The year 2023 was a trying time for startups. More setbacks than triumphs marked the global tumult. Funding-wise, startups hit a dry spell due to rising interest rates, geopolitical tensions, inflation, and recession concerns. Unfavorable economic conditions caused venture capital to pull back significantly, dragging the pace of startup growth and tech innovation down.
In the US, 543 startups shuttered in the past year. This number highlights the sharp rise in failures in an industry already known for its high failure rate in the early stages.
Crunchbase confirmed the increase in closures compared to 2022. The third fiscal quarter of 2023 was especially dismal, recording 212 shutdowns. Despite these challenges, many founders and aspiring entrepreneurs expect a turnaround in 2024.
Entrepreneurs hope for positive developments in the first quarter of the new year. While challenges persist, there are encouraging signs of recovery.
After the hottest inflation surge in four decades, central bankers are signaling a possible cut in borrowing costs at some point within the year.
Despite their hopes, founders need to familiarize themselves with the changed environment in which they compete. Here, we discuss the new conditions startups must take on, how to get a new company up and running, and the most strategic steps to take to catch the eye of investors and ensure success.
What’s changed? Trends Impacting the New Startup Landscape
While 2024 may be expected to be better than 2023, startups will experience different conditions during the years of high valuations and free money. There’s less venture capital moving around in the tech world. The factors that slowed the industry in 2023 may continue to have their lingering effects on the ecosystem, including:
Cautious valuations
Investors are becoming more prudent in valuing startups. The trend is seen as a reversal of substantial rounds in 2021 and 2022.
The downturn in the venture capital market
Startups in 2024 may still feel the pinch of the venture capital downturn in 2023, where the overall VC market experienced a decline. Global events like the Ukraine war, inflation, and rising interest rates caused VC funding to shrink.
Deal volumes decline
If not for AI megadeals, the 2023 VC market would have struggled to reach $100 billion. As it turns out, VC-backed startups raised a little over $140 billion—a low mark compared to previous years. Unfortunately, startups may record a new low of less than $100 billion in 2024. VC funding may continue to shrink without much of the AI mania to buffer it.
While we could be up for some surprises and disruptive deals that may lie ahead, things may not be enough to shift the outlook.
The markets will not revert to the exuberance of the previous bull market anytime soon.
Turning to robust fundamentals
Investors are directing their focus to startups with solid business fundamentals. Due to fewer resources, the bar to fundraising is now higher than it’s ever been.
Despite these challenges, many startups weathered the problematic climate and entered the new year, anticipating better days.
Launching Your Business: From Concept to Location
Equipped with the knowledge of the current economic conditions, you can now decide whether it’s an opportune time to launch a new company. Whether in trying economic conditions or not, startups tend to be high-risk endeavors.
A startup can be defined as a developing company or business venture. However, it is differentiated from a regular business by its outlook on scaling. It usually deals with tech, but it is not limited to it. Venture capital plays a fundamental role in scaling. The following are the key steps to get your startup up and running:
Define your business concept
When it comes to startups, an idea is not enough. You need to come up with a working model for your business. You must measure your idea against realistic expertise assessments, potential profitability, and competition. The idea doesn’t have to be 100 percent original—it can radically improve an existing service or product.
Conduct preliminary research
Now that you’ve defined your business’s initial parameters, it’s time to get more in-depth with your plans and conduct research based on direct customer surveys and census data concerning your company and product.
You’ll want to analyze SWOT (strengths, weaknesses, opportunities, and threats). Hence, you get a comprehensive view of how your startup’s business model or product may perform when taken to market.
A SWOT analysis may provide more information to help you decide your strategies. Identifying weaknesses will help you improve your initial idea and capitalize on opportunities unidentified by your competitors.
Get started on a business plan
With the initial knowledge you’ve gathered, you’re ready to start on a business plan. A business plan is a document that works as a foundation and roadmap for your new startup business.
Rather than considering it fixed, view it as a dynamic paper that can be adjusted anytime as you grow and evolve your business. It is also a valuable document to show to investors, partners, and founding team.
The essential parts of a business plan include the executive summary, company description, market analysis, organizational structure, goals and mission, planned operations, product and or service, marketing plan, and financial plan.
When conceptualizing your business organization, be clear about your risk management strategies, initial hires, and business registration. You must decide whether your startup will be formed as an LLC (limited liability company), a partnership, or a corporation.
Think about scalability
Startups stand out from other types of businesses because of one thing: their level of scalability. Startups are designed to achieve a high level of growth—much more than your regular mom-and-pop store, even if they start with the same amount of capital.
A scalable business model is easily replicable. It is also designed to serve more customers exponentially—it can grow without a significant cost bump. Examples of scalable businesses include franchises, digital businesses, digital products, subscription-based businesses, and fintech businesses. As a startup, scalability must be a primary goal of your business model.
It’s not too early to devise an exit strategy
Before you even start, it might be helpful to begin visualizing an exit strategy. If you are seeking funding, you need to determine how you will be able to sell or transfer ownership of your startup business if you decide to move on. Some VCs will want to know this early on, as it may suit their investing style.
Common exit strategies include liquidating assets, handing the reins to family members, and selling the business to another entity or party. Ideally, there should be no loss of value, and shareholders should be able to profit in the process.
Start with your tax plan
Early in your startup formation, you’ll need to study how to deal with taxes. Dealing with tax obligations can turn complex. Depending on your business model and location, you may be liable for several types of tax. You could be obligated to pay self-employment, property, sales, and income taxes. Apart from these expected taxes, you could be required to pay additional ones like unemployment or payroll taxes.
Decide on your business structure
As you progress with your startup plans, you must firm up your business structure. Your chosen structure will impact your operations, your assets, and how much taxes you owe. You may choose among the following types of businesses:
Single or sole proprietorship
If you want to start things lean, a sole proprietorship might be an ideal way to go. Sole proprietorships are easy to set up with less paperwork. You also have more control of the business.
However, you must remember that it comes with its disadvantages. As the sole proprietor, you are, by law, personally liable for all the business’s debts. If the company fails, you assume all financial responsibility.
Another disadvantage of this type of business is the difficulty in raising money. There are better structures for a raise. VCs may decline it or ask you to change into an LLC or corporation. Sole proprietorships are also known for their limited lifespan.
A limited liability company or LLC
LLCs limit the owner’s liability for business debts. It can be set up by one or several people or companies. LLCs need a registered agent. Owners of LLCs are referred to as members. Apart from liability protection, LLCs have other advantages. They are easy to establish. Single-member LLCs are convenient to set up.
The downsides of LLCs include the inability to issue stock, payment of annual filing fees to the state you register in, and additional paperwork requirements with the state with their yearly corresponding filing fees.
Corporation
Corporations offer protections on personal liability for business debts, like an LLC. Corporations are taxed as either an S-corp (S corporation) or a C-corp (C corporation). When you have an S-corp status and a small corporation, you are offered pass-through taxation if you meet specific IRS requirements.
Startups and larger companies aiming to attract venture capital are often taxed as C-corps.
Corporations have the advantage of holding an unlimited number of shareholders and having an indefinite lifespan. Their downsides include the expense of setting up, their higher level of complexity compared to other options, and double taxation.
Select a favorable business location
The US is home to the most prominent startup ecosystems in the world, with Silicon Valley at the top of the list. Registering in a dynamic location with a robust startup ecosystem that supports founders and maximizes their chances of establishing a solid business network significantly increases a startup’s success.
However, several other locations offer distinct advantages for your new LLC or corporation.
The following are the best US cities for startups with distinctive qualities and benefits:
Silicon Valley
Silicon Valley is the world’s best-known startup hub. It is situated in California’s San Francisco Bay Area and is home to the world’s most successful tech businesses, including Google, Facebook, HP, eBay, Intel, and Apple.
Apart from being an epicenter for tech innovation, it is also an ideal location for fundraising because of the concentration of VC firms and investor networks. In 2021, Silicon Valley-based startups raised $105 billion in VC funding—a peak figure that declined in succeeding years but is still well ahead of other startup ecosystems.
In addition to the VC wealth in the area, Silicon Valley is also the home of some of the world’s top startup incubators and accelerators. Local laws generally support tech startups, favoring companies that develop based on applications, services, and ideas—all constituting intellectual property (IP).
Silicon Valley’s laws have been fine-tuned to protect idea ownership, trade secrets, and business interests.
However, this environment comes with its downside. Its high-pressure programs and highly competitive culture may not make it the best place for those who want to enjoy a less cutthroat environment.
New York City
New York is a close second to Silicon Valley regarding business dynamism and networking opportunities. After all, it is the most populous city in the US. Beyond Wall Street, its businesses thrive on tech innovation, startup culture, and new ideas.
NYC is the center for some of the most significant startup acquisitions. Compared to their Silicon Valley counterparts, New York tech startups focus on generating high returns for their investors.
They do this by choosing business models with more straightforward and stable paths to generating revenue. If you are ambitious and enjoy NYC’s mix of opportunities, it could be the right city to start your new LLC or corporation.
New Jersey
A stone’s throw away from NYC, New Jersey, may be an attractive alternative for setting up your LLC. New Jersey has seen an uptick in business creation in recent years, with some of the highest increases registered in 2021. The Census Bureau recorded a 21.1 percent boost in new applications in the state during that period.
New Jersey offers several advantages for corporations or LLCs. Startups must study the Grow New Jersey Assistance Program or Grow NJ. It is a program specifically targeted towards innovative startup corporations, offering tax credits on job retention and creation.
Grow NJ is designed to help strengthen the state’s competitiveness in the global tech ecosystem and marketplace. The program offers annual tax benefits ranging from $500 to $5000 per job. It also offers bonuses, with bonus credits ranging from $250 to $3000 per job annually.
If you plan to register an LLC in New Jersey, you will enjoy its STX or Sales and Use Tax program benefits. You are eligible for sales tax exemptions if you make specific construction and business facility renovation purchases.
The instructions for how to start an LLC in New Jersey are straightforward and ideal for those who want to be part of a growing startup-friendly ecosystem while enjoying a better work-life balance than other startup hubs.
Boston, Massachusetts
Boston is not known to be a tech hub, but it offers many advantages to entrepreneurs from every industry and level. It is a hotbed of exceptional talent, home to over 100 universities and colleges. Your startup has the benefit of access to top graduates from top Ivy League universities like MIT and Harvard.
Moreover, Boston has a formidable venture capital presence with major firms based there.
The city has startup-friendly programs like the Mass Challenge accelerator, which has existed since 2010 and helped more than 1,300 new companies. The city also boasts a collaborative environment. The relatively small startup community in Boston means networking with access to top-caliber talent will be easier, especially if you fall under sectors like the life sciences, manufacturing, and robotics.
Los Angeles, California
Behind NYC, Los Angeles is the most populous city in the US. While not top-of-mind regarding tech startup radar, LA boasts a high concentration of engineering graduates. It is less costly to live in LA than the famed Bay Area—they can be as low as half that of San Francisco.
SpaceX, Snapchat, and Riot Games are all famous startups registered in LA. The city’s diversity, robust startup culture, and balanced lifestyle make it ideal for founders who want the best work and leisure.
Austin, Texas
Austin, Texas, is notable for the growth of its startup community. Home to the University of Texas and other institutions, Austin is noted for its educated workforce. Creative talent is also abundant in the city.
Austin is also known for its affordability and supportiveness of its small business ecosystem. The state has no personal income tax—an advantage valuable to small business owners who often pay taxes at an individual level in other jurisdictions. It has a zero corporate tax rate.
These two factors make the city attractive to startup founders, freeing up more money to reinvest in their business ventures.
Increase The Odds of Startup Success: Choose the Right Location
Startups have a notoriously high failure rate—often above 90 percent, even among the best and most supportive ecosystems.
Nonetheless, a founder’s selection of an HQ is crucial for setting the foundation for a new venture.
Startups are a different breed of business—they need the right environment, laws, culture, and funding ecosystem to thrive. Built for scaling, they rely on capital to optimize their resources and deploy their platforms effectively, as many aim for global reach.
The steps towards business creation are similar wherever you go. However, there’s nothing more beneficial than a place with exceptional talent, favorable tax laws, an abundance of VCs, and a collaborative mindset. At a time of continued economic uncertainty, market volatility, rising costs, and less funding for startup businesses, your location could spell the difference you need to survive and eventually succeed.
