The number of bankruptcies among US startups increased by 60 percent last year, jeopardizing millions of jobs in venture capital-funded companies and potentially having far-reaching impacts on the overall economy.
According to data from Carta, a provider of services for private companies, the number of bankruptcies of venture capital (VC)-backed startups has sharply increased. In the first quarter of this year, 254 Carta customers filed for bankruptcy. This is more than seven times the bankruptcy rate the company recorded in 2019.
Among the prominent victims of the recent wave of bankruptcies is the financial technology company Tally. The startup, which offers credit management tools and was last valued at $855 million in 2022, had to cease its activities due to a lack of follow-up financing. Other well-known companies such as the live-streaming platform Caffeine, the health startup Olive, and the transportation company Convoy have also ceased operations in recent months.
The sharp increase in bankruptcies is a direct result of the drastic decline in VC investments in early-stage companies since the interest rate hike in 2022. The bankruptcy of Silicon Valley Bank last year has further exacerbated the situation for start-ups, as the opportunities to secure venture debt have been severely limited.
Healy Jones, Vice President at Kruze Consulting, emphasizes that during the boom years of 2021-2022, incentives for founders and investors were often misaligned. Many startups raised unusually high amounts during this time, which is now exacerbating current problems.
According to Morgan Stanley, about 4 million people worked in venture capital-backed companies in the USA last year. The bank warns of potential negative impacts on the overall economy if the rise in bankruptcies is not halted.
Peter Walker, Head of Market Analysis at Carta, sees a "huge gap" in the current situation between start-ups that can successfully raise money and those that are struggling. The situation is particularly challenging for companies operating in less attractive sectors. While the majority of new investments are flowing into the artificial intelligence sector, other industries are under significant pressure.
Jones adds that the few startups that have managed to secure a second round of funding this year are showing an average annual revenue growth of 600 percent. This highlights the increasing polarization within the startup ecosystem.
The lack of public offerings and the slowdown in M&A activity have also made it difficult for venture capitalists to return capital to their investors. Only 9 percent of VC funds launched in 2021 have returned capital so far, compared to a quarter of the funds from 2017.
