In a striking shift from recent years, the number of bankruptcies among US startups has surged by 60% over the past year, according to data from Carta. This dramatic increase highlights the challenges facing many young companies as they grapple with a changing economic landscape marked by rising interest rates.
The data: Carta, which provides services to private companies, said 254 of its venture-backed clients had gone bust in the first quarter of this year. The rate of bankruptcies today is more than seven times higher than when Carta began tracking failures in 2019.
The surge in bankruptcies can be traced back to the unusually high levels of funding that startups received in 2021 and 2022. During this period, venture capitalists (VCs) were eager to invest, providing substantial financial backing to a wide range of companies.
However, as interest rates began to climb in 2022, the favorable economic conditions began to shift. With the cost of borrowing increasing and economic growth slowing, these once-promising enterprises are finding it difficult to sustain their operations.
The impact extends beyond the individual startups and their investors. Noted by the Financial Times, VC-backed companies employ approximately 4 million people across the United States, so the financial pain is likely to be felt throughout the economy if they keep going under.
This situation underscores a growing concern for the broader economy: the vulnerability of the labor market and economic growth. As these companies face financial difficulties, resulting layoffs can reduce spending in today’s economic environment.
Related: How to Thrive After a Job Loss
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