn by 2024, and three-quarters of that went to AI start-ups, although they represented less than a quarter of its total customers.
For those in less glamorous circles, the outlook is more challenging. “There are only so many ‘adventure-backable’ companies at any given time,” Walker said. “The amount of capital may have grown faster than the number of start-ups to absorb it.”