Even the best investors in the world aren't right all the time. So most investors apply a portfolio approach to spread their risk and increase the chances for backing a billion-dollar opportunity. In any investor's portfolio you have three types of ventures: the dogs, the stars, and the zombies.
- Dogs run out of cash before finding a scalable business model. These companies return nothing to the investors.
- Stars are the home runs--the investments that generate 10x returns and make up for all the dogs.
- Zombies are companies that are neither dogs nor stars. They make revenue, perhaps enough to break even, but not enough to generate a huge return for investors. 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 to customers than existing solutions. Investors see zombie startups as no longer attractive, and not worth a follow-up investment--which can be the kiss of death for those companies.
What Creates a Zombie
Ten years ago, Seth Godin wrote a 76-page book entitled The Dip: A Little Book That Teaches You When to Quit (and When to Stick). Godin's main idea is that in order to be the best in the world, you must quit the wrong stuff and stick with the right stuff. In the case of startups, it says that after some initial traction, there comes a dip.
From there, one of two things happens: The dip bounces back and starts to trend upward to scale, or the dip turns into a cliff and never bounces back. Godin proposes that at the bottom of the curve--in the dip--founders have to choose to double down or cut their losses. The ability to know when to hold them and when to fold them is the difference between dogs and stars.
Zombies happen because some founders get caught up in the dip, and neither flame out nor take off to greatness.
How to Tell If Your Startup Is Doomed
There are many signs that can alert a founder (or investor) that a venture is stalling and zombie-bound. Danielle Morrill is an outspoken founder on the issue of zombie startups. A few years ago, she published the following signals that you may be in a zombie phase:
- You don't want to get out of bed in the morning.
- You don't want to go out in public for fear you'll have to explain what you do.
- You haven't hit 10 percent week-over-week growth on any meaningful metric (revenue, active users, etc).
- You're working on the same idea for than a year and still haven't launched.
- You've launched a consumer service and have less than 2 percent week-over-week growth in signups.
- You've launched an enterprise service and have less than 2 percent week-over-week growth in revenue pipeline.
- You are the CEO and hole yourself up in the offices so you don't have to talk to employees and can read TechCrunch.
- You've hired consultants to figure out revenue, culture, or product in a company of less than 10 people.
What You Can Do About It
- Accept it. Call it a day, or as some founders choose to, flame out big. Double down on your efforts and fail large instead of quietly fading away.
- Pivot one of the parts of your business model. To become a startup unicorn, you likely need an exponential advantage in one of these areas to shift from zombie to star (think: Netflix offers 10x the entertainment of a movie theater for less than half the cost). There are lots of examples of how a pivot evolved a zombie into a star: Yelp, YouTube, PayPal, Flickr, Groupon, and Shopify.
- Organize an acquihire and make lemonade from your lemons. Sometimes, others can leverage what you have built to drive growth at their business. This is often done through an acquihire (buying a company as a means of hiring that startup's people). While this may not be an optimal outcome, it is often the best choice for zombies.
Unlike on the TV show The Walking Dead, zombie status isn't forever. There are examples of startups pivoting and becoming stars (and many more examples of startups pivoting and becoming dogs).
But what's more important that the decision you make is making a decision. Do not delude yourself. Let the data set you free.