Why You Should Be Worried About The Uptick In Startup Shutdowns

Most of us are probably concerned about grocery prices or the cost of housing, however, there are other elements of the economy that can be important to keep an eye on as well. While many people might not fully understand how startups differ from small businesses (startups are more motivated by scalability), the way those particular ventures fare can be a good indicator of overall growth in the economy. This growth can serve as one of the red flag warning signs of a recession. While 20% of new businesses fail in the first two years, and two-thirds of startups never actually deliver a positive return to their investors, the 2024 failure rate of these types of businesses in the U.S. is concerning. According to new data from Carta, a stock management company for startups, more startups shut down in the first quarter of 2024 than at any other time in the last decade.

More specifically, the number of startup shutdowns increased by 58% between the first quarter of 2023 and the same time in 2024. Keep in mind that this follows closely behind a 124% increase in shutdowns between 2022 and 2023. While you might be wondering how these startup failures affect you personally, it's important to realize that these shutdowns can lead to not only job losses but also reduced tax revenue for the government. Plus, as failures increase, the likelihood of new businesses getting the funding they might need to succeed becomes less likely. This can create a cycle that reduces entrepreneurship and innovation.

One of the most significant ramifications of the upward trend of startup shutdowns in the U.S. is how it could affect future funding. With an increase in failures, venture capitalists (who are typically the group most likely to invest in startup concepts) will be generally less likely to want to invest in new startups. This is largely due to the perceived increased risk they will lose money on something that'll fail. This also means venture capitalists will be significantly more selective with the startups they do choose to invest in, which could in turn make it even harder for new small businesses to grow and succeed (remember that some industries have higher failure rates).

Unfortunately, an increase in selectivity could also ensure even more startup shutdowns since a lack of funding is easily one of the biggest reasons for new business failures. Not only does an increase in venture capitalist selectivity damage the potential for new businesses, but it can also spell trouble for already existing startups that might need additional funding to stay afloat or grow. While it might not seem like a slowdown in startups and new businesses directly affects you, a lack of new innovation could set the country behind, especially in the fields of new and emerging technologies.

Plus, a lack of new businesses hurts overall economic growth, which can also be an indication of a slowing job market. All of this to say, the factors that influence the increase in startup shutdowns can have ripple effects through the rest of the economy.

To go back to the causes that have led to the current uptick in startup shutdowns in the U.S., it's important to factor in the current AI trend (which has also impacted the financial advisory industry). Some have argued that the over-interest in artificial intelligence (the AI boom started in late 2022) would inevitably lead to this downturn. In fact, according to The European Business Review, the current wave of startup shutdowns is simply a natural part of the innovation process. Even more so, the mass extinction event of AI startups could clear the way for more groundbreaking technology, through the startups that survive and are able to successfully scale up.

However, another way AI is contributing to the overall startup failure problem is due to just how much oxygen it's still sucking out of the room. According to PitchBook data, investors poured $21.7 billion into U.S.-based AI startups between April and June 2024. This haul accounted for nearly half of all startup funding in the same period, leaving less money for other startups not in the AI field.

As venture capitalists attempt to compete with already established big tech corporations over the future of AI technologies, small businesses and startups will continue to find themselves in feast-or-famine funding scenarios. The increase in startup failures is also a reminder of how difficult it is to scale and monetize AI, due to the lack of not only hardware ability but also the lack of tangible products and details inherent in many AI startups.