You know the adage that 90% of startups fail in their first 3 years of existence? According to a startup genome report from 2019, that figure is actually a bit higher, 11 out of 12 startups fail (which is 91.6%).
But now, startup failure rates, which were already elevated in 2022, have trended even higher as we approach Q4 2023 according to new data from Carta. As the chart below shows, 543 startups have shut down so far this year compared to just 467 in all of 2022 (the data is limited to Carta users only and more US-biased, so the bigger picture is likely to be worse).
The Carta data showed the following trends:
- About half of the companies that closed had not raised any venture capital, relying solely on bootstrapping, angel investors, or other sources.
- For those that did tap VCs, 90% were either Seed or Series A stage companies. Fewer established Series B+ startups shuttered operations, though the 34 later stage shutdowns exceeded last year’s 25.
- In raw numbers, 87 startups that had raised at least $10 million ended up closing down. That’s nearly double the total in 2022, evidencing the spree of overfunded startups now running out of runway.
Reasons for elevated startup failure
According to CBInsights, the #1 cause for startup failure is running out of money. Of course, that’s more often than not a symptom, not the direct cause (i.e. bad management, lack of product market fit, costly mistakes that accelerated the said running out of money). But in the recent figures, in addition to the ‘normal’ startup risks, something else is at play.
While the reasons for failure vary, it’s clear that mounting macroeconomic headwinds combined with a reduction of over 50% in VC funding in 2023 have contributed to the accelerating failure rate. Startups that raised in 2021 and 2022 often at high valuations, had to adjust quickly to the new market conditions of 2023.
Many conducted layoffs, reduced burn and and either aimed for profitability or to become ‘default alive’, meaning being able to survive indefinitely without external funding. But many had to swallow a bitter pill and either raise extension rounds at flat/down valuations (causing painful dilution) or sell, often at prices lower than their last round valuation.
Now the effect of those extension rounds, debt (which has become expensive to serve given the higher interest rates) and slow commercial markets (consumer cost of living up and discretionary spend down, companies tightening the belt etc) have also meant that companies found lower organic growth to a large extent.
Of course, a certain startup mortality rate is expected and even healthy for the broader ecosystem. It comes with the territory. But the current times call for tighter planning and founders would be wise to adjust their expectations on growth at all cost, and expect longer funding cycles and smaller round sizes in the near future. There are exceptions to every rule of course, but in a nutshell 2023 has been, and will probably continue to be, a challenging year.