Startup Survival Then vs Now!

The old adage states that "only 10% of startups survive”. But that was far from the case during the boom years of the last cycle when startup failure rates were low—very low.

According to Miguel Lui?a, managing director of fund investments at Hamilton Lane, “VCs expected a certain percentage of their portfolio not to make it to the next round, but success was off the charts,". He added that for certain managers, almost 100% of their companies raised subsequent funding during the capital-rich era that ended last year.

According to PitchBook data, the number of VC-backed companies filing for bankruptcy or shutting down has been around 1,000 per year since 2016. At the same time, new startup formation has increased substantially if you measure by VC financing, greatly exceeding startup failures.

So does this all mean the years of low startup mortality are coming to an end? Well, don't get your hopes up too much. Rosenbloom, a co-founding partner at Founder Collective stated, "I think loss ratios will be triple—or some big multiple of what they've been”.

Last year's valuation correction has yet to force many companies to close their doors, but investors expect the shutdown rate to shoot up dramatically in the second half of 2023 and into 2024.

The most severe ramifications of the dive will have latency for several reasons. Startups that entered the downturn with a solid cash reserve were allowed to continue operating. Investors have been proactive in helping their founders without providing more cash to save their portfolios, even providing bridge financing.?

But most VCs will have no choice but to let their less optimistic investments protect their winners. "In 2022, VCs dumped money into companies that probably they shouldn't have", said Yash Patel, a general partner at Telstra Ventures. In 2022, there was still "hope" that many struggling startups could weather the storm, but now it looks like investors like me may have been doubling down with the wrong deals at the wrong time, so we will most likely see a pullback.

While the number of shutdowns is still low, high-profile closures are on the rise, and the prominent shutdowns have been in the battered crypto space and technology areas. But remember, this is due to overvaluation in the first place due to what you can only define as an over-excited market that, if you did not see coming, you need to see your optometrist.

"I think it's going to be companies that just either didn't realize how hard this is going to get and could not get control of their burn rates," said Rosenbloom of Founder Collective.