What should VCs do with zombie companies? Inevitably, some of a VC’s portfolio companies will become “zombies”: not dead, but not growing. They have some technology and revenues, but morale is low. The CEO is hinting he’d like to get into VC or otherwise find a soft landing. Finding a buyer is difficult, because the company is not exciting to anyone, including even the founders. So what do you do? You can only lose 100% of the capital you invest, but in VC you make high multiples on your capital on your winners. So it doesn’t make economic sense to invest too much energy in companies that appear to be losers. Every VC including us has a line of despair, when the investor will lose faith and will devote minimal effort to a company. I know one corporate VC which will sell its stake in such companies for $1 (typically to the founder), just to get the company off its books. It’s impossible to say in advance where that line is for a given investor. The best predictor of passing the line of despair: if the management team (especially the large equity holders) looks like they’ve lost confidence in the company, and are looking for new jobs. If management doesn’t believe in the company, your investors are definitely not going to. That said, zombies do sometimes turn around/pivot and become successful. Many successful companies today are successful pivots or turnarounds from companies that initially were struggling or went through extremely challenging circumstances. Just think of Apple or IBM. The odds of a startup turnaround go up if: -core employees are willing to work during the transition in part for equity or reduced wages, which shows their belief in the company; -existing investors are willing to put in more money; and/or - they are in a growing sector, where a rising tide lifts all boats. I suggest target as buyers some of the firms which specialize in buying “aged”, slow-growth or no-growth VC-backed companies, including but not limited to Constellation Software Inc., Dura.software, Enghouse, ESW Capital, Hale Global, IgniteTech, Marlin Equity Partners, Roper Technologies, Inc., STAGE FUND, Think3, Tiny, Vector Capital, SaaS Wealth Fund and Vista Equity Partners. A number of marketplaces specialize in helping small private companies achieve exits, e.g., acquire.com, Axial, BizBuySell, Empire Flippers — Buy, Sell & Invest In Online Businesses, Flippa.com , MicroAcquire, WithKumo , Dealwise (YC W23) , Searchfunder, Rejigg, Boopos. Brokerages in this space include FE International, Inc. and Quiet Light . #venturecapital #vc #manda Coolwater Capital John Frankel Neil Hunn
This is very interesting and makes sense!
General Partner @ The Global AI Internet Freedom Fund | 20+ years experience with AI | CloudTech, FinTech | Author
2moThis frankly describes 90% of US corporations. VC and tech have done a great job in the US of saying that they back moonshots and accelerate to billion dollar revenues without even turning a profit. We back companies at the growth stage of lifecycle with a clear handle on margin accretion and capital formation. How many VCs know the difference?