Start-ups are making greater use of artificial intelligence while laying off workers to contain costs, helping send insolvencies in the small business sector down to the lowest level in a decade.
According to research by PwC, the consultancy, based on government data, start-ups accounted for 46 per cent of company insolvencies in 2024, down from 60 per cent ten years ago. PwC defined a start-up as a company younger than eight years old.
Researchers at the consultancy said that smaller, younger businesses typically had operating structures that could be quickly restructured in response to rising costs or falling demand. This agility enabled them to respond quickly to a deterioration in trading conditions, reducing the risk of falling into insolvency.
John Baker, start-up specialist at PwC UK, said: “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, to drive efficiencies and offset rising costs.”
Since 2021, interest rates have risen sharply from a record low of 0.1 per cent to a peak of 5.25 per cent — before being cut to 4.5 per cent — putting pressure on the finances of start-ups. Companies in the early stages of their development often borrow heavily to finance growth.
Wages have also risen rapidly over the past two years, driven by workers receiving pay increases to offset steep inflation, which has fallen to 2.5 per cent from a peak of more than 11 per cent in 2022.
PwC said that the looming £25 billion rise in employers’ national insurance contributions in April may prevent smaller companies from reaching their growth ambitions by making it costlier for them to hire workers.
Tax increases come as start-ups are grappling with a shortage in venture capital funding and a limp flotation market, making it tougher for them to secure early-stage capital. Concerns among investors about being unable to offload their stakes in young companies due to the stagnant IPO environment have also cut off funding.
Since 2020 there have been record numbers of company creations, leading to speculation that individuals have set up businesses to gain access to money distributed by the government during the Covid-19 crisis. It is claimed that insolvency support — which was gradually wound down from 2021 —suppressed the number of business failures and created a long tail of so-called zombie companies.
Baker said: “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.”