US tech: dwindling funding rounds will create bonfire of the start-ups

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The number of US tech start-ups at risk of failing or being scooped up for ultra-low valuations has never been higher. This is not just the result of investor unwillingness to part with funds. It is down to the sheer size of the market. 

Across the US, there are now more than 50,000 venture capital-backed companies, according to data from PitchBook. Ten years ago there were less than 20,000.

There are a number of reasons for this. Years of low rates resulted in plentiful funding for risky enterprises. The number of VC firms reached a new high as deal values peaked in 2021, driven up by so-called non-traditional start-up investors, such as pension funds. That encouraged more founders to try their luck.

Meanwhile, the cost of launching a start-up fell. Cloud computing allows companies to avoid spending large sums for on-site servers and enables them to scale up quickly when needed. There was also a jump in tech companies offering online versions of real world services — apps for laundry, takeaway delivery or taxis. These tend to have low R&D budgets. 

This year, however, start-up funding has largely evaporated. VC firms can still raise big funds for artificial intelligence investments, see Wing Venture Capital’s new $600mn AI fund. But elsewhere the gap between funding rounds is growing. Quiet initial public offering and M&A markets mean exits are few and far between. The loss of Silicon Valley Bank, known for catering to tech start-ups, is a further blow. Start-up failures this year include fintech Plastiq and robot pizza maker Zume. 

Capital availability is dwindling. At the earliest stage of fundraising, the seed stage, deal values dropped by more than a quarter from the first quarter of the year to the second. One in five new businesses fail in their first year, according to data from the US Bureau of Labor Statistics. In tech, that figure is going to be far larger.