Start-ups that were created during the U.S. economic boom have recently suffered from difficulties in financing and are on the verge of bankruptcy. If this continues, concerns are raised that millions of jobs could be lost, adversely affecting the economy as a whole.
Citing asset management service provider Carta, the Financial Times reported on Wednesday (local time) that the number of U.S. startups going bankrupt has jumped 60 percent year-on-year. Of the startup customers who use Carta’s service, 254 went bankrupt in the first quarter of this year. The bankruptcy rate has increased more than seven times in five years compared to 2019, when Carta started compiling the status of startups going bankrupt.
The list of startups that went bankrupt due to lack of funds included fintech company Talley. Talley raised more than 170 million dollars in 2022 from large venture capitals such as Andreeson Horowitz and Kleiner Perkins, and had a market value of 855 million dollars at the time. The live streaming website Caffeine, which raised 250 million dollars last year from Foxcorp, Andreeson and Sanaville Investment under Saudi Arabia’s sovereign wealth fund, also went bankrupt. Healthcare startup Olive, which was previously valued at 30 to 4 billion dollars, and trucking startup Conboy, which was also unable to withstand the depletion of funds. Office-sharing company WeWork, which attracted Softbank’s investment, also filed for bankruptcy in November last year.
The FT diagnosed that such a breakdown corresponds to a painful adjustment process in the start-up industry triggered by the interest rate hike in 2022. Analysts say that after the bankruptcy of Silicon Valley Bank last year, venture loans have declined significantly and venture investors’ investment in early-stage startups has also shrunk, increasing pressure on companies to finance. Venture capital has been unable to repay investments to institutional investors due to the decline in initial public offerings (IPOs) or mergers and acquisitions (M&As). According to Carta, only 9% of venture funds created in 2021 actually repaid investments to investors. Compared to 25% of the total in 2017, the proportion of repayment funds is very low.
There are also warnings that if the financial difficulties in the start-up industry continue, the impact could spread to other sectors. In a recent memo to customers, Morgan Stanley pointed out that the reason for the surge in bankruptcy was that an unusually large number of companies raised an abnormally large amount of funds between 2021 and 2022. Morgan Stanley continued, “Companies that have received venture investments in the U.S. employ 4 million employees. If bankruptcy growth does not slow down, it could spread to other areas of the economy.”
SOPHIA KIM
US ASIA JOURNAL
