Startup Failure Rate 2025: What the Data Says

Startup Shutdowns Surge in 2024, Signaling a Potential Trend

Recent reports from various sources indicate a rise in startup closures during 2024, exceeding the numbers observed in the previous year. This increase isn't unexpected, given the substantial funding influx experienced by numerous companies in 2020 and 2021.

Increased Closure Rates Across Data Sources

Data compiled by TechCrunch reveals a consistent trend. According to Carta, 966 startups ceased operations in 2024, a 25.6% increase compared to the 769 shutdowns recorded in 2023.

It’s important to note that Carta’s figures are based on U.S.-based companies that were clients and discontinued their services due to bankruptcy or dissolution. Peter Walker, Carta’s head of insights, acknowledges that this data likely doesn't encompass all startup closures.

Walker explained that the increase in shutdowns was anticipated, considering the heightened funding levels of 2020 and 2021. However, precisely quantifying the extent of future closures remains challenging.

AngelList reported 364 startup winddowns in 2024, representing a significant 56.2% jump from the 233 recorded in 2023. Despite this increase, AngelList CEO Avlok Kohli maintains a relatively optimistic outlook, emphasizing that these numbers remain low relative to the total funding received by startups in both years.

Contrasting Data and Reporting Limitations

Layoffs.fyi presents a differing trend, identifying 85 tech company shutdowns in 2024, down from 109 in 2023 and 58 in 2022. Founder Roger Lee concedes that this data is limited to publicly reported closures and therefore represents an underestimation of the true number.

Of the 2024 tech shutdowns tracked by Layoffs.fyi, 81% involved startups, while the remainder consisted of public companies or previously acquired entities that were subsequently closed by their parent organizations.

The Role of Venture Capital and Valuation

VCs didn’t pick “winners”, and a significant factor contributing to these closures is the large number of companies funded in 2020 and 2021 at inflated valuations, often with limited due diligence. Consequently, many of these companies have struggled to secure additional funding to sustain their operations.

Walker suggests that venture capital firms may not have effectively identified promising ventures in 2021, potentially leading to a lower success rate. He posits that if the rate of successful investments remains constant while funding increases, a corresponding rise in shutdowns is inevitable.

Dori Yona, CEO and co-founder of SimpleClosure, a company focused on automating the shutdown process, believes that many startups received seed funding in 2021 before being fully prepared.

This early funding, Yona argues, may have inadvertently contributed to their eventual failure by encouraging rapid spending and a focus on growth at all costs, ultimately creating sustainability issues.

Cash Flow and Product-Market Fit as Key Factors

The most common reason for these shutdowns is a lack of financial resources.

Walker surmises that running out of cash is the immediate cause, but underlying issues such as a lack of product-market fit, inability to achieve cash-flow positivity, and overvaluation hindering further fundraising are likely contributing factors.

Looking forward, Walker anticipates continued shutdowns in the first half of 2025, followed by a gradual decline. This projection is based on the time lag between peak funding and subsequent closures, estimating that most companies will have either found a viable path forward or been forced to cease operations by the first quarter of 2025.

Kohli agrees, stating that many startups funded at excessive valuations during the peak period are not necessarily doomed, but a significant number will face challenges.

Recent Examples of Startup Closures

Recent examples include Pandion, a Washington-based delivery startup that shut down after raising approximately $125 million, and EasyKnock, a proptech company that ceased operations in December after securing $455 million in funding.

Industry and Stage Breakdown of Shutdowns

The impacted companies span various industries and stages of development.

Carta’s data indicates that enterprise SaaS companies experienced the largest number of shutdowns, accounting for 32% of the total. Consumer-focused startups followed at 11%, with health tech at 9%, fintech at 8%, and biotech at 7%.

Walker notes that these percentages align with the initial funding distribution across these sectors, suggesting that macroeconomic factors, such as interest rate changes and reduced venture funding in 2023 and 2024, are the primary drivers of the increase.

SimpleClosure’s data reveals that 74% of all shutdowns since 2023 occurred at the pre-seed or seed stage, with the seed stage representing the largest proportion (41%).

Investor Returns and Future Outlook

Most startups ultimately lack sufficient capital to return funds to investors. Yona reports that 60% of failing startups are unable to provide any return, while those that do typically retain around $630,000, representing approximately 10% of the total capital raised.

Yona predicts that the rate of startup closures will remain elevated in the near future.

“Tech zombies and a startup graveyard will continue to make headlines,” Yona said. “Despite the crop of new investments, there are a lot of companies that have raised at high valuations and without enough revenue.”