Zombies in the startup ecosystem

I neither had the content for this post planned for today nor have lost perspective about its punny timing. Zombies, synonymous with Halloween, appear in front yards, movie screens, costumes and even food decorations on Oct 31 each year. They also continually appear in the world of business, especially amongst geriatric startups.

An AI rendition to avoid identifying real zombies, image courtesy MS Copilot

In addition to reading about successes and achievements of numerous companies on these pages, regular readers have encountered a handful of stories about companies created to solve a problem imagined and verified by its founders. These handful committed financial and time resources, built products, accessed customers, and hired people. For varied reasons, however, they recognized that the dream could not be fully realized and moved quickly to shutter the business and release themselves and resources for the greater good.

Those that did not, often struggle as zombies. This is a story of their impact.

A definition

Zombie startups are companies created to realize a founder’s vision via a product or service to solve a problem. As they raise money, they create an expectation of a financial return for the founder and investors. A staff is hired to create the product or service for the market. A number of customers find relevance in the product and adopt it for their use and business. A coworking space, a small office, a warehouse or even a garage are sequestered to run the business.

In many unfortunate instances, growth eludes the business or product, and revenue barely allows the business to operate profitably. Founders rely upon lifelines for continued support, low or no interest loans and even government support to survive. Unfortunately, these lifelines barely allow survival capital and not provide enough capital to grow, pivot, or innovate. Yet these bridges - the lifelines - are large enough to avoid the important conversation - whether to euthanize the company.

What zombies take away from a business ecosystem

Zombies aren’t just a drag on the founder and their vision. They can keep the founder from moving on to their treasure trove of other ideas. Much like the compulsive gambler at the table, the founder continues to invest their funds into the business. Worse, the founder is compelled to invest time, their most valuable asset into a flailing (or failing) business.

Although such a business continues to pay employee wages, they do keep talented workers in stagnant roles and away from other promising ventures. Zombie businesses sometimes reduce prices, thereby creating pricing pressures on successful peers, potentially creating a vicious cycle of falling profitability and persistence.

Zombie investors find funding fatigue, especially those who continue to invest good money after bad. Sufficiently fatigued, investors often leave ecosystems, robbing future startups of funding opportunities.

Recognizing zombies

Zombie companies, especially angel and venture funded startups, often share a visible attribute - perpetually raising money. Their successful counterparts, by contrast, raise money for a set of goals and then shift to deploying the money to achieve those goals. In many cases, the goals remain consistent across various fundraising endeavors, indicating a basket of problems — unrealistic goals, ineffective management, immature market, or simply a failed product.

This cycle of perpetual raises exposes a critical fracture in the startup - the CEO and founder who provided the spark and idea is now focused on an alternate priority and largely unable to focus on building the dream. Delegating the business to employees or third parties, the founders take eyes off the most critical ball.

Vanity led me to add a graphic, courtesy MS Copilot

Another telltale sign is the continual adoption of vanity metrics such as number of app downloads for a mobile app instead of real metrics like monthly active users or paid subscriptions. For my Substack here, for example, a vanity metric is number of subscribers, but the real metric is the number of reads in a post’s first 24 hours.

What is an investor to do?

Investors are as likely to be frozen by sunk cost fallacy as a company’s founders yet are in one of the best positions to see an impending failure. They should be amongst the first to withhold new funds support when their portfolio company’s

Revenue growth is stagnant or negative over multiple (3-4) quarters
The L of the P&L is increasing without a corresponding shift in the P
The CEO is in constant fundraising mode, looking for the next “hit”
Vanity metrics grace company presentations
Promised updates are missed, late, or simply full of words without saying anything

What is a founder to do?

A startup isn’t a lifestyle but an experiment to test and tweak an idea to meet a known customer need. I was reminded of this by an analogy used by a friend this morning over breakfast (incidentally - the spark that led to this article) - if a startup is a painkiller, it has a shot at success; if it is a vitamin, externalities will dislodge it from the customer’s mind. A rideshare hauling app is a painkiller, a rideshare price comparison a vitamin. A ticketing app is a painkiller, an event discovery app a vitamin.

Have you built a painkiller or a vitamin?
Are you adding people who are continually using your product?
Are people unrelated to you paying for your product?
Do you constantly need investor/bank money to continue operations?
Are you monitoring vanity metrics?
Are you earning more revenue from customers than the cost to acquire them?
Are you avoiding providing updates (good and bad) to your investors and stakeholders?
Are you constantly adding features without successfully selling what you have?

Each startup comes to a juncture where euthanizing the company is a better option than leaving it on life support. Fail fast isn’t just a phrase - it is a deliberate action taken to stop an experiment, to stop throwing good money after bad, to escape from the sunk cost fallacy, to recapture passion and resources and pursue a new life. Startup communities overrun by zombies suffocate the ecosystem, draining energy and enthusiasm for the new, leaving behind disenfranchised investors, thinning support systems, and ultimately, fewer entrepreneurs.

It’s best to supply less candy to the zombies

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