Leading venture capital players are warning of a “mass extinction event” for early- and mid-stage startups in 2023. This is likely to surpass the global financial collapse of 2008 in scale, according to a new survey by research firm January Ventures. The survey, conducted between August and October 2022, polled 450 startup founders from the US and Europe, with 61% of respondents from the US and 32% from Europe. The findings indicate that 81% of early-stage startups are facing failure in 2023, as they had less than 12 months of capital left to continue their operations, due to VC funds turning off the spigot on seed funding last year.
An “Extinction Event” of Startups
The survey found that four out of five startups are at risk of failure in 2023, with less than 12 months of runway left. This means they have enough capital to sustain their operations, without generating revenue. The survey categorized respondents by the level of funding for their startup, with 48% of respondents stating they raised pre-seed funding, 32% raised seed funding, and 16% had not started raising funds yet. If 80% of early-stage startups go extinct, it will be the largest extinction event since the global financial system collapsed in 2008.
VC Industry Trends
In a tweet following January Ventures’ findings, Mark Suster, partner of Los Angeles-based venture capital firm Upfront Ventures, agreed with the survey’s predictions. He estimated that half of the 5,000 early-stage startups his company has funded over the past four years are at risk of going out of business. Suster said that excess capital has kept the number of startup failures artificially low for the past seven years. In the same Twitter thread, Tom Loverro, a venture capitalist at Silicon Valley-based investment firm IVP, predicted a “mass extinction event” for early- and mid-stage startups in late 2023 and 2024 that will surpass the epic collapse in 2008.
The total global venture capital funding dropped 32% in 2022, decreasing to below $300B from the $513B total in 2021, according to GlobalData. The data also shows a decrease in the number of seed funding rounds for early-stage ventures, with bigger deal sizes for growth stage deals. In Q4, there was a 24% drop in deal volume for growth stage deals.
The predictions of a “mass extinction event” for early- and mid-stage startups in 2023 is alarming. Startups need to focus on their runway and explore alternative funding options to sustain their operations. Venture capitalists also need to consider the impact of their actions on startups and take a long-term view on funding. The VC industry needs to rethink its priorities, particularly during tough times, to ensure the survival of the startup ecosystem.