To say it has been a tough time to be a startup founder over the past two years is an understatement. We all know that venture capital funding has been down, valuations are down, interest rates are up, and the predicted merger boom has yet to materialize (although deals are still happening). Throughout the summer, there were many news stories about a purported wave of startup shutdowns that have resulted from the economic rollercoaster we have been on, warning those numbers could increase as we move into late 2023.
According to recent data from Carta, Q3 2023 saw the highest number of startup shutdowns yet due to bankruptcy or dissolution. While failure is to be expected among emerging companies, we are seeing a peak in startups forced to close their doors in general due to a lack of funding. CB Insights reports that global funding for startups fell 34% from 2021 to 2022. And at the halfway mark of 2023, funding levels only reached $130.2 billion. For context, that is less than a third of the total for 2022.
While lack of funding is a large part of the story when it comes to shutdowns, other factors can come into play and lead to a startup’s demise. Founders are facing a myriad of issues, particularly those in the tech sector. For example, one high-flying startup closed due to an overwhelming number of fake users, while others closed because of regulatory issues. CB Insights did a deep dive into the top reasons for startup failure, and they cite additional minefields implicating flawed business models, competition, obsolescence, not having the right team in place, pricing, and cost overruns.
So, what is the best course of action for the startups left standing? We have discussed in past articles the many ways that startups can operate more efficiently to survive a dry spell in funding. This will require examining every penny of cost in a business, where they are being deployed, at what levels, and assessing every aspect of the business to ensure it is operating as lean as possible to extend the length of time between funding rounds. Sadly, it often requires startup founders to scrutinize the role and utility of each team member, often resulting in layoffs. It could also involve taking on multi-year customer deals for discounted upfront cash and the incurrence of debt.
One other possible outcome that startups will have to evaluate is a merger with or acquisition of or by another company. Those startups with proven business models who can make it through the incredible economic ups and downs we are experiencing will be prime targets for M&A deals. Conditions are ripe for that M&A boom we have all been waiting on, and founders should be positioning themselves as attractive targets for buyers. What’s the best way to be an acquisition target? It usually means having a longstanding commercial relationship with the buyer where the buyer can assess your startup’s utility and track record.
There are predictions that things will get worse for startups before they get better, so this is the time to focus on the issues within your control, such as costs, making sure the right team is in place, and adapting when necessary. Founders who can find a way to make it through this downturn and prove they have a resilient model will be setting themselves up for success and drawing the attention of acquirers.