PwC analysis finds failure rates amongst startups at lowest level in a decade, despite record company formations

_{Source: The Insolvency Service, PwC analysis, Companies House Official Statistics}

_Notes:

 _{1) A startup is defined here as a company in its first 7 years of incorporation.}

_{2) The 2024 incorporation figure is a PwC estimate, as Q4 2024 data release has been delayed.}

Startup versus non-startup

While startup insolvencies, which in 2024 returned to a 2019 pre-pandemic range, (see Chart 2), non-startup insolvencies are still twice as high. Pressure has been felt particularly across the retail, hospitality, manufacturing and construction sectors. Much of this is due to non-startups having traditionally higher fixed cost bases, such as larger workforces, site footprints or input supply costs - leading to greater exposure to inflationary pressures such as increases in wages, rents, tax rates and supply costs.

Startups and scaleups are typically more agile and adaptable, often operating with flexible business and cost structures which allow them to adjust quickly to changing conditions. These adjustments could come in the shape of adapting workforces, or cutting back on “non-core” areas such as new product development or sales and marketing. Many have also been able to embrace advanced technologies at speed, such as generative artificial intelligence (GenAI), to drive efficiencies and offset rising costs. 

Chart 2: Volume of insolvencies over 2014 to 2024

Resilience or redirection?

Despite the figures seemingly showing an upward trend in resilience, since 2021 startups have faced their fair share of challenges - including a significant decline in venture capital (VC) funding, reduced investor risk appetite for later stage investments, changing macroeconomic and geopolitical environments, and a cooling of the IPO market - constraining liquidity and reducing potential exit routes. 

These factors have forced companies to make difficult strategic decisions, including realigning their cost base and scale of short term ambition. Whilst making these decisions have helped some startups survive in the short term, the longer term risk is that it compromises growth, causing prolonged stagnation and undermining long-term objectives. Companies will now also need to consider the implications of the tax changes due to take effect this April on their hiring and growth ambitions.

There have been record numbers of company formations since 2020, as well as a lower rate of failure in 2020 and 2021 due to Government stimuli over the COVID-19 period. There is a risk that the figures mask a potential build-up of ‘zombie’ companies, whereby businesses are merely surviving rather than thriving. 

John Baker, startup specialist at PwC UK, said;

“Although total corporate insolvency figures saw a marginal fall year-on-year in 2024, overall insolvency levels remain at some of the highest seen in decades. This is a concern for small and medium sized businesses who typically have limited financial resources to fall back on, as well as larger, more established businesses, given their higher fixed cost bases.

“The notable decline in the startup failure rate is a sign that many have had to make difficult decisions and adapt at pace due to necessity. However, concerns about cash conservation and available runway will persist for many founders, management teams, boards and investors.

“The rapid advancement and transformative potential of GenAI presents a huge opportunity for startups and scaleups to grow their businesses at speed with limited upfront investment and reduced ongoing costs. Companies that can adapt to market changes, harness technology, prioritise customer needs and maximise their staff and resources are the ones most likely to become the market leaders of tomorrow. 

“No one wants to sleepwalk into being the next ‘zombie’ company. The critical question is whether those that have implemented cutbacks and survival strategies can transition back into sustainable, long-term growth or risk stagnation by losing their relevance and missing their market opportunity.”

Shifts in the investor landscape

After a prolonged period of VC investment in UK startups, culminating in the highs of 2021 and 2022, the mood in the market has changed. There is an increased focus on advancing milestones and delivering exits, together with growing caution around businesses struggling with prolonged commercialisation timelines and proving out their underlying concept. With VC funds requiring more due diligence and increasingly seeking companies with a clear pathway to profitability, this is placing pressure on those who have yet to achieve business milestones.

Although the value of the Global Top 100 Unicorns rose by 10% in the year to October 2024, surpassing $2,000bn, investor appetite across investment stages is mixed. In early-stage funding (pre-seed to Series A), interest remains strong in new ideas, particularly GenAI. There has been a concentration in breakout-stage funding (Series B and Series C), which now commands the largest share of funding, with a significant decline in late-stage investments (Series D+) as investors question the risk/reward model for these more developed businesses.

Despite this, a revival in the IPO market is generally anticipated, with hopes for a big year for corporate M&A and UK markets in 2025. 

Strength of UK early stage ecosystem and adoption of GenAI

PwC’s recent Global CEO Survey found that the UK has surpassed Germany, China and India to become the second most important destination for investment after the US. The results of the survey also point to an improved confidence in the UK’s economic outlook, with 61% of UK CEOs anticipating economic growth in the next 12 months compared to 39% last year, and UK CEOs being ahead of the global average on GenAI adoption. 

In addition, the UK has a number of important sources of capital aimed at investment in the UK’s fast-growing innovative businesses, as well as recently unveiling plans to keep the UK at the forefront of advances in technology, green finance, and GenAI. All this will be positive news for the startup and early stage community, and for their ability to capture growth and demonstrate value creation potential in rapidly evolving markets.

James Lewin, Deals Partner at PwC UK, added:

“Looking ahead, startups and early stage businesses need to stay alert and focused on growth and maintaining a stable platform. Despite our positive findings, coupled with the strength of the UK early stage ecosystem, challenges remain. These include the impact of the Autumn 2024 Budget, maintaining a compelling customer value proposition, sensitivities around consumer sentiment and changing investor appetite, particularly when establishing commercialisation or proof of concept is taking longer than anticipated.

“Whilst venture debt or growth financing is a viable path for growing a cash generative business, many companies should start to look to reduce their reliance on shareholders or lenders, as there is no guarantee that the next funding round or urgent cash call will be supported. 

“We are seeing prudent boards take advice early on the position, so they’re able to consider all potential options and understand when it’s necessary to enact alternative strategies –  safeguarding the business and protecting employees, stakeholders and shareholder value.

“There are currently very favourable operating conditions for UK startups. We fully expect that with access to talent, infrastructure and support, some of the future’s defining companies will be created from the startups we see incorporating and operating today.”

ENDS

Notes to editors

Notes: A startup is defined here as a company in its first 7 years of incorporation.