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Ask HN: How do angel investors/VCs deal with “zombie companies”?

28 points by wenbin ↗ HN
If it's clear that a portfolio company won't be able to reach venture scale, but founders refuse to sell/shutdown the company (maybe because it has already become a lifestyle/cashflow business), how do angel/VCs deal with this situation?

From the Internet, I've found a few data points:

1) "I don't care. No need to return money to me/us. Keep the money. Do whatever you want. Good luck."

- Seems Y Combinator and some good investors go this way [4]

2) "I'll sell our shares back to you for $1."

- KPCB sold their shares back to Gumroad for $1 [1]

3) "Return my/our original investment back. 1x return. No need to worry about inflation over the past 5 years. Just return the original dollar amount. Let's both move on."

4) "I'll sell our shares back to you for 120% ~ 500% returns. Pay me/us back within X months using your cashflow or just borrow money to pay me/us back."

- Buffer used cash to buy back investor shares [2]

- Wistia raised debt to buy back investor shares [3]

If you are an angel/VC, what did you do?

[1] https://sahillavingia.com/reflecting

[2] https://buffer.com/resources/buying-out-investors/

[3] https://wistia.com/learn/culture/taking-on-debt-to-grow-our-own-way

[4] https://share.transistor.fm/s/43dad61e

13 comments

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revolutukr
If you are not a rockstar, keep a list of zombie companies. These are the ones most likely to hire you, especially when you are over 40 years old.
s09dfhks
This is a sad reality and it pains me to read this
joshxyz
the modern jobsecurity haha
revolutukr
It's not so bad. The stress at these places is far lower, the work load is realistic, and the salaries are pretty good, sometimes the base is higher than you'll make at FAANG because they can't entice people with stock.

What's best is these companies welcome wisdom over leet coding. They aren't going to be like Amazon where the way you advance is by stabbing your coworkers in the back. They just have steady revenue streams they want to protect, with no delusions about ever becoming a unicorn.

ornornor
How do you even find these?
llampx
One way would be to look at the company headcount statistics on Linkedin or Crunchbase. If the headcount stays the same, it is likely a zombie company or has insane churn. I worked for a company like this. 4 years after I left, they're still about 50-60 people, but everyone is different except C-level and HR.
ornornor
I see. How much does it suck to work at such a place? I mean in terms of disorganization, constant fire fighting, time to fix existing issues vs implementing new bugs?

Basically I don’t mind working at a boring company so much, what I want is serenity and calm so that my job doesn’t end up taking over my non work time by polluting my mind with stress and worry. Wondering if zombie companies fit the bill.

revolutukr
If you aren't a 25 year old kid trying to win the startup lottery at a future unicorn, or getting fat at FAANG, then these jobs are great. They move slower, so their processes are often very well refined, the churn is low and the change/velocity is even.

There are few fires to fight in a stable company with moderate growth, a low change rate, and predictable customer behaviors. Disorganization and exhaustion is usually a side effect of hyper growth.

When I hit 40 or so, I accepted I wasn't going to be a billionaire and that I was too old and too mediocre to get a job at a unicorn. I still provided a lot of value for my customers in last few years of work before I retired from tech.

If you are ready to transition from "My life is my work! I'm going to kill it, crush it, and get my lamb" .. Then look for a stable, low growth company which disappointed investors but not customers.

llampx
I think that's more on a case by case basis. In the example I gave, the CEO is capricious so there's a lot of churn because the vision is a moving target, and the company itself isn't growing much so people do their 1-2 years and move on.
revolutukr
> so people do their 1-2 years and move on.

Sounds like about 50% of the employees at every company I worked at over 30 years. In the '00s and '10s, there was no such thing as raises unless you were at a public company, so the only way to increase your salary was to job hop every 18-24 months. When you hit your 40s, however, that resume history makes you unhirable I found out.

revolutukr
Primarily I used to search Crunchbase and Hacker News for companies which got a lot of hype 5+ years ago, then I never heard of again.
contingencies
Objectively, early stage private equity is the wild west. The law in most cases is that the investor took a risk knowingly, ceded control of the capital, and does not have the control of the company to do anything about it. If they have a near-majority of board control they may attempt to acquire one. If they don't, they're effectively powerless.

However, the reality is that you may have gentleman's agreements or reputational concerns to uphold. "Intentionally bad-acting" vs "failed" founders will be blacklisted from one or a cluster of funds. Sometimes there are other concerns. For example I have, due to informal agreement, personally returned capital to small scale investors in past ventures.

In an extreme case, I have even seen investors screw over inexperienced founders demanding they work to pay back debt and that they "owe" them the capital invested, even after a venture collapses. This is absolutely unfair and not the sort of thing founders should put up with.

I would encourage anyone asking this question to educate themselves as to the standard mechanics by taking TechStars' course Venture Deals https://venturedeals.techstars.com/pages/coming_soon

badpun
Feeling obliged to return the capital in case of failure is sort of messed up. It basically turns their bet into risk-free investment, with potentially massive upside. When I worked in a startup that eventually failed, and heard that the young (and broke) founder felt obliged to fully return seed money to the billionaire angel investor that funded us (even though he explicitly refered to us as "a bet"), it felt really weird.