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The number of tech start-ups in the US facing the risk of failure or being acquired for significantly lower valuations has reached an all-time high. Investors are hesitant to invest, not only due to their unwillingness to part with funds but also because of the sheer magnitude of the market.
According to PitchBook data, there are now over 50,000 venture capital-backed companies across the US, a substantial increase compared to less than 20,000 a decade ago.
Several factors contribute to this surge. A prolonged period of low interest rates has resulted in ample funding for high-risk ventures. The number of VC firms has also reached new heights, with deal values peaking in 2021, thanks to the emergence of non-traditional start-up investors like pension funds. This has further prompted aspiring founders to take a chance.
Furthermore, the cost of launching a start-up has decreased significantly. Cloud computing allows companies to avoid hefty expenses on on-site servers and facilitates seamless scalability. Additionally, there has been a rise in tech companies offering online equivalents of real-world services, such as laundry apps, food delivery apps, and ride-hailing apps. These types of businesses generally have lower research and development budgets.
However, start-up funding has experienced a significant slowdown this year. While VC firms can still secure substantial funds for artificial intelligence investments, such as Wing Venture Capital’s new $600mn AI fund, the gaps between funding rounds have widened. The sluggish IPO and M&A markets have resulted in fewer exit opportunities. The departure of Silicon Valley Bank, renowned for its support of tech start-ups, adds to the challenges. Notable start-up failures this year include fintech company Plastiq and robot pizza maker Zume.
The availability of capital is decreasing rapidly. In the seed stage of fundraising, deal values dropped by over a quarter between the first and second quarters of this year. According to the US Bureau of Labor Statistics, one in five new businesses fail in their first year, and the number is likely to be significantly higher in the tech sector.
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