Record-Low Number of Tech Startups Will Be Created in 2019. Why?
By: Vlad Pavlov
Tags: Venture Capital, Data Science, Startup, Trends, VC

Record-Low Number of Tech Startups Will Be Created in 2019. Why?

According to Crunchbase data, the number of startups created every year is steadily declining since 2016. At the same time, both the number of investment deals and the total amount of cash powered into startups were growing, so the problem was not on the monetary side. How do we explain this phenomenon?

Figure 1. Startups and Investments, based on Crunchbase data (*as of November 2019, final numbers for 2019 will differ).

Let’s deep-dive into the data to see what is inside these trends.

As the total # of startups grows, what happens with the founded-to-exited ratio?

Maybe, “more startups” does not mean “more exits”? If this was the case, then the growth of the overall ecosystem would lead to a decrease in the founded-to-exited ratio. Such an increase in the competition, in turn, would send a bad signal to aspiring entrepreneurs, discouraging them from starting new companies.

But the data shows a different picture. In 2014–2015, exit numbers were growing. 2016 and 2017 were exceptionally fruitful from an exit perspective, both in absolute numbers and in percentages. Something happened to exits later, in 2018; but it could not trigger the decline in startup creation in 2016.

Figure 2. Startup exits, by startup foundation and exit years, based on Crunchbase data (*as of November 2019, final numbers for 2019 will differ).

Figure 3. Startup exits, %, by startup foundation and exit years, based on Crunchbase data (*as of November 2019, final numbers for 2019 will differ).

What about the founded-to-funded ratio?

Maybe, the super-fast growth in the number of startups in 2010–2015 resulted in overcrowding the investment market, so did it become harder for a new company to raise money? And is that the reason why more aspiring entrepreneurs refrained from launching startups in 2016 and later?

Not at all. While the founded-to-funded ratio was fluctuating a bit from year to year, there was nothing dramatic that could scare new founders.

Figure 4. Investment deals, by startup foundation and investment years , based on Crunchbase data (*as of November 2019, final numbers for 2019 will differ).

Figure 5. Investment deals, %, by startup foundation and investment years, based on Crunchbase data (*as of November 2019, final numbers for 2019 will differ).

Could it be a measurement/reporting error?

Crunchbase separated from AOL/TechCrunch in 2015. Maybe after the spin-off, did they change the way the database is populated with information about new companies?

It is possible, but highly unlikely: such change would probably result in a one-time drop, not in a multi-year negative trend. Anyway, I have written to Crunchbase and will update this post when/if I receive their response.

UPDATE: According to Crunchbase, they did not make any changes to their data collection methodology that could explain the observed decline.

So, what is it?

One possible explanation is that people are feeling increasingly uncertain about the long-term prospects of the economy: the fears of a new recession are growing, that is why entrepreneurs are afraid to start new companies.

While this could be the case, I suspect the opposite motives are in play here. It’s not because the future might look bad, it’s because the present feels good.

For the last several years, the economy was doing exceptionally well. The unemployment rate is low, one might argue that in the tech sector it is below a healthy level. Most people reject high-risk “start-a-venture” alternatives when they can easily choose a low-risk “get-a-real-job” path. Steadily growing economy allows more people to stay in a comfort zone, so they are less motivated to make sharp moves with their lives.

The more prosperous the economy becomes, the less pressure people feel to innovate. Over time, this will cause the economy to slow down and eventually stagnate. Then another recession will come, the cycle will restart.