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Layoffs. Ego-shattering down rounds. Startup failures. We review the tech carnage of 2023 and why some investors think 2024 could be worse.

f 2022 was a year of shock and denial for tech founders and investors as stocks collapsed, 2023 was a year of acceptance of their harsh new reality.

Startups slashed headcount. Founders swallowed their pride and accepted ego-shattering down rounds just to survive. Venture capitalists cut ambitious targets for the size of their next funds and made tough choices about which startups in their portfolios they would keep supporting—and which ones they would leave to die. They soured on many of the sectors they had once celebrated, such as fintech, cryptocurrency and the creator economy. And big swaths of Silicon Valley had a momentary panic attack with the collapse of Silicon Valley Bank earlier in the year.

But what made 2023 more extraordinary was that the party music got louder in one corner of tech—artificial intelligence—even as it fell silent throughout the rest of the industry. Money poured into OpenAI, Anthropic and other AI startups from venture capitalists and big tech companies such as Microsoft, Amazon and Google. “The only people that had a good time [this year] were early-stage AI companies,” said Immad Akhund, founder and CEO of fintech startup Mercury.

THE TAKEAWAY

Despite a boom in the AI sector, tech startups had a brutal year, with widespread layoffs, funding struggles and outright business failures.

The split-screen realities between the AI sector and everything else baffled even seasoned Silicon Valley veterans. “You have a boom and a downturn running in parallel,” said Peter Wagner, a longtime venture capitalist who was a managing partner at Accel before launching his own fund, Wing Venture Capital, in 2013. “I can’t think of a time that’s happened.”

Still, the euphoria over AI couldn’t drown out the steady drumbeat of layoffs, distressed sales and startup implosions, such as that of logistics company Convoy. Startups scrambled to get profitable quickly by slashing spending, while big companies similarly turned to cost cutting as their growth stalled. That led to an astounding number of job cuts—almost a quarter of a million of them in tech, many of them from big companies like Meta Platforms, Amazon and Microsoft, according to layoffs tracker Layoffs.fyi. That figure was up 50% from last year.

For younger companies, the root cause of their suffering—rising interest rates—cut them off from the cheap capital that had sustained them for so long. Any hopes for a near-term resurgence in the initial public offering market were dashed by the underperforming IPOs of Instacart and Arm. And while inflation eased as the year progressed, rising tensions with China and the conflicts in Ukraine, Israel and Gaza helped keep the specter of a recession alive.

“In this year, you’ve had the confluence of changing geoeconomics, interest rates going up, the rise of inflation, and you have now two hostile conflicts,” said Paul Kwan, a managing director at venture capital firm General Catalyst and the former head of West Coast technology banking at Morgan Stanley. “Stop and think: When was the last time you had all those factors?”

As bad as it got this year, worse pain may lie ahead, investors and founders say. Many investors believe the carnage in the startup sector will increase as companies that haven’t raised money since 2021 simply run out of cash. An intensification of the Middle East or Ukraine conflicts, for example, could turn those into global black swan events—a term investors use for unpredictable, momentous occurrences that can reshape economies and societies.

“We are just seeing that reality kick in,” said Avlok Kohli, CEO of AngelList, a startup that connects companies with investors. “We are going to see a lot more [startup] shutdowns coming up.”

A Landslide

This year’s numbers show just how brutal things were in the startup sector.

In total, U.S. startups raised $126 billion in the first three quarters of 2023, according to financial data firm PitchBook, a significant decline from the $195 billion raised in the same period in 2022 and $239 billion for the same period in 2021. The third quarter was the slowest period for fundraising since early 2018. About 20% of financings in that period were down rounds, compared to just 6.5% in the third quarter of 2021, according to data from Carta, which sells financial software to startups.

At least those companies are alive. Many others can’t say the same. Zume Pizza, a startup that raised $445 million from investors to automate pizza making with robots, as well as pet health company Fuzzy, real estate startup Zeus Living and healthcare startup Olive AI were all among this year’s startup casualties.

Two companies competed for the biggest megaflop of the year. Convoy, which had raised nearly $1 billion in funding and once garnered a valuation of $3.8 billion, wound down its operations in October, wiping out its investors (the logistics business Flexport acquired its technology assets earlier this month). Then there was former real estate titan WeWork, which filed for bankruptcy protection in November. The company’s biggest backer, SoftBank, lost more than $14 billion on its investment, according to the Japanese conglomerate’s recent earnings report. WeWork, at least, has hopes of living on after it reorganizes.

“If you’re a founder who was only able to get funding because it was this period of 2021 where everyone was feeling pretty flush, I think you’re feeling really scared right now,” said Chrissy Farr, a health tech investor at early-stage venture firm Omers Ventures.

Of the startups that use Carta’s software, 543 shut down in the first three quarters, compared to 467 for all of last year. And the numbers keep climbing: In the third quarter, the number of Carta startups to fold reached 212, the highest peak yet.

“The consensus is that we will all lose companies,” said Karen Page, a general partner at B Capital Group, a venture firm formed by Facebook co-founder Eduardo Saverin, and a former executive at cloud software company Box. “That’s the nature of the beast.”

One sign of the turmoil: Martin Pichinson, a co-founder of Sherwood Partners, which specializes in restructuring failing startups, said his business is booming, and he expects it to get even bigger in the coming year. He has doubled the headcount of his firm to 40 to handle an increase in demand for Sherwood’s services.

“This is the great awakening,” he said. “We are now in a new era.”

For their part, venture capitalists faced fundraising struggles of their own. Venture firms raised only $42.7 billion in the first three quarters of this year, less than a quarter of the record $172.5 billion they raised last year, according to PitchBook. The limited partners who supply those funds have retreated, largely because they found themselves overallocated to private investments when the stock market tanked, a phenomenon known as the denominator effect. In some cases, the LPs were disappointed with VC returns and with how VC managers handled their money.

Either way, the lack of LP interest forced many venture firms to rethink and refine their strategies, cut headcount and perform triage on their portfolios, leaving the weaker companies to fend for themselves. “This is basically a landslide” of startup shutdowns, said Pichinson. Venture “firms are realizing that cash really is king and it has to be protected.”

The transformation of Tiger Global Management, the hedge and venture fund that once shook up VC with its frenetic deal-making pace, is an especially stark illustration of the new mood in startup investing. After participating in more than 350 VC deals in 2021, Tiger inked only 37 this year, according to PitchBook. Those deals were largely small checks or follow-on investments in their strongest companies, such as enterprise software firm Databricks, which earned a valuation of $43 billion in September, up from $38 billion in 2021.

Tiger’s slowdown was likely the result of fundraising challenges. The New York firm reportedly cut its fundraising target for its upcoming megafund twice this year, a sign that it had inaccurately predicted demand from its LPs, the institutions and wealthy individuals that invest in venture funds. Embattled venture firms may end up cutting staff, just like their startup counterparts.

The tech industry’s job losses were at their worst at the start of the year. In January, 90,000 workers across 275 tech companies were laid off, according to Layoffs.fyi. But the layoffs continued for the rest of the year, including some at once high-flying tech unicorns.

In the past month, non-fungible token marketplace OpenSea, which was valued at $13.3 billion in 2022, cut 50% of jobs; wholesale marketplace Faire, valued at $12.4 billion in 2021, cut 20%, or 250 workers; and Flexport, valued at $8 billion in early 2022, axed 20% of its workforce, a total of 660 people. Unfortunately, the sizable job cuts at Meta, Google, Qualcomm and LinkedIn made it harder for some people laid off from startups to find a soft landing at bigger employers.

Reasons for Optimism

Still, many of them did find new jobs.

The overall number of tech industry jobs in the U.S.—including technical and nontechnical jobs such as marketing and legal positions—was around 5.6 million in October, comparable to the number at the start of the year and roughly 6% higher than in October 2021, according to an analysis of U.S. Bureau of Labor Statistics data by the Computing Technology Industry Association, a tech trade group. The data suggest that hiring by tech companies, including those that laid off workers in some parts of their business, outpaced job eliminations overall.

It’s possible that some of the laid-off workers found their way to the booming AI sector. AI startups raked in cash, raising $25 billion in the first half of the year alone, according to data provider Crunchbase. That was down slightly from the same period the prior year, according to Crunchbase, when some financings at the tailend of the bull market occurred.

The vibrancy of AI, among other things, has helped founders and venture investors, many of whom are naturally inclined toward positivity, to hold onto their optimism. The companies getting started now in the furnace of hard times will likely end up more resilient than those founded during the record bull run, when it was far easier to launch and scale a company, founders and investors say.

“When you don’t have that capital availability, you’re forced to do things in a more grounded way,” Wing’s Wagner said.

To survive in this market, he advises startups to be pragmatic. “Manage expenses, capitalize the company on terms that fit the current world if you have capital available and [don’t] get emotional about last-round valuation,” he said.