The startup ecosystem is experiencing a significant shakeout, with new data revealing a 25.6% increase in startup shutdowns in 2024 compared to the previous year. According to Carta, 966 startups shut down in 2024, up from 769 in 2023. This trend is expected to continue, with experts predicting a brutal year of startup closures in 2025.

The data, gathered from multiple sources, including Carta, AngelList, and Layoffs.fyi, paints a stark picture of the startup landscape. While the numbers may not be exhaustive, they suggest a significant increase in startup failures across various industries and stages. Peter Walker, Carta's head of insights, notes that the shutdowns are likely underreported, with many companies leaving Carta without disclosing the reason for their departure.

Experts point to the frenzied funding environment of 2020 and 2021, when many companies received large investments at inflated valuations, as a primary cause of the shutdowns. "The working hypothesis is that VCs as an asset class did not get better at picking winners in 2021," Walker said. "In fact, the hit rate may end up being worse that year since everything was so frenzied." This has led to a situation where many startups are struggling to raise additional capital, ultimately resulting in shutdowns.

Dori Yona, CEO and co-founder of SimpleClosure, a startup that aims to automate the shutdown process, believes that many startups received seed funding too early, setting them up for failure. "The rapid capital infusion sometimes encouraged high burn rates and growth-at-all-costs mentalities, leading to sustainability challenges as markets shifted post-pandemic," he noted.

The primary reason for the shutdowns is running out of cash, often due to a combination of factors, including lack of product-market fit, inability to reach cash-flow positive, and overvaluation. Walker expects more shutdowns in the first half of 2025, followed by a gradual decline in the second half of the year. This projection is based on a time-lag estimate from the peak of funding, which he estimates was the first quarter of 2022 in most stages.

The types of companies impacted by the shutdowns are diverse, spanning industries such as enterprise SaaS, consumer, health tech, fintech, and biotech. According to Carta's data, enterprise SaaS companies took the biggest hit, making up 32% of shutdowns. SimpleClosure's data found that 74% of all shutdowns since 2023 are either pre-seed or seed, with the plurality (41%) at the seed stage.

Most startups tend to shut down when they have exhausted their capital, with 60% of failed startups not having enough capital left to return to investors. Founders who do plan on returning funds have an average of $630,000 of investments left, about 10% of total capital raised, on average. Yona predicts that the rate of startup closures will not slow down anytime soon, citing the presence of "tech zombies" and a "startup graveyard" that will continue to make headlines.

The implications of this trend are far-reaching, with potential consequences for investors, employees, and the broader startup ecosystem. As the startup landscape continues to evolve, it remains to be seen how the industry will adapt to these challenges and what opportunities will arise from the ashes of failed startups.