Thoughts on Zombie Startups

Ever watched the show The Walking Dead? Every episode zombies appear and mayhem ensues. Even years after the apocalypse started, zombies (called walkers in the show) are still roaming around doing their thing. Well, the startup world has a similar challenge with zombie startups (minus the gore and killing part). Zombie startups are startups that have enough revenue to stay in business but not enough growth or scale to raise more money or be attractive to an acquirer. Note: a tech company that’s primarily owned by the founders, didn’t raise any money, and can persist indefinitely while providing a nice living is a cash flow business and not a zombie startup.

Here are a few thoughts on zombie startups:

  • With the massive growth in seed rounds, and the limited number of Series A rounds, the number of zombie startups has gone way up
  • Turnover, especially at the top, is common for zombies as investors are trying to find new leadership that can get the company growing again
  • Opportunities exist to create a holding company that rolls up zombie startups and focuses on profitability (e.g. take a $2 million/year SaaS business that’s breakeven and put it in harvest mode generating $500,000/year in profits)
  • Venture investors that have a zombie startup are motivated to get out of the company as quickly as possible while still meeting their fiduciary responsibilities (time is often the most limiting factor for investors)

Look for more zombie startups to emerge, especially when the current boom in seed investments settles down and the frothy times are over. Zombie startups are a normal part of the tech community but it’s important to pay attention and recognize them for what they are in the ecosystem.

What else? What are some more thoughts on zombie startups?

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