Did you know What’s Behind the 2024 Startup Collapse? Funding Woes and Overvaluations Take Center Stage

 

2024 was certainly not a great year for startup companies. As per several different sources, more companies shut down last year than that seen in the past.

The news is not striking for many, considering the huge number of organizations funded during the 2020 to 2021 year. Does this mean startups might see a breakthrough in 2025? Well, not exactly.

Thanks to data gathered from different sources, a report from CartaInc revealed that 966 U.S.-based startups, specifically Carta clients, failed to thrive in 2024. This is higher than the 769 that shut down in 2023, marking a 25.6% rise. While these numbers are significant, they do not account for all shutdowns, as many companies leave Carta without reporting the exact reasons.

 The figures align with those seen for Carta’s clients, who typically left due to bankruptcy or dissolution. Shutdowns increased across all stages, with pre-seed and seed-stage startups being the most affected. What’s interesting is how many firms were funded during the 2020 to 2021 period, yet the shutdowns are more now than before. Predictions suggest more closures in early 2025, though a gradual decline is expected later as the market stabilizes.

It’s hard to determine exactly how many more shutdowns took place as a whole and how many more we can anticipate. So many don’t even inform Carta before pulling the plug on the organization. This might be why we’re actually underestimating the figure in the long run.

2024 witnessed 364 startups go down the drain, as per stats from AngelList. That’s a dramatic rise from 233 in the previous year or, to be exact, a 56.2% rise. Thanks to the CEO of AngelList, there are some optimistic views on this front. He says that winddowns are still low compared to the number of firms funded across the years.

Another study from Layoffs.fyi highlights a trend that tells a different story. Layoffs.fyi reported 85 tech company shutdowns in 2024, down from 109 in 2023 and 58 in 2022. However, this data only includes publicly reported cases and does not represent the full picture.

81% of the shutdowns were related to startups, while the others were publicly owned or those acquired by others in the past. They ended up being shut down by parent firms.

So many companies receiving funding in the 2020 to 2021 period rose up with heated valuations. Therefore, it makes sense why so many couldn’t raise more funds to fund operations. When you make investments at a high value, it just increases risk so that investors don’t wish to invest more until the business starts to grow well.

The working hypothesis on this front has to do with the asset class that didn’t get better in terms of picking out the best winners for 2021. The rate of hits could be worse in that year since everything is a frenzy. If hit rates on good firms remain flat, more companies get funded, so automatically the rates for shutdowns rise after a couple of years. This is where many companies stood last year.

The CEO for SimpleClosure felt that 2021 was a major year where huge startups arose thanks to seed funding but were not ready to hit the market and face the real world. Getting the funds would have set them up for failure.

The huge capital infusion encouraged high burn rates and major mentalities that gave rise to more challenges in the markets as they shifted post-pandemic, the CEO shared. This might give rise to a negative trend for shutdowns in the future, as so many high-profile firms stopped operations despite the huge amount of funding and early promises made.

The main impetus behind a shutdown is a clear-cut one. Running out of funding is the obvious reason, but sometimes other underlying reasons exist. It might be due to diminished product-market fit, reduced likelihood to attain cash-flow positive status, or simply an overvaluation that gives rise to carrying on with fundraising.