Venture-Backed Startup Failures Surge 60 Percent In the Last Year

The rise in the failure rate of venture-backed startups is raising a number of questions about the venture model's applicability given the costs required for success in AI. Big tech companies seem better able to fund the necessary investments.

In addition, extant concerns about corporate hesitancy regarding AI are causing a slower than expected revenue uptake, resulting in VC firms' having to make tough decisions sooner so as to not lose too much too soon. JL

PYMNTS reports:

Startup failures in the U.S. have surged by 60% in the past year. 254 venture-backed firms went bankrupt in the first quarter of 2024, more than seven times higher than in 2019. The rise in startup shutdowns comes as funding for early-stage AI startups slows leading to a wave of failures for venture capitalists. This trend threatens other startups attempting to develop their own AI large language models and raises concerns that VCs cannot compete with Big Tech companies in investment. Despite big budgets and ambitions, most large companies are struggling to employ AI in meaningful ways, with a significant gap between the perceived potential of AI and its actual application in the corporate world.

Startup failures in the U.S. have surged by 60% in the past year, posing a threat to millions of jobs and potentially impacting the wider economy.

Data from Carta, a provider of services to private companies, reveals that 254 venture-backed clients went bankrupt in the first quarter of 2024, a rate more than seven times higher than in 2019. Notable casualties include Tally, a financial technology company valued at $855 million, and desk rental company WeWork, which had raised $16 billion in debt and equity.

The rise in startup shutdowns comes as funding for early-stage AI startups slows, leading to concerns of a tech bubble burst.

The Financial Times reports that the funding slowdown is leading to a wave of failures, leaving venture capitalists on the outside looking in. This trend threatens other startups attempting to develop their own AI large language models and raises concerns that VCs cannot compete with Big Tech companies in terms of investment.

The European Business Review argues that the coming wave of AI startup failures is a natural part of the technology’s evolution, clearing the way for innovation and paving the road to broad adoption. The report suggests that the most robust and viable AI companies, those that have identified specific problems and built practical solutions, will continue to thrive. Furthermore, the failures create opportunities for other companies to acquire talent and innovative technology.

However, the report also highlights the limitations of AI, including the difficulty of scaling due to hardware limitations and the need for significant processing power.

The Wall Street Journal adds that many AI startups raised funds on a big vision without tangible examples or detail, leading to a struggle to develop AI large language models.

PYMNTS Intelligence’s research shows that despite big budgets and ambitions, most large companies are struggling to employ AI in meaningful ways, with a significant gap between the perceived potential of AI and its actual application in the corporate world.