There’s a term used to describe startups that have raised money from venture capitalists (VCs), been around for several years, built sustainable businesses, but don’t have the hockey stick growth necessary to raise more money or provide a venture quality return: zombies. Zombie startups are actually more prevalent than you might think and represent one of the more difficult situations for VCs. Here’s a few reasons why these are so tough:
- VCs often have more money than time and can only sit on a limited number of boards and still be effective
- Once a VC believes an investment is a zombie they want to sell it and move on
- Valuations are down significantly compared to three years ago and companies that try to sell themselves often don’t command as much money as when a strategic buyer comes knocking
- The VC still has a personal reputation and brand to maintain thus needing to provide significant energy to sell the company and get the highest price as part of their fiduciary responsibility to the limited partners in the fund
Now, if the startup was bootstrapped and in the same position it could still be a great business for the managers and employees to continue indefinitely. It is very unlikely for a VC to sell his or her stake back to the company or co-founders due to the difficulty of the buyer coming up with enough money. Zombies are part of the startup community and should be understood by entrepreneurs.
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