Start-up failures increase by 60%.

The number of start-up failures in the United States has surged by 60 percent over the past year, as entrepreneurs exhaust the funds they secured during the technology boom of 2021-22. This trend poses a significant threat to millions of jobs within venture-backed firms and raises concerns about potential repercussions for the broader economy.

Data from Carta, a provider of services to private enterprises, indicates a sharp increase in start-up closures, despite the influx of billions of dollars in venture capital into artificial intelligence companies.

According to Carta, 254 of its venture-backed clients declared bankruptcy in the first quarter of this year. The current bankruptcy rate is over seven times higher than when Carta began monitoring failures in 2019.

Recently, financial technology firm Tally became the latest victim of this trend. The nine-year-old company, which specializes in credit management tools, was valued at $855 million during a funding round in 2022 and had secured more than $170 million from prominent venture capital firms such as Andreessen Horowitz and Kleiner Perkins.

Tally's founder, Jason Brown, stated in a LinkedIn post that the San Francisco-based company was "unable to secure the necessary funding to continue our operations."

This adds to a growing list of notable company closures over the past year, including the live-streaming platform Caffeine, which raised over $250 million from investors like Fox Corp, Andreessen, and Sanabil Investments, a division of Saudi Arabia’s sovereign wealth fund; healthcare start-up Olive, which was last valued at $4 billion in 2021; and trucking company Convoy, valued at $3.8 billion in 2022.

WeWork, a desk rental firm that secured approximately $16 billion in debt and equity from SoftBank and its Vision Fund, ceased operations in November following its public offering in 2021. This downfall is indicative of a broader and challenging recalibration for start-ups, prompted by interest rate hikes in 2022. Investment from venture capitalists in early-stage firms has significantly decreased, and the availability of venture debt has also contracted after the failure of Silicon Valley Bank last year, leaving numerous start-ups in precarious positions. During the peak years, venture capitalists often urged entrepreneurs to pursue increasingly larger investments, which led to inflated valuations, as noted by Healy Jones, vice-president at Kruze Consulting, a firm that provides accounting services to many venture-backed start-ups. He described the period as a “crazy fundraising environment” where “the incentives of VCs and founders did not always align.” Now, founders are grappling with the aftermath. The surge in bankruptcies can be attributed to the fact that “an unusually high number of companies raised an unusually large amount of capital during 2021-2022,” according to analysts at Morgan Stanley in a recent client communication. Morgan Stanley also reported that VC-backed firms employed 4 million individuals in the United States, creating potential “spillover risks to the broader economy” if the increase in bankruptcies does not begin to decline. Peter Walker, head of insights at Carta, remarked on the significant decline in the number of companies capable of securing funding again within two years of their previous funding round.

This situation is particularly frustrating for start-ups that have made significant cost reductions to endure the past two years, often at the expense of their growth. Walker noted, “The guidance has changed . . . VCs [were] previously urging growth at any cost, but now they expect profitability immediately.” He added that if a company has limited its growth through budget cuts, it may no longer fit the venture capital model. Jones pointed out that Kruze clients successfully securing a second funding round this year are experiencing an impressive average revenue growth of 600 percent annually. Even robust companies are facing challenges, as public offerings have significantly decreased and mergers and acquisitions have slowed down. This stagnation has hindered VCs from returning capital to their institutional investors, which is crucial for future fundraising efforts. According to Carta, only 9 percent of venture funds raised in 2021 have managed to return any capital to their investors, in stark contrast to a quarter of funds from 2017 that had done so by this point. Both Jones and Walker observed that funding activity is starting to rebound after two years of stagnation. The majority of investment is currently directed towards start-ups focused on artificial intelligence. Jones reported that Kruze’s clients raised $2 billion in 2024, with three-quarters of that amount allocated to AI start-ups, even though these companies make up less than 25 percent of their total clientele. For those operating in less high-profile industries, the future appears more difficult. Walker remarked, “There are only a limited number of companies that can attract venture capital at any given time. The influx of capital may have outpaced the number of start-ups capable of utilizing it.”