We are told that 2023 was an extinction level event for tech startups. In the United States, roughly 3200 private venture-backed companies went out of business last year, in a huge “cash bonfire.”

We have likely never heard of most of them because their stories are more conventional than, say, the saga of crypto bad boy Sam Bankman-Fried. As Tech Crunch puts it,

The story of most startup failures is far less exciting. The timing isn’t right, funding dries up, runways run out. Of late, a lot of macroeconomic factors have come into play, as well. These past few years have been especially brutal for startup land…

Combined, those companies raised north of $27 billion. Even more starkly, it’s a figure that doesn’t include companies that failed after going public or were able to find a buyer. That, after all, would really be stretching the definition of a “startup.”

Brian Heater, Mary Ann Azevedo, Zack Whittaker, “Remembering the startups we lost in 2023,” Tech Crunch, December 30, 2023

2024 is not looking much better in Tech Crunch’s view.

So, causes?

From Fortune, we learn that rising interest rates have taken a toll and “You can’t sugar coat it”:

Rising interest rates proved to be a problem for the startup economy, Walker said. The beginning of 2023 was marked with mass job cuts and plummeting investments, and many venture capitalists warned companies would be forced to take lower valuations as the year continued. Artificial intelligence seemed the only bright spot for startups, with funding for related companies rising above every other tech category and reaching $17.9 billion, according to data from PitchBook.

So far this year, 543 startups shut their doors due to bankruptcy or dissolution, according to Carta. The third fiscal quarter saw 212 shutdowns, the highest number since the firm began tracking the data. Last year, 467 companies folded.

Jessica Nix and Bloomberg, “Startups weather a dismal year during which 543 have already declared bankruptcy or shut down,” Fortune, November 30, 2023

Failure-proofing a startup means beating the odds

Realistically, of course, a high proportion of startups — high tech or not — fail anyway, according to Forbes Business Council Historically, nearly 20% fail in the first two years. But, writing for the Council, entrepreneur Miles Nidal adds, “it falls off sharply from there—especially as the “new normal” for entrepreneurs is characterized by volatile stock markets, weak housing markets, steadily increasing inflation and rising interest rates.” According to the U.S. Chamber of Commerce, around half of all startups fail in the first five years and 65% in the first ten.

For those who think they can beat the odds, entrepreneur Brian Will offers, on behalf of the Council, some advice about the riskiest pitfalls. Note that none of them relate to whether or not the entrepreneur has a good idea:

Joe, the plumber, decides to quit his job and start his own plumbing business. Joe knows how to be a plumber. If Joe’s new business fails, it won’t be because Joe didn’t understand plumbing. Joe will likely fail because he doesn’t know how to run the business side of Joe’s plumbing. What Joe doesn’t understand is that running a successful business is more about mindset than skillset. These soft skills will determine Joe’s ultimate success or failure.

Brian Will, “Why Do So Many Business Startups Fail? Ways To Set Yourself Up For Success,” Forbes Business Council, February 10, 2023

Joe — or a tech entrepreneur — should make the time for a couple of night courses in running a small business, preferably taught by successful business people with good communications skills.

Will adds that he often sees people starting a business in the same place — perhaps a pizza palace — as the last one failed: “Unfortunately, that location already failed as a pizza place, and it will probably fail again.”

That advice could apply to tech startups too. If tech entrepreneurs have never succeeded in turning a profit from a given idea, why does the entrepreneur expect to change the picture? In 2023, Uber, which started in 2009, finally succeeded in turning a profit from its internet-based ride-hailing taxi operations. Is ride-hailing a good business to be in? We don’t know but studying that history carefully would be a wise idea.

Will adds, “Finally, people fail because they don’t understand cost structures and efficiencies. Businesses fail because they don’t know their numbers.” He sees the startup’s monthly detailed profit and loss (P&L) statement as “a magic crystal ball into what your company is doing and where it’s going.” Interpreted correctly, financial statements can give early warning signals of problems while there may still be time to address them. They are certainly more informative about specifics than gut feelings or enthusiasm will be.