What Should VCs Do With Zombie Companies?

Uzone.id — Zombie companies, sounds straight out of a sci-fi movie, doesn’t it? Too bad it’s real and they’re an issue in the startup world.  

These are businesses that are still around but aren’t growing or profitable. They’ve stopped growing, aren’t profitable, and are surviving mainly on existing investments. Dead inside but alive outside, just like a zombie.

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They survive mainly on old investments, and that’s a big issue for venture capitalists (VCs) who are looking for growth and returns. 

So, what should VCs do with these stagnant startups?

The Rise of Zombie Companies

Zombie companies aren’t a new phenomenon, but they’ve become more common, especially in the post-pandemic. 

Based on dunia management consultancy Kearney, in 2023 alone, Kearney identified 827 new zombie companies, as the new total reached 2,370. 

Kearney also stated, in 2023, the share of zombies among companies with an annual revenue of USD 500 million or less grew by nearly nine per cent, raising their share within this group from 6.2 per cent in 2022 to 6.7 per cent in 2023.

According to a report by PitchBook, around 20 percent of VC-backed startups today are in a zombie-like state, stuck between raising additional funds and finding an exit strategy. 

“These startups often have potential, but something goes wrong along the way, and they get stuck in a limbo,” says venture capitalist Sarah Tavel from Benchmark. 

Identify the “Walking Dead” Startup

First, VCs need to know how to spot a zombie company. The clear signs that the company is Zombie are flat revenue growth, constant cash burn with no path to profitability, and an inability to raise new funds. 

“Their growth seems stagnant and they can’t consistently generate more revenue than costs. They are constantly raising money, are focused more on investors than on customers, and rarely have a unique value proposition that generates exponentially more value for customers than existing solutions,” said Sahil S, a VC at Stedu Fund, a dunia sector-agnostic fund.

VCs need to analyze whether the company is just in a rough patch or if it’s stuck in a death spiral. The key is to identify the difference early enough. Once VCs identify that they’re dealing with a zombie company, the question that arises is do you cut your losses, or do you help the startup pivot?

It may sound harsh but zombie companies that show no sign of improvement and have burned through millions may be draining resources that could go toward more promising startups. 

But some zombie companies just need a new direction. VCs can step in with guidance and resources to help these companies pivot.

Double Down on High Potential or Spread Out Risk?

For VCs, deciding how to allocate capital is always a game of strategy. Zombie companies force them to decide whether to double down on what might become a high-potential comeback story or to spread out risk and diversify investments.

For real example, Slack originally started as a gaming company before pivoting to the communication tool we know today. That’s how the game is on the right hand.

“It’s risky, but if you see a team that is resilient and willing to adapt, it might be worth staying invested,” says Ann Miura-Ko, co-founder of Floodgate.

However, for every Slack, there are countless other companies that just can’t make it. So, VCs must evaluate their portfolio carefully and understand that some zombie companies are just destined to fail no matter how much they try.

Dear VC, not all zombies can be cured 

Zombie companies present a real dilemma for VCs. Some deserve a second chance with high hopes, while the others are better off being let go. 

For VCs, the ability to recognize a struggling startup and a zombie company can make a big difference–to both parties. The key is recognizing which is which early enough to avoid sinking more money into a lost cause. After all, the goal isn’t just to keep startups alive – it’s to help them thrive.