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.
The 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:
WeWork, the epitome of VC largesse, went public via a SPAC in 2021 at the height of the boom. Its stock has plummeted from about $13 to 18 cents now. Here's how screwed WeWork is. SoftBank was a huge investor there by the way.
Zume, a robot pizza delivery startup that raised $500 million from VC investors, got burned and will be baking no more pies as of this month. Another SoftBank investment there.
Neeva, which offered an awesome search engine and browser, gave up competing against Google, shut down and sold itself to Snowflake. Sequoia and Greylock backed Neeva.
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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Read the original article on Business Insider