Venture Capital 'Zombies': Who's Buying Plateaued Startups?

Try very hard not to make your startup company too central in who you are. Find other parts of your personality or being that have meaning. I find the people who have other things that transcend their startup have an easier time dealing with setbacks if the startup doesn't work out. It's not this totally ego destroying activity. And I find that there's a handful of people I've worked with where the startup became such a big part of their identity, they didn't know what to do without it.

It's the week of December 1st. Welcome to the Learning Corner, a Precursor Vent Podcast.

Welcome to the Learning Corner by Precursor. I'm Mia Farnam and I'm joined by RGP and Managing Partner Charles Hudson. And also this week we've got one of our graduate interns, Missy Martin, here to talk through this week's Goodreads and articles. Welcome Missy.

Thank you so much for having me. Really excited about today's conversation.

Awesome. Excited to have you. Well, our first piece is an article by Tyler Brown at Emarketer titled With Forge Global Acquisition, Schwab Taps Demand for Alternative Assets Last month Charles Schwab announced that it will acquire Forge Global, a platform that lets retail investors buy and sell shares in private companies for 660 million. This move came closely after Morgan Stanley's announcement to acquire private shares platform Equity Zen, and in the piece, Tyler argues that these acquisitions signal a clear shift. Alternative assets are going mainstream for REIT retail investors. What was once the domain of institutional investors and very wealthy individuals is trickling down to the rest of the population, was a quote from the piece. This article builds on a pattern we've seen across the financial ecosystem. Just a few episodes ago we discussed Goldman's acquisition of industry ventures on the institutional side. Now we're watching similar momentum unfold on that retail side as well. Charles wanted to ask you how will the mainstreaming of private markets reshape the liquidity, conversations and expectations? And what new responsibilities might GPs face as retail investors enter?

Oh yeah, I think private markets. I don't know that we'll call them private markets for that much longer with all the capital that's coming into them. But look, I think ventures going through one of these scaling moments, and I think anytime you want to scale a subsector of finance, you find yourself in a situation where you just need to find access to new pools of capital. So for private assets to grow, you look at some of the traditional sources, pension plans and institutional endowments. Like most of those folks are pretty well exposed to privates. So to grow the industry, you have to find new sources of capital. And I think, you know, we've tapped into sovereigns now sovereigns all have exposure to privates. And so in some ways the final frontier is always the public. The question will be, what will it mean? You know, historically, part of the reason we've had private markets manage the way we do is because there's a feeling that you need to have a different level of sophistication, whether that's because of the illiquidity or because of the lack of formal reporting. So I'm very curious to see what changes, if any happen or whether what really happens is instead of going directly from institutions to Main street, you go from institutions to sophisticated, but, you know, slightly less wealthy, more accredited investor type folks getting exposure. It's pretty clear to me that the money train for private assets is not done yet. There's going to be more and more money piling into this asset class and that money's got to come from somewhere. And I think we've exhausted most of the traditional sources. The only way to grow the pie is to bring in new people.

And within your GP circles, did you feel like this announcement was seen as good news, neutral news, bad news, or nothing to kind of talk through?

I think a lot of people I talked to recognize that secondaries are going to be a more important part of how we all get liquidity in venture. And it might be because, simply because some of the best companies choose not to go public, maybe even ever. And so like, the only way you'll get out of those names is to sell those shares to somebody else who wants to hold them. And so a more robust secondaries ecosystem is good for all of us. It really is. And I think it's funny if you'd said five years ago, hey, do you think there'll be three secondaries platforms in venture that trade for meaningful sums of money? People are like, no venture secondaries is too small a business. So it's just a good reminder that today's TAM is not tomorrow's tam, because the world can change and people's perception of the market size can really change as the world changes.

Charles, do you think that the broader investor participation will influence aspects like valuation dynamics, governance expectations, or even just founder behavior more broadly?

I think I'm a big believer of like, be careful what you wish for. And so I think historically most of the money in private markets has been in the hands of people who can afford to bear those losses, who understand what they're signing up for. And as we move to more mainstream investors, I'm not sure that that's the case. Meet a lot of people who are like, I want to get into private investing, I want to invest in venture. I'm like, you might not get your money back for 12 to 15 years and there's nothing you do to get it back. It's not like you can go to the manager in most cases and demand liquidity. How much money would you be interested in tying up potentially for 12 to 15 years with no recourse to like not that much? Then that's the amount of money you should put to work in private markets. I think the more retail it becomes, I think the more investors become a part of the conversation. And right now one of the nice things about raising money from accredited or qualified purchasers on the private side is they're sophisticated. And so it, it makes life easier for you as the gp. And I wonder how different that will be if the money comes from less, quote unquote sophisticated investors.

It'll be interesting to see what happens in the future.

We're not done by any means.

Moving to our second piece. Why hold forever investors are snapping up venture capital zombies. Maria Temkin at 10 crunch spotlights a growing wave of investors, firms like Bending Spoons and Curious who are buying so called venture zombies or once VC backed software stars that have lingered without rapid growth. These investors follow a buy, fix and hold forever model. They acquire underperforming businesses at a fraction of high growth startups. They centralize the operations across their portfolio companies and really focus on profitability. And then they hold them indefinitely, earning steady recurring cash flow rather than chasing those unicorn style returns that we like to see in vc. So similar to private equity in some ways. But these firms have no plans really to sell the businesses. And Andrew Dumont, CEO of Curious argues that this hold forever strategy will become much more important in the coming years as AI native startups make older VC backed software businesses less relevant. So Charles, before we go deeper, I'm just cur. Do you agree with Andrew's argument that this hold forever strategy will become more important in the coming years?

I do. I think it's an opportunity for people. For those who didn't read the article, part of what's important here is like these are not people who are acquiring these businesses with the intention to flip them. These are people who are like, hey, I'm happy owning this business forever. And I think if you're going to innovate in markets, I think it's helpful to understand well, what's something you're willing to do that other people aren't willing to do? And I think what's interesting about bending spoons and Curious and other folks here is if you're willing to hold an asset forever, that's very different than someone is like, I actually need to generate liquidity by selling this asset to somebody. Either it has to go public or it has to get acquired. And if you think about it, if you're like, look, I have something that I think is going to produce money for a long time. If I can buy that asset and hold it and it continues to generate cash, that's great for the person who owns that asset. But you know, sometimes as a fund manager, you have to think about what are the tax situations of the people who gave you money, like, what do they care about? And without turning this into like a deep dive on venture tax, there's a lot of things that I think venture capitalists realize. If you were to do them, for example, cash dividends have all kinds of weird tax consequences. There's all these like features of venture capital funds that make it hard to do things that are outside of the lines. You know, if you think about it, venture funds are closed end funds. At some point you're supposed to return all of the money, liquidate all the positions and the fund is over. That is at odds with a I'm willing to own this asset forever strategy. And so I do think what's going to happen is one, most people don't think this is a good idea yet. And so the competition to buy these assets will be minimized because there's only so many embeddings, boons. There'll be a very small univers of bidders. And second, in many cases you're buying assets that are pretty mature so you don't have to spend a lot of money on R and D. The real question is like, can you retain the customers long enough to pay off the purchase price? I think they just announced bending spoons that they're buying eventbrite. Again, if you think about like, what are the aspects of products that fit this model? Very sticky customer basis over a long enough period of time that you know, people are unlikely to churn. Not a ton of pressing need to keep up with a super aggressive feature development roadmap. These are all like good things. And so I think there will be a class of business that are a great fit for this model and it'll be a great way for those founders to find an off ramp. And it'll be a great way for those holding companies. I know a little about Bending spoons. These are fantastic businesses if you choose the right asset and if you can buy the asset at a price that makes sense. Now, look, the problem is that this becomes a consensus good Strategy and there's 10 of them. It's funny, like, I talked to a friend of mine who was doing one of these I'm going to buy a bunch of tax firms and AI theme. And he's like, the problem is there's too many people who want to do this. So all the assets I want to buy are like 2x minimum, what the model said they would cost me. And the model doesn't work as well at 2x as it did at the original. And so I think it's interesting that this article didn't come out when Bending spoons and carriers were getting started. It's coming out on the back of some pretty successful transactions on their part.

On the threat of creating newer off ramps, which we've talked a lot about on the podcast of just trying to figure out new ways to usher startups into the next chapter that didn't exist in earlier versions of venture. At what point do we as investors need to have these conversations with founders that this is a possible route? Ironically, sometimes these zombies were oftentimes seen as a fund's value driver at one point or the other, I can imagine, before it hit plateaued growth. So at what point do you have an invite?

Went public? Yeah, Evernote was once probably the king of note taking apps. I mean, the irony is like, in order to be interesting to this model, you have to achieve some level of success that generates enough recurring cash flow that someone says, if I buy this, it's not going to zero tomorrow. And you know, I've started doing this with our portfolio companies. It's somewhere between the seed and the A. You have to figure out what are you? Are you a rule of 40 company? Are you a rocket ship? Are you something that's different? I think what you don't want to be is a venture company that's spending money like a venture company but not growing like a venture company. I think that right now is the dead zone, which is like, oh, we're growing like 50% a year, but you know, we're burning a lot of cash to do so. I'm like, there's no market for that company. There's markets for profitable companies that are growing, like at good rates but not great rates. Now we have another option for established companies that maybe aren't growing that quickly but have really stable user bases of predictable cash flow. And so I think increasingly, ironically it's going to be. You just don't want to be like a bad venture business, a high burn medium growth business. I just don't think that's, that's tenable right now.

I know Missy kind of asked a similar question yesterday, but when you think of the term venture zombie, you typically mean that it doesn't have this hyper growth that VCs look for. I mean you gave good examples. Some of these companies went public. So it's kind of in complete odds with what we're talking about. But does that mean that a company wasn't ever a VC backable business to begin with or were there deeper reasons these companies stall out?

You know I was an early investor in Eventbrite through during my time at nCork there's a period of time where like Eventbrite was the particle Luma. It was like the modern event software. And it turns out building event software is a very complicated enterprise business and like the world changed and it was a hard product but like that was a company that was absolutely venturescale. And for a while Evernote was this magical note taking app back when like working across all of your devices and staying in sync was actually a really big deal. And if you were an Evernote user, you were very avant garde in the same way that maybe when notion came out or, or some of the, or you know, we could go back through the history of note taking tools, Rome, Obsidia, all of these things, it was the, the vanguard and then it, it wasn't anymore. And so I think there's going to be a new end of life scenario for a lot of these companies where it's going to be, you hit this point where you're simply not growing but you have an established user base that wants to continue to pay for the product and someone needs to step in. And I think if it's private equity, you're only going to buy these businesses if you think you can turn around and flip them back to somebody else or take them public versus if you're one of these other folks, you might be like, hey, I'm happy to just.

Operate this thing with AI. It seems like there's just so many people coming into entrepreneurship and building startups and I think that we're going to have a lot more people reflecting on whether or not, you know, they are a VC backable business and having to, to you know, reflect between the seed and series A What, what they are.

I probably in the last year have told more people. I just don't see how you get on the VC trajectory with this business and it lands better than it did a few years ago. A few years ago. Like, how dare you say something mean about my company. I'm like, I'm not trying to say something mean. I'm trying to save you from a bunch of wasted effort raising money. And then if you are successful, a miserable experience running a business that isn't suited for the type of capital you raised. And I think in the last few years I think there has been a subtle evolution and, and I think some of it's just there are founders who are less interested in venture capital in some cases. So telling somebody that our capital isn't the right fit for their business lands differently when the person's like, oh, I'm not even sure I'd want it if you gave it to me. So.

And there's no need to publish the stories of all the founders who raised sub $5 million and are doing close to 90 million in revenue.

But they exist.

And like there's a reason why they're not in the media. It's because they don't want to be in that space at all.

No, I mean we have a handful of companies that by the time that the dust settles they will be like remarkably capital efficient but there's just not an interesting headline. Company gets become really, really huge and raises very little money in the process. Like that's a harder story to write if this is going to become more of a thing somebody needs to figure out, like how do you write? And I think the stories about the people in these businesses are very interesting and the way that they were able to achieve. It's funny, I've almost never read a boring profile of a CPG founder. It's like almost never. They're almost never boring. There's always some interesting insight. They had to do one or two like kind of wild or craz busy things to keep the business going. Those are great stories. And so I don't know. I think there are many ways to build a great business and venture is only one of them.

I think we can move to our last piece, which is an essay by space and defense economist and investor Sinead o' Sullivan titled Out of office when you're burnt out and hollowed out. A definition. And Sinead pushes back against that popular idea that burnout is simply about doing too much or really needing more rest. Instead, she argues that the real burn feels like A collapse of meaning or a hollowing out of your emotional and internal world where structure, motivation and identity just suddenly disappear. She uses high intensity advanced programs, high apps, as the clearest example of how this happens. And these are extreme environments such as elite sport programs, conservatories, military pipelines, high pressure academic labs, and even certain finance and tech firms. And these are places that compress time and meaning and identity and performance into a single very, very intense channel. People in these systems can perform at an incredibly high levels because the external pressure really gives them clarity in structure. But when that external pressure disappears, the aftermath can really be disorienting and destabilizing. Without the extreme external demands, many people find they have no internal scaffolding really, which is why just this rest that is often given as a prescription often makes burnout worse and not better. So Sinead's really larger point is that burnout isn't about exhaustion or failure or stamina or really a lack of discipline. It's about what happens when the only thing holding your identity together is that external pressure. So recovery then isn't about time off and more rest. It's about slowly rebuilding an internal foundation and meaning and purpose through small self directed activities that can really reconnect what's actually fulfilling to you. And so Charles, I'm curious from the founder side, how can investors recognize when a founder's burnout isn't about workload, but about the loss of internal meaning or structure? And what does constructive support look like from a VC perspective when a founder is hitting that kind of identity level? Burnout?

Boy, Missy, that gets a big topic. A couple of things. One, I often tell our portfolio company founders there are effort problems and there are thinking problems that you're going to face in your startup ever. Problems are problems you can overcome simply through like sheer force of will and hours spent. That again, effort problem is Cyber Monday, Black Friday and you're an E commerce retailer, you're just going to be busy if you have a popular product that is about can you actually get enough stuff in boxes? Can you like respond to enough support tickets? And thinking problems are ones where spending more hours on it won't actually change a trajectory. And I find a lot of founders, I will ask them, hey, I think you're applying effort level energy to a thinking problem. And I'll say, hey, like you've been working 70 hours a week and nothing's yielding. I don't think the 71st hour of work is the answer. Answer, it's probably not the unlock because you're already spending enough time that if time were going to be the unlock, you would have unlocked the problem. Maybe you need to take a step back and think about what are other ways. And it's very hard to find people who are naturally action oriented and tell them, actually what I need you to do is to push less hard. And I think you will see something. And it's very counterintuitive to those people, but I try really hard to convince them that it's the case. And sometimes it's like, oh, I got sick and I couldn't work and suddenly I realized I was working. I was like, yeah, well, like life intervened. The other thing I will say is this is the whole reason I tell people I don't like doing rebound startup. For many founders, so much of their identity becomes being a startup founder of such and such company. And when that goes away, it does leave a hole. And for a lot of people the goal is like, I want to fill that hole as quickly as possible with something new. I'm going to start a new company so I have a new identity as the startup founder of this new company. I'm like, yeah, but you got to like process everything that happened in your last company and you got to reestablish who you are before you do this again. Which is why I tell a lot of our portfolio company founder. Try very hard not to make your startup company too central in who you are. Find other parts of your personality or being that have meaning and that are important to you. It could be being a partner, it could be being a parent, it could be a hobby, it could be another passion. Find something else about you that transcends your startup. And I find the people who have other things that transcend their startup have an easier time dealing with setbacks if the startup doesn't work out. It's not this totally ego destroying activity. And I find that there's a handful of people I've worked with. The startup became such a big part of their identity. They to your point, missy, they didn't know what to do without it.

When you give that feedback to founders, do they go and find that purpose and meaning outside of the startup? Do you find that they take your advice?

Not usually the first time I give it to them because oftentimes they're like A, that feels abstract, B, I don't actually have the problem that you're describing. Other people have that problem. It seems like, oh yeah, no, no, my startup's not my whole identity. It's, trust me, it isn't. And Then the startup fails and they're like, I feel like a failure. And, you know, I spent a lot of time with founders on, on the other side, and I think a lot of them realized, like, oh, I had allowed this to become too big a part of my identity, and it has become too much of who I am. And like, I didn't realize it in the moment because I was trying to make this thing successful. I was trying to, like, force it or will it to succeed.

Now it's interesting, with Precursor, we have a couple of folks who are on their own, our next thing within our own portfolio. And you can feel the palpable difference between the rebound concept that you were describing. Charles and I have really taken time to absorb what happened, reflect, and I am ready. And we've had conversations with those founders who are like, but I'm not ready to take on investor capital yet. I'm just ready to start tinkering with the idea and want to sound board with you. But I'm not ready to take on those people into my circle yet because I'm still recovering. And I've found, like, it's very clear when you're ready versus when you're like, I'm just itching to get back in me out there.

You know, in dating, only a handful of people are aware when they're in a rebound relationship. Like, no, no, I'm ready for love again. And I've had a handful of founders of, of our. In our portfolio have been like, I cannot work on this company with you. It is too soon for me. I still don't know how I feel about your last company and my contribution to it maybe not succeeding. Like, I don't know how I feel yet. And if I don't know how I feel, I don't know how you can be fully ready. And so I've told some people, like, I think this is too small soon. One of the hardest things to do in venture, I find it it's hard to say no to people that you don't know. That's hard to get you. So it's very hard to say no to someone that you worked with before who didn't, you know, commit a crime, who comes back to you and asks for money for another try. And I find myself in some cases just saying, I don't want to do this. It's more of a not now, not a not ever, but probably the least fun conversations I have.

This one's for Missy. I mean, naturally we think about this through the lens of founders being burned out, but in a lot of the circles I've been sitting in, it's the individual contributors and more middle career folks who really feel very paralyzed by burnout and what to make of it. And Missy, I know you've had great operator experience across different emerging markets, so I wanted to pause and get any personal takes on this one from your perspective.

In the article there was a brief mention of startups where Sinead says that in startups people often confuse belonging with martyrdom and treat chronic self sacrifice as evidence of the vision. And I deeply resonated with that. I've worked at three early stage startups now and there were definitely times where there was a lot of self sacrifice from both me and the team, but it stemmed, I think, more from fear than purpose and meaning sometimes. And Charles, you actually had mentioned this a few episodes ago when you and Mia were Talking about the 996 working culture in San Francisco, that there are a lot of high achieving people in high stress environments in places like San Francisco that are working really hard, but they're doing it out of fear and anxiety and that's just not really a good reason to work hard. And I think in startups it's just so intense and there's so much to do that oftentimes it's really hard to recognize where the work is stemming from. And I think it's really important, at least for me, when I was reflecting on this, for people to remember to check in with themselves and ask, does what I'm doing make sense? Why am I doing what I'm doing? Does it actually add value or am I just working to work? I think, Charles, you. You touched on that a little bit earlier. And in my personal experience, even if I was working a lot, there were times that I was so energized because I had purpose and it added value. For example, Mia, we were talking about this a little, a little bit earlier a couple of weeks ago. There was a week where the former CTO of Coinbase Biology, he had posted a list of startups and my startup was on the list. The start I was working at at the time and I got this idea that I was going to reach out to all the organizations on and within a week and host this huge roundtable on Twitter Spaces. And I had to work a lot of hours and reach out to a lot of people and do a lot of relationship building and it was incredibly intense. But I had purpose in a way that added a lot of value. And in the end we actually got Balaji on, we got 14 organizations and 5,000 people tuned in. It was, like, such a proud moment for me. I think that if that event hadn't made sense, though, and I was working all those hours and it didn't happen in a way that was meaningful, and there were definitely many events and initiatives like that at startups I've worked at, then I think I would have felt more burnout. But in this case, with the Twitter space, I think that it added value in a way that I love. I love relationship building. I love connecting with people. I love learning and asking questions. And so I think in that case, it kind of touches on the point, like, you can work a lot of hours, but if it adds that value in a way that's really special. Yeah. Then it feels really good and it doesn't feel like burnout.

Perfect way to end the pod. We are are all out of time today. Thank you, Charles, for stopping in. Thank you, Missy, for joining us this week. Thank you to our listeners for popping in as well. Please like and subscribe and we will talk with you all next week. Thank you. Bye.