A Startup 'Mass Extinction Event' Has Begun
Startups raised a ridiculous amount of money in recent years through 2021.
That year, very few startups failed, making the market look artificially robust.
Now, the rate of startup failures is rising. There could be a wave of capitulation in the next year.
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Venture capitalists love to talk about how failure is essential to innovation. They will have a LOT to discuss soon.
Startup failure rate is beginning to increase, from artificially low levels in 2021, and there could be a wave of capitulation in the next year where an unusually large number of startups shut down.
"The Mass Extinction Event for startups is underway," according to a recent tweet from Tom Loverro, a general partner at IVP, which has backed companies including CrowdStrike, Datadog, Discord, Klarna, Slack, Snap and Twitter. "It is a news footnote most of the time. Don't be fooled. The market has changed. Funding announcements get lots of headlines. Bankruptcy filings…less so." The Wall Street Journal turned his insight into a great story here.
As Loverro notes, startups die quietly and slowly. They also shut down a lot. While VCs tweetstorm the latest M&A or IPO exit, there are many more young businesses in their portfolios that wither in the background.
This is the way venture capital is supposed to work. VC funds back loads of startups and they expect most to fail. They only need a small handful to become the next Meta or Twitter or Snowflake to generate big returns.
So there's a natural run-rate of startup failures. The problem is that the VC boom that peaked in 2021 put this natural order out of whack. There was a frenzy of investment, where startups raised massive amounts of money and some businesses got funding that maybe shouldn't have. The failure rate plunged as VCs money gushed everywhere. SoftBank and Tiger Global were major actors here, but there were many others.
The money spigot has run dry
Now, the money spigot has run dry (except if you're an AI startup). There was so much money raised in recent years that startups have a lot of runway to survive. But, at some point, struggling businesses will run out of cash and no one will want to fund them again.
This will produce a series of painful asset sales, nasty cram-down recapitalizations, ultra-cheap acqui-hires, and yes, simple shutdowns and bankruptcies. You can't see this slow-motion train wreck happening right now because startups are not public companies. There's no stock price that you can watch tumble to see fortunes crumble in real-time.
Looking closer, there are signs of Loverro's "Mass Extinction Event" building:
Crunchbase is tracking startups that have failed so far this year, and the count is up to 72. There will be a lot more. Loverro's firm, IVP, has been urging founders to "surgically pare down expenses" to stave off extinction, according to an internal presentation seen by Insider.
We'll leave you with Loverro's honest outlook. "Late '23 & '24 will make the '08 financial crisis look quaint for startups," he wrote in this insightful thread.
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Source: Business Insider
