Death of a Startup: The Chilling Truth of Why Growth-Stage Companies Collapse
Startups are dying. And at an alarming rate.
I wish I could say that was just a dramatic hook to keep you reading. But no, the fact is, this generation of startups is inherently broken. (I’ve got data to prove it, too. More on that in a second.)
Last month, I spoke about two problems that commonly cripple growth-stage businesses. And our Educational Email Course (EEC) digs into three others.
But today, I want to address the “why” behind it all. Why do so many outwardly ‘successful’ founders and CEOs suddenly face shutdown?
I’ve given some thought to this. And I’ve built a unifying theory that explains the root cause behind each of the five growth-stunting problems discussed in our EEC.
In short? I think I’ve figured out what’s killing our startups.
(And no, it’s not just high interest rates.)
The Data: A Frightening Trend
First, let’s look at that data I promised you:
Data source here
They say a picture is worth a thousand words. But in this case, you really only need two:
Not. Good.
Now, a fair disclaimer: A single chart or statistic never paints a perfect picture. As in, we need to consider a lot of other factors to understand the context, like:
- Where do the numbers come from?
- How reliable are these reports?
- What other caveats live in the footnotes?
We could spend forever debating the technicalities.
But for now, let’s just assume the data is accurate. Let’s assume startup failures are over 400% higher than their low point in 2021. (Which, to a reasonably verifiable degree, is true. I wouldn’t blindly present misleading statistics.)
Even providing margin for reporting errors and data tunnel vision, we cannot deny the reality:
There is a clear, sharp uptrend in startup shutdowns.
The Context: What Aren’t We Considering?
Before we can deduce why, we need to figure out what got us here.
Remember how I said you need to consider caveats when looking at data? Well, here’s an important one: The US is the single biggest VC space. By a ginormous margin.
Data source here
And within the US itself, the VC economy is a volatile thing, prone to frothy, explosive investment cycles (as in 2021) and massive, sustained pullbacks (as in 2023–2024).
These facts may or may not be new to you. But it’s central to the crux of my theory and answering ‘the big question.’
Speaking of…
The Big Question: Why So Many Startup Failures?
When you consider the market’s cyclical nature, the answer seems quite obvious.
With a massive influx of capital, of course not every new business could survive the pullbacks. The sheer volume of fresh startups alone means that more closures are inevitable.
… Right?
Yes, and no. Finance is rarely so straightforward. And whenever money is involved, logic often loses out to emotion, no matter how much we try to deny it.
That, I believe, is the fundamental answer to why so many startups fail:
Poor financial planning and decision-making.
The Nuance: How it Happens at a Company Level
When introducing our Educational Email Course, I mentioned that it came about thanks to dozens of in-depth conversations with our fractional CFOs. And interestingly, a pattern emerged (which ultimately became Mistake #5 in the course.)
Too many founders are their own finance and accounting team.
That, in turn, leads to scenarios like this:
- The founder is flush with funds and drunk off VC approval. Confidence balloons into complacency.
- A costly error gets overlooked. Maybe revenue falls short. But hey, there’s still cash in the bank, right?
- Then, they make another mistake. And another. Pretty soon, the losses aren’t so easy to swallow.
The worst part is that these slipups often go unnoticed, or their impact understated, until it’s far too late. Again, all due to a sore lack of financial oversight.
(This isn’t theoretical, by the way. We broke down real-world examples of this happening in last month’s blog. You’ll probably want to read it.)
The Solution: Shore Up Your Financials for Every Market With a Fractional CFO
What’s killing our startups isn’t a lack of capital. It’s poor management of it.
But the most vulnerable moment isn’t when you’re just starting out. It’s when you hit growth stage. That’s when the complacency kicks in. That’s when a jury-rigged, solo finance operation won’t cut it anymore.
And yes, that statement has caveats, too. Sometimes, there is simply an unfortunate mix of circumstances that dooms the best idea before it’s born.
But in most instances? That onus falls on the founder and CEO.
So if you want to make sure you aren’t unintentionally falling into this trap…
If you want to ensure you’re steering clear of the top five financial screwups that hamstring growth-stage businesses…
I’d highly recommend our Educational Email Course.
It’s a five-day series of clear-cut, bite-sized discussions on each of these mistakes, how they happen, and how to avoid them. And it’s all free.
Sign up here and get them straight to your inbox. Or book a chat with Ramsey or me to hear it straight from the horse’s mouth.
Startups may be dying, but yours doesn’t have to be one of them.
Sources:
Carta. Startup shutdowns continued to accelerate in Q1 2024. https://carta.com/data/startup-shutdowns-q1-2024/
Dealroom. The State of Global VC. https://dealroom.co/guides/global