Startups are shutting down

Daily Data: And other sundries from the private capital markets

In today’s dispatch:

• startups are shutting down

• more lagged and variable certain effects of higher rates

• bankruptcies up, and more distress for the leveraged loan market (but, still not too terrible in the big scheme of things)

• PE valuations and the duration of the Fed put

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Startups are shutting down

The data from the startup ecosystem continues to be grim.

Startup closures are peaking higher:

Startups are shutting down

Total closures are higher than ever (although, to be fair, more startups were funded the ever).

The trend holds for priced rounds, and even Series B companies:

Shutdowns have effected priced rounds, A and B

Carta

More “mature” companies aren’t immune from the slowdown.

It’s been two years since the music stopped, so none of this is surprising, even if it is unfortunate.

The effect of higher rates is lagged and variable certain (and is causing stress in the private markets)

The reason that startups are winding down is because they never figured out how to get profitable, and there is very little funding for risky, loss-making ‘moonshots’ right now, certainly relative to when these companies were funded in the first place.

Startup closures are, in other words, the lagging (but direct) effects of higher interest rates.

The effects are “lagging” because it can take a while for a company that raised huge amounts of money (back when money was everywhere) to finally reach the bottom of the tank. Generally, companies raise ~ 2 years of runway at a time, but they can extend it with prudence (or burn through it with exuberance). They can also extend it with bridge rounds, down rounds, and other funky financing.

In the meantime, though, investor appetite for riskier assets faded, venture funds pulled back (partly because they knew that other venture funds would pullback), liquidity and exits got scarce, which makes fundraising scarce, which makes deployment scarce . . . which means that startups run out of money.

A virtuous cycle of endless liquidity drove VC on the way up, and now a vicious cycle of capital scarcity is driving on the way down.¹ That’s true, even though it can take a while to finally realize these losses.

Bankruptcies up

To be fair, it’s not just startups, as other bankruptcies are also picking up (albeit off a very low base):