With funding drying up and valuations plummeting, the once-thriving ecosystem of innovation and risk-taking is now grappling with a stark new reality: the days of free money are over.
The data is clear: startups and venture capital are in a recession that is as bad as the recession of 2008. But no one is talking about it. It’s not dominating the headlines like the election or climate change. Why? While Amazon’s layoffs may hit the headlines because it’s publicly traded, startups are closing quietly. Your favorite brands and apps have silently gone dark. Their last Instagram post was a year ago and their website isn’t working. The founders haven’t updated their Linkedin, or if they have, they are consulting/advising now. That’s because while startups are keen to shout news of their launch to the sky, they’re not as likely to tout the closure of a firm. They go out quietly into the night without a word.
But here’s the truth: Between 50% and 70% of VC backed startups went out of business last year. Data from Carta shows that more than half of startups founded between 2017 and 2023 that had raised more than $1 million went out of business in 2023. Even worse: startup closures in the first quarter of 2024 were much greater than each of the quarters in 2023.
The 2008 crisis was about real estate caused by a number of factors including subprime mortgages, predatory lending practices, and securitization by lenders. Today’s crisis revolves around the cost of capital—how it remained incredibly cheap for too long and has now rapidly become more expensive. In the last year, teams that didn’t swiftly achieve profitability in response to the capital markets perished.
This VC/Startup Recession was caused by the rapid rise of interest rates, which took Silicon Valley Bank and every VC and startup by surprise. They didn’t cut headcount fast enough or tighten marketing budgets and margins quick enough. The sea change from rising interest rates, inflation, market saturation, consumer behavior shifts, and decreased funding swamped many startups last year.
The wave of tech layoffs continues to surge in 2024. According to layoffs tracker Layoffs.fyi, this year has already witnessed 60,000 job cuts across 254 companies after substantial workforce reductions in 2022 and 2023. In the early months of 2024, large companies including Amazon, Google Tesla, TikTok and Microsoft have carried out significant layoffs, while smaller startups have also faced considerable cuts and, in some cases, have completely shut down operations.
Although some rounds are still getting done, the valuations are misleading. Carta data shows that valuations have come down steeply for late stage companies, but the story for Seed and Series A is a little more oblique. This is because these rounds often come with steep liquidation preferences and/or warrant coverage—factors that aren’t reflected in valuation data.
VC funds on Carta called more capital in January 2024 than at any point since mid-2022, so there’s a lot of activity happening – most of it bridge rounds for portfolio companies that they’ve decided to support.
The industry stands at a crossroads — while the challenges have been significant, they also present an opportunity for introspection and innovation. Investors are now (finally) prioritizing sustainable growth and profitability over rapid expansion, signaling a shift towards a more resilient and disciplined market. As the dust settles, those who adapt to the new norms will be well-positioned to lead the next wave of entrepreneurial success.
As the saying goes “What doesn’t kill you only makes you stronger.” If previous recessions have taught us anything it’s that companies that are born during recessions tend to outperform – they have to be scrappy from the start. AirBnB, UBER, Netflix, and Microsoft were all started in recessions. So, hopefully, the crop of ‘23 and ‘24 founded companies will be just that: stronger.
