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> The usual VC company failure mode is the "zombie". A zombie generates enough cash to cover its operating expenses, but no significant return for investors. It

> The usual VC company failure mode is the "zombie". A zombie generates enough cash to cover its operating expenses, but no significant return for investors. It won't die. It demands attention from the VCs on the board for years on end. Too many zombies can choke a VC firm. This is basically the problem with VCs. If a company is making enough money to cover it's expenses, it's successful. We need more companies like this, rather then more companies that try abusive practices to extract more market share.

timr 8y ago
"This is basically the problem with VCs. If a company is making enough money to cover it's expenses, it's successful." If a company is making enough money to cover expenses, they don't need follow-on funding and aren't going to succumb to this failure mode. It's the ones that are trying to raise that suffer from broken syndicates. And if you can't continue to exist without raising funds, you don't actually have a successful business, even if you're technically cash-flow positive. But more importantly, while there can absolutely be perverse incentives in the VC world, this isn't one of them. If you're just barely making a company trundle along, you're wasting your one-and-only life. It's a mercy to have someone take you aside and tell you that it's time to give up. From personal experience, it isn't noble, glamorous or fun to have a startup that is just lurching sideways. It sucks, and you feel trapped. You are stuck in eternal grind-mode. Having investors who will tell you to stop doing this is not evil, but a sign of good, professional investors. Investors get many shots at the goal each year. You get a few shots in your lifetime. Don't waste them on bad opportunities.
- fastball 8y ago
  By the time you are a zombie, your board could still be populated by members that want a 10x exit, not long-term profitability. The internal conflict between "should we continue growing at a healthy rate" vs. "what can we do to find a buyer or position for an IPO" can still ruin a company.
  - ChuckMcM 8y ago
    Exactly. The weird thing about zombies are that now the board and the CEO are seriously not aligned. VCs seem to have only two questions, do I get my return this year or do I get my return next year? :-). And being cash flow positive you can answer, "Over the next 'n' years." and a commitment to run for 'n' years. That leaves them with the solution of figuring out what sort of a return 'n' would be with various discounts on their investment. I did see a company that was buying back preferred shares at 2x their initial price (that was the liquidation preference) out of net income, but money has a time value as well so that doesn't work for a lot of fund managers. If it takes you 10 years to repurchase that is a 7.2% rate of return, but 20 years and you're down to half that at 3.6%. And that doesn't do well for the internal rate of return on the fund.
  - timr 8y ago
    VCs can force a company into selling. That's true, and that is one of the misaligned incentives that comes from VC funding. It also only happens if you don't maintain board control. It's not as if young, slow-growth companies are being abducted by evil VCs handing out cash from an unmarked van. You know what you're getting into when you sign the contract. It's also not the scenario of a "zombie startup". If you're a zombie, nobody wants to buy you. If investors can line up an acquihire in that scenario, it again falls under the category of "mercy", not "evil". The case of the happy, naïve, slow-growth company who is forced to sell out by evil investors is more theoretical than real. The people who complain about that outcome are shooting for the moon, not for a lifestyle business.
eldavido 8y ago
Success for who? Customers: probably, employees: maybe, investors/early founders: maybe, maybe not. Capital has a cost. The job of investors is to allocate it. A company that gets to moderate success on a million of equity is a much different beast than one who blows though $100 million with little to show for it.
elgenie 8y ago
The difference is between a seemingly "successful company" and a "successful investment". The latter requires the company not to just make enough money to cover its ongoing expenses (variable costs), but also to cover the cost of setting itself up (the fixed cost). In starker terms, the same allegedly successful company would, had it been financed with a loan, be drowning due to the inability to pay off its debt.
AznHisoka 8y ago
Ok, give me $50 million so i can build a lifestyle business that can sustain just me, and we’ll see if you then call it successful.

timr 8y ago

"This is basically the problem with VCs. If a company is making enough money to cover it's expenses, it's successful." If a company is making enough money to cover expenses, they don't need follow-on funding and aren't going to succumb to this failure mode. It's the ones that are trying to raise that suffer from broken syndicates. And if you can't continue to exist without raising funds, you don't actually have a successful business, even if you're technically cash-flow positive. But more importantly, while there can absolutely be perverse incentives in the VC world, this isn't one of them. If you're just barely making a company trundle along, you're wasting your one-and-only life. It's a mercy to have someone take you aside and tell you that it's time to give up. From personal experience, it isn't noble, glamorous or fun to have a startup that is just lurching sideways. It sucks, and you feel trapped. You are stuck in eternal grind-mode. Having investors who will tell you to stop doing this is not evil, but a sign of good, professional investors. Investors get many shots at the goal each year. You get a few shots in your lifetime. Don't waste them on bad opportunities.

fastball 8y ago
By the time you are a zombie, your board could still be populated by members that want a 10x exit, not long-term profitability. The internal conflict between "should we continue growing at a healthy rate" vs. "what can we do to find a buyer or position for an IPO" can still ruin a company.
- ChuckMcM 8y ago
  Exactly. The weird thing about zombies are that now the board and the CEO are seriously not aligned. VCs seem to have only two questions, do I get my return this year or do I get my return next year? :-). And being cash flow positive you can answer, "Over the next 'n' years." and a commitment to run for 'n' years. That leaves them with the solution of figuring out what sort of a return 'n' would be with various discounts on their investment. I did see a company that was buying back preferred shares at 2x their initial price (that was the liquidation preference) out of net income, but money has a time value as well so that doesn't work for a lot of fund managers. If it takes you 10 years to repurchase that is a 7.2% rate of return, but 20 years and you're down to half that at 3.6%. And that doesn't do well for the internal rate of return on the fund.
- timr 8y ago
  VCs can force a company into selling. That's true, and that is one of the misaligned incentives that comes from VC funding. It also only happens if you don't maintain board control. It's not as if young, slow-growth companies are being abducted by evil VCs handing out cash from an unmarked van. You know what you're getting into when you sign the contract. It's also not the scenario of a "zombie startup". If you're a zombie, nobody wants to buy you. If investors can line up an acquihire in that scenario, it again falls under the category of "mercy", not "evil". The case of the happy, naïve, slow-growth company who is forced to sell out by evil investors is more theoretical than real. The people who complain about that outcome are shooting for the moon, not for a lifestyle business.

eldavido 8y ago

Success for who? Customers: probably, employees: maybe, investors/early founders: maybe, maybe not. Capital has a cost. The job of investors is to allocate it. A company that gets to moderate success on a million of equity is a much different beast than one who blows though $100 million with little to show for it.

elgenie 8y ago

The difference is between a seemingly "successful company" and a "successful investment". The latter requires the company not to just make enough money to cover its ongoing expenses (variable costs), but also to cover the cost of setting itself up (the fixed cost). In starker terms, the same allegedly successful company would, had it been financed with a loan, be drowning due to the inability to pay off its debt.

AznHisoka 8y ago

Ok, give me $50 million so i can build a lifestyle business that can sustain just me, and we’ll see if you then call it successful.