VC Funds: Startups Face "Mass Extinction Event" in 2023

Leading venture capital players are predicting a “mass extinction event” for early- and mid-stage startups that will make the global fiscal collapse in 2008 “look quaint” by comparison

A new survey indicates that 81% of early-stage startups are facing a failure in 2023 because—as of the end of October—they had less than 12 months of capital left to keep going because VC funds turned the spigot off last year on a flood of seed funding.

An international survey of 450 startup founders in the US and Europe was conducted between August and October 2022 by research firm January Ventures, with 61% of respondents from the US and 32% from Europe.

The founders who participated in the survey also were categorized by the level of funding for the startup: 48% of respondents said they had raised pre-seed funding, 32% said they had raised seed funding and 16% hadn’t started raising funding.

The survey found that four out of five startups are at risk of failure this year, with less than 12 months of “runway” left—defined as “enough capital to keep the lights on” (in the dot.com era they called this a “burn rate,” a reference to the amount of VC capital a startup was burning through before generating any revenue).

An extinction event that extinguishes more than 80% of early-stage startups would be the largest since an asteroid in the form of a housing collapse hit the global financial system in 2008.

In a Twitter post after January Ventures’ findings were released—in, of course, January—Mark Suster, a partner of Los Angeles-based venture capital firm Upfront Ventures concurred with the survey’s findings, estimating that half of the 5,000 early-stage startups his company has funded over the past four years currently are at risk of going out of business.

Suster said that the number of startup failures has been “held artificially low” over the past seven years due to the market being flooded with excess capital, London-based InvestmentMonitor reported.

“Loss ratios in the last seven years have been artificially low due to excess capital. The pendulum will swing too far in the other direction,” Suster said, according to IM’s report.

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 that will be worse than the epic collapse in 2008.

“There’s a mass extinction even coming for early- and mid-stage companies. Late ’23 & ’24 will make the ’08 financial crisis look quaint for startups,” Loverro tweeted.

The total for global venture capitalism dropped 32% in 2022, dropping below $300B from the $513B total of 2021, according to GlobalData. The fact that deal volume only showed a dip in 2022 from 21.7K to 19.2K is indicative of a prevalence of bigger deal sizes with far less seed funding rounds for early state ventures.

In the fourth quarter growth stage deals took a big hit, with a 24% drop in deal volume, GlobalData reported.