Are You a Zombie Startup?

I have a confession to make: I am an utter devotee of the TV show “The Walking Dead”, which I enjoy under the false pretense of “monitoring” what my kids are watching. If you haven’t seen it already, the show is about life in a post-apocalyptic world infested by flesh-eating zombies. The zombies are difficult to kill and many of the scenes show the human survivors putting them out of their misery by shooting, stabbing or crushing their skulls with a wide variety of weapons.

It is totally gory and mighty satisfying after a long day at work.

But today, I am talking about a different type of zombie: the one of the startup kind. Zombie startups are early stage companies that were able to secure some financing and have enough money for now (usually with concessions from the employees working almost for free), but aren’t growing fast enough to sustain the business at the pace needed to keep the company viable. In a nutshell: the founders and employees are still dedicated to the vision and the product, but the rest of the world (read customers and investors) really doesn’t care.

Recently, there has been quite a lot of discussion in the US on the issue of zombie startups, initiated by a very funny (and brave) post by Danielle Morrill, CEO of Referly, and further fuelled by the fear of the upcoming Series A Crunch, which could result in over 1000 seeded startups being orphaned in the US.

Series A Crunch is good

The situation in Canada is similar to the one in the US: the level of available Series A funds is holding steady, while the number of seed deals has exploded.

But, this perceived crunch is nothing more than excessive demand for a limited supply of Series A financings and “natural selection” will apply. Let me be clear: this is a healthy and natural process in the high-risk seed financing business, in which many startups will not make it through the next phase (and probably shouldn’t anyhow). Some angels and seed VCs will lose their investments, but hopefully their portfolio is diversified enough to be able to ride out the storm.

Zombies coming to Canada: keep calm!

The number of startups in Canada has risen steadily in the past few years and there are many avenues today to get seed financing and mentorship. This is great news. But it also implies that the “Series A Crunch-Zombie Startups” combo might also be coming to our Canadian screens soon and we need to be prepared to understand the phenomenon, embrace it and make sure we do not collectively go into a funk of self-doubt and unhelpful headlines about failure and capital destruction.

Have you turned?

So how do you know if you have become a zombie startup? Here is Morrill’s list of signs, to which I have added a few of my own:

• 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 have been going to more demo days than customer meetings 
• You are an accelerator junkie and keep applying to one after the other
• Your only clients are non-paying early adopters (but they say they love the product!)
• You haven’t hit 10 percent week-over-week growth on any meaningful metric (revenue, active users, etc.)
• You are working on the same idea after 12+ months and still haven’t launched
• You have launched a consumer service and have less than 2 percent week-over-week growth in signups
• You have 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 and Techvibes
• You have hired consultants to figure out revenue, culture, or product in a company of less than 10 people

Sounds familiar? If it does, it’s OK, you are not alone.

Co-op zombie fighting

I work with some of the best accelerators and startups in Canada, and it is up to all of us, entrepreneurs, mentors and investors to identify the early signs of becoming a zombie and act. Fortunately there are tools that we can use to help zombie startups, which almost never require the forceful use of a screwdriver through their skulls.

In my post next month, I’ll be looking at what can be done once we have spotted a zombie startup.