Venture-backed startups are failing at record rates

If current trends continue, more VC- or private equity-backed startups will fall into bankruptcy this year than at any point since 2010. 

In the first half of 2023, 338 U.S. companies filed for bankruptcy protection, according to newly released S&P Global Market Intelligence data, including 54 companies with private equity or venture capital backing. At that rate, 108 VC-backed startups will fail by year’s end, besting the 95 that failed during 2010.

Why is this happening? Highly leveraged companies are dealing with headwinds they didn’t face just a year ago. Because of rate hikes by the Federal Reserve, they’re paying higher interest rates on loans. And it’s become increasingly difficult to secure new money from investors. As a result, some companies can’t bring in enough revenue to keep the business moving toward profitability and eventually a lucrative exit for their backers.

Many of the startup bankruptcies come from the healthcare (15) and consumer goods (12) sectors, while 6 information technology companies have filed for Chapter 11 so far this year. 

Rising interest rates have stunted venture capital investment worldwide this year. PitchBook data shows that VC investment was nearly cut in half in the first six months of 2023. The firm reports a 48% decline in investment to $173.9 billion, and a 19% drop in deal numbers. 

The massive excitement over AI has sustained investment rates in that subsector but has not buoyed up the rest of the industry. Pitchbook says private equity and VC investors bet $40 billion on AI startups in the first half of 2023, but that includes a $10 billion chunk of Microsoft money put behind OpenAI, and a $1.3 billion investment in Inflection AI.