Startups that raised funding during the boom times of 2021 are finding capital is much harder to come by in 2023. For some of those companies, that scarcity has resulted in more than just a round of layoffs.
Startups unable to raise fresh capital and find traction with customers are increasingly closing their doors. It's a result of a funding market that has dried up after years of venture capital growth, and business models that worked during Covid-19 or before the pandemic are no longer viable.
Investors today are willing to sit on the sidelines as initial public offerings and other startup exits have come to a screeching halt.
The latest high-profile startup to close up shop is Zume, a Bay Area pizza-making startup that at one point was valued at more than $2 billion. Backed by $445 million in VC funding from a lineup of investors that included Softbank Group Corp., the startup announced earlier this month it was shutting down and liquidating assets.
While Zume is one of the more visible recent startup flameouts, it's not alone. Cana, a Bay Area beverage startup that made a machine that could serve thousands of beverages on demand, shut down in May after failing to find new funding. Cana raised $30 million in early 2022 and brought on actor Patrick Stewart as a brand ambassador.
Pittsburgh autonomous-driving startup Argo AI shut down in late 2022 after raising more than $1 billion from Ford Motor Co. in 2017. Nirvana Money, a fintech startup launched by former PayPal Inc. CEO Bill Harris, also shut down in late 2022, folding just weeks after a late-October launch. Austin, Texas-based Scribe Media, a book-publishing startup founded by controversial author Tucker Max, had grown to 100 employees before shutting down in May. In 2019, Max predicted the company would one day be valued at more than $1 billion.
Heath-care startups like FemTec Health, Sickweather Inc. and Medly, all backed by VC funding, have shut down in 2023. At least 10 biotech startups have shut down in Boston this year.
The startup market has been overdue for a correction, said David Schonthal, an investor at 7wireVentures LLC and professor at Northwestern University's Kellogg School of Management.
“There’s no way that as many businesses, startups that exist right now deserve to exist in the long run,” Schonthal said. “This correction, or whatever you want to call this moment in time, will serve as an arbiter of what is a good business and what is not a good business. … In general, it will clear out some of the noise that has been in the market the last couple years.
“This will cost people jobs," Schonthal added. "There will be some pretty unfortunate human fallout from this. But there's no way that the market can continue to support as many startups that exist. Money will find the deals that are best to support and, unfortunately, that will leave some behind.”
For startups that shut down this year, many cite the changing economic environment and lack of funding as the cause of death. Biotech startup Goldfinch Bio, which raised $100 million in 2020, had "funding challenges" before closing its doors in January. Biometric authentication startup Tascent, which shut down in March after raising $40 million, had trouble scaling its manufacturing processes. Investment app Clim8, backed with $20 million in funding, closed in March and cited "dramatic changes" to the funding environment, along with rising inflation.
But not all of the startup world is struggling in 2023. Artificial intelligence is thriving, and AI startups make up half of all the new North American unicorns in 2023.
These startups are hauling in massive funding rounds, with some having hardly any revenue — and, in some cases, barely a product. Mistral AI, a Paris startup that's only four weeks old, raised a $113 million seed round for its generative AI tech that aims to take on OpenAI.