Two surprising ways that funded startups are failing in 2024
Among the startups in my investment portfolio are two kinds of zombie companies. I think it’s another bubble about to burst. Do you recognise them?
The Cashed-Up Zombie
These are companies that raised a big round, let’s say, in 2021. Since then, they’ve spent millions of dollars trying to find product-market fit. None of it worked. Meanwhile, the fundraising environment took a turn for the worse. So they made massive cuts, preserved their capital, and essentially put progress on hold.Where are they now?
Well, many of them are still steadily burning money. They never found PMF, but thanks to their huge cash reserves, they could keep going like this for another 5 years. Of course, they could turn on the taps again and move faster, but there’s a good chance it wouldn’t work.
Nobody wants an early death… especially not their VC backers.
…Right now, for many of their investors, these companies are still priced the same as they were in 2021. For the VCs trying desperately to raise their next fund, the status quo (and their TVPI) actually looks ok. For the founders and early investors, however, it’s just postponing the inevitable.
The Profitable Zombie
Similar to the cashed-up zombie, these companies are stuck. They also raised money back in the day, but unlike #1, they burned their cash reserves, found some degree of PMF, and just about broke even. Just.The problem these companies have is lack of momentum. They don’t have capital to experiment with (either marketing or product), and they’re not growing quickly enough to raise again.
Even if they could raise money (or sell), it would mean a huge down-round. This would trigger horrible anti-dilution clauses and preferences, which the founders agreed to when times were good.
So they’re stuck. It’s Groundhog Day. They’re creeping along, staying alive, but with no levers to pull to escape their current, mediocre velocity.
Are they lifestyle businesses?
Not exactly. The founders are still earning well below market-rate salaries, and the teams spend every day feeling like they’re failing. Meanwhile, anyone with shares or options realises, a little more each week, that their net worth is a fraction of what the paperwork suggests.
Is it even worth continuing?
There’s chatter about a recovery in venture capital and startup land. I hope it’s true. But, from where I’m sitting, it looks like there’s more pain to come first. When these companies come up for sale, however—probably for cents on the dollar—it could be an interesting buying opportunity.
Does anyone see this differently?
Anybody (besides me) own shares in companies like these?
