Help! I’m a Zombie Startup! What do I do?

OK, my zombie friends, we have work to do (if you are not sure whether you are a zombie startup or not, see last month’s post for a list of symptoms). First repeat after me: “It’s OK to fail. It’s OK to fail. It’s OK to fail.” Failure is just part of the game.

Remember that for startups, it’s never actual failure. It’s just that your hypothesis was invalidated. Take it as a very useful learning experience.

But.

Yes, there is a “but”.

It is alright to fail if, and only if, you behave honestly in the process, look after your team, act reasonably quickly (which can include an attempt at a pivot) and do not alienate your investors.

In other words: Pivot or get acquired, land your team and return what is left of the capital. Let’s break that up:

1. Pivot: This is not a mandatory step (sometimes it is braver to go straight to step 2 and consider selling) because a pivot is a radical change of course, not a little tweak in the hope things will get better. It means applying your technology to a completely different problem, often accompanied by a change of team. You will have to really define the “metric that matters”, establish your goal, measure it. And if you fall short again, you will perhaps need to seriously consider option 2.

You might now be saying: “What about a company like Rovio?” Remember that Rovio had years of sluggish sales before its now legendary Angry Birds. But in gaming, every new game is a new product. So, really, Rovio performed a series of pivots until they hit it big.

2. Get acquired: Easier said than done? Maybe, but we are seeing firms these days that are offering startups new services to make the search for a buyer easier. Take San Francisco-based Exitround, which (discreetly) connects troubled startups with potential buyers. Its founder, John Mullins, says he has received hundreds of applications from startups seeking a soft landing since Exitround’s launch in March. On the other side, there are quite a few companies out there scouring the landscape for cheap IP and technologies. You should know from the top of your head who your competitors are and who might need your technology. It might be time to approach them.

3. Land your team: Talent is a serious currency and acqui-hires are a good way to deal with the emotional side of shutting down your baby. Often, an acqui-hire may demand that you stay put in the other company for a while. Maybe that is the last thing you want to do at that point, but you should always consider it carefully, unless you have another bright idea burning inside you (but if that’s the case, why not pivot in the first place?). If your (temporary) continued presence is part of the deal that lands your team and makes your investors wholly or partially recuperate their money (see step 4), put up with it. It is part of the de-zombification process.

4. Return what is left of the capital: Angels and venture capitalists are part of a small, intimate industry where your reputation is your strongest currency. A well-handled winding down, sale or acqui-hire will go a long way in making your investors want to back you again, even if they lost money the first time around. “Total write-off” is a label you do not want stuck on your forehead. As Exitround’s website says: “Never underestimate the importance of a graceful exit from the ecosystem”.

What if you have not taken VC money and are not in the grow-fast or die approach? Should you ignore points 1 to 4? There are many examples of successful businesses that were bootstrapped, grew organically and eventually sold. The critical word here is “grew”. The absence of sufficient growth is usually a good sign of zombification. You are probably a borderline case: define the metric that matters, and wait and see.

Next episode: Are accelerators nothing but zombie farms?

There have been a lot of discussions and headlines recently about accelerators potentially creating many future zombie startups and no large companies, yet. While this is a bit like wondering how come there are no Nobel Prize winners among recent high school graduates, it is reasonable for us, investors and modern VCs, to ask ourselves whether we are really destroying capital via accelerators or worse, creating so much noise that deserving companies risk being overrun by herds of zombies.

I will tackle this topic in my next post.