By Mark Sullivan | Fast Company
If current trends continue, more VC- or private equity-backed startups will fall into bankruptcy this year than at any point since 2010.
In the first half of 2023, 338 U.S. companies filed for bankruptcy protection, according to newly released S&P Global Market Intelligence data, including 54 companies with private equity or venture capital backing. At that rate, 108 VC-backed startups will fail by year’s end, besting the 95 that failed during 2010.
Why is this happening? Highly leveraged companies are dealing with headwinds they didn’t face just a year ago. Because of rate hikes by the Federal Reserve, they’re paying higher interest rates on loans. And it’s become increasingly difficult to secure new money from investors. As a result, some companies can’t bring in enough revenue to keep the business moving toward profitability and eventually a lucrative exit for their backers.
Many of the startup bankruptcies come from the healthcare (15) and consumer goods (12) sectors, while 6 information technology companies have filed for Chapter 11 so far this year.
“As an investor it is critical to know what happens to your investment if the company you have invested in, files for bankruptcy. Depending on your instrument (SAFE, convertible notes, etc), it’s possible that you get nothing back and it is important to know that upfront so you can protect yourself.” -Shruti Gurudanti, Rose Law Group partner and director of corporate law
