In 2024, more startups shut down than the previous year, and this trend іs expected tо continue into 2025. According tо data from various sources, 966 startups closed their doors іn 2024, a 25.6% increase from 769 shutdowns іn 2023. This increase іs not surprising, considering the massive funding that occurred іn 2020 and 2021 during the height оf startup investment. As a result, many companies that received funding during those years have now struggled tо raise more capital, leading tо shutdowns.
Why Shutdowns Are Increasing
The data points to a natural consequence of the influx of capital into startups during the frenzy of 2020 and 2021. There were simply more companies funded, and the high valuations at the time have led to unsustainable business models. Peter Walker, head of insights at Carta, explained that many of these companies failed to grow as expected and, with no way to raise more funds, faced closure. Walker also noted that estimating the exact number of shutdowns is challenging since many companies leave platforms like Carta without informing them of the reasons for their departure.
Optimism Amid Shutdowns
While there are many shutdowns, some, like AngelList, maintain an optimistic view. AngelList reported 364 winddowns in 2024, compared to 233 in 2023, which is a 56.2% increase. However, CEO Avlok Kohli emphasized that these numbers are still relatively low compared to the number of companies funded in those years. On the other hand, Layoffs.fyi, which tracks publicly reported shutdowns, found fewer tech company closures in 2024 (85) than in 2023 (109), though they acknowledge that their data is incomplete.
VCs Didn’t Pick Winners
One оf the key reasons for the increasing shutdowns іs that many оf the companies funded іn 2020 and 2021 were done sо at inflated valuations. The lack оf thorough diligence іn those days has led tо a situation where many startups couldn’t achieve the expected growth, making іt difficult tо secure further funding. Walker emphasized that the venture capital community didn’t improve its ability tо pick successful companies іn 2021. This has contributed tо a high number оf failures as companies with unsustainable business models struggle tо stay afloat.
The Primary Reasons for Shutdowns
According to Walker, the main reasons for startup closures include running out of cash, lack of product-market fit, inability to reach cash-flow positive status, and the overvaluation of companies, which hindered their ability to continue fundraising. These issues have led to a rising number of shutdowns, and the trend is expected to continue in 2025, at least in the first half of the year.
Looking Ahead to 2025
Walker expects that by the first quarter of 2025, most companies will have either found a new path forward or had to shut down. However, he believes the shutdowns will gradually decline for the rest of the year. This projection is based on the time-lag effect from the peak of funding in early 2022. Despite the challenges, AngelList’s Kohli remains hopeful, stating that many startups funded at high valuations are still standing strong, though some may still face difficulties.
Industry Breakdown of Shutdowns
The sectors affected by startup shutdowns in 2024 were diverse. Carta’s data revealed that enterprise SaaS companies were hit the hardest, making up 32% of the closures. Other sectors such as consumer products, health tech, fintech, and biotech also saw significant shutdowns. These trends align with initial funding patterns, suggesting that economic factors, such as interest rate changes and lack of venture funding in 2023 and 2024, are contributing to the shutdowns across various industries.
Shutdowns by Stage
In terms of stages, SimpleClosure found that 74% of all shutdowns since 2023 occurred at the pre-seed or seed stage, with the majority happening at the seed stage. Many startups fail once their capital runs dry, though some manage to return a portion of their funds to investors before shutting down. However, around 60% of failed startups have no remaining capital to return. For those that do, the average amount returned is about $630,000, roughly 10% of the total capital raised.
The Future of Startup Closures
Looking ahead, the rate of startup closures is expected to remain high. Dori Yona, CEO of SimpleClosure, predicts that the trend of “tech zombies” and “startup graveyards” will continue to dominate headlines. Despite the flow of new investments, many companies have raised money at unsustainable valuations and are struggling to generate sufficient revenue. Therefore, the startup ecosystem will likely see continued closures in the near future.
