Are we honest about the opportunity cost of too many zombies in our ecosystem?
I will discuss our concerns about follow-on funding and our fear of failure in future articles on funding and culture. For now, let's focus on how draining "zombies" can be on the talent pool.
What do we mean by "zombie"?
For those unfamiliar with the term, "zombie" was originally used in the 1990s to describe businesses that could service their debt interest but not repay the debt. In the context of the start-up revolution, it now refers to companies that make/raise just enough money to survive but are very unlikely to scale or thrive, operating for years as if on life support.
To clarify, this does not necessarily apply to lifestyle companies or scale-deeps. This is about businesses that strive to achieve product-market fit and then seek rapid growth towards a funding event or exit.
Founders and early employees of any start-up, successful or not, should be treated like gold dust.
I started my first business when I was 23 years old and it was HARD! I threw everything at it learning more in a short period than ever before. I split my day into 15-minute chunks and the accelerated learning was immense. I was head of sales, head of IT, head of Marketing and SEO, IT support, CFO and head of fundraising – you get the point. We invested our own savings to get the business started and 18 months later we raised a grueling ￡250k. And yet, through those dozens of tough investor conversations, we realised the opportunity wasn’t big enough to justify the time and effort. This company was our baby and the toughest day of all days was the day we decided to kill the business. We returned the cheque to the investor and closed the site down. I still wonder “what if”- but my point is The opportunity cost of every startup goes beyond cash or investment—it includes human capital.
Founders and early employees work in accelerated learning environments, absorbing massive amounts of knowledge in a short time. Crucially, they learn to rapidly assess risk. Decisions must be made quickly, as procrastination is fatal. One option might be 80% good and another 75%, but the key is to decide quickly. Pick one and move on. Decide or die.
Years later, when interviewing for the CFO role at Skyscanner, my founder experiences were a significant factor in securing the position and carrying out the role. My broad understanding of unexpected areas for a finance person—such as SEO, product activation and product-market fit metrics—along with a growth-oriented and forward-looking mindset, were largely developed from running my own business.
How do we know if a company is becoming a zombie?
So, when is it time to call it a day with a startup? There isn't a definitive playbook. Ending a venture is agonizing, and it's understandable why many wait too long. Founders and early employees should know they are more employable after their startup experience than before. The unknown should not be feared. Founders and early employees who have fought to keep a business alive are invaluable and should be cherished.
However, everyone has limited energy and personal resources (cash, family sacrifice, patience) to bridge the startup to product-market fit gap. Many exhaust these resources only to realise they’re on the wrong horse. At that point they’re forced to “get a normal job” to replenish these resources, leaving the startup ecosystem. This feels like a tragedy.
Of the first 2,000 businesses through Y-Combinator, only about 15% made it to the next level of funding. Failure is an inevitable part of the ecosystem, and we need to embrace it. Even writing this I’m expecting a torrent of abuse because this may be deemed by some as “unsupportive”. I LOVE start-ups and I am passionate about the ecosystem - and that is why I believe we must support founders by telling them the hard truths. A great jockey on a lame horse will never win, but they can always race again on another horse—unless they wait too long and lose the passion to race.
If we had a highly functional funding marketplace, this issue would be less prevalent. Fifty tough conversations with VCs can quickly reveal whether you're on a good path. Scotland has a world-leading angel Network and a fantastic co-investment program through Scottish Enterprise. However, they don’t want to be judged as having “made a bad investment” and are in many ways incentivised to follow-on fund rather than allow a business to fail. Founders should carefully consider before accepting follow-on funding: “Have I spent enough time engaging with potential new investors and have I listened to their feedback?”. Product market fit (PMF) isn’t binary, it’s a sliding scale. Set clear gates to achieve on your journey from poor PMF to minimal lovable product (MLP). Re-assess at every stage.
In reality, Directors, stakeholders, investors, advisors, friends, and family all have a role to play. If you’re worried that the start-up you’re involved with may never make it then ask people the question – and make it safe for them to give an honest answer…
Thank you for reading. A really tough post for me to write but I feel I’d be doing a disservice if I didn’t call it out.
Next up: ?Taxes and incentivisation, is working in Scotland worth it?
Sales Director at ARRAN Sense of Scotland
8 个月Great article Shane. I actually think it applies equally to lifestyle business, scale deep businesses and perhaps even more so to family business. With a 35 year old PE owned business I think I have experienced many of the challenges you mention up close and personal. We are not a startup, however the changing market, credit crunch, pandemic etc all required significant pivots which generated many of the needs you describe. Even at 35yrs we are trying to focus on scale up rather than modest growth. There are some great people out there; finding them is not so easy. Getting alignment of interest and motivation is the next challenge. Follow on funding risk as you mention is another crucial topic. Thank you.
CEO - Entrepreneurial Scotland Foundation. Building belief & connection in Scotland.
8 个月Another great article Shane, and you had me the second you started talking about jockeys & horses! ?? It’s a hugely emotive topic and in fairness, we feed leaders a consistent diet of stories where “everyone told you it wouldn’t work but you ploughed through and proved them wrong”. Most leaders will fear not so much letting themselves down, but letting down their investors & staff. I hear that often, the pain of failing others more than failing yourself. That’s where great mentors & supportive capital can help them understand they aren’t letting people down. Look forward to the next installment.
Every US investment I made has either closed down, had a successful exit, or taken major funding with a realistic prospect of returning 5X, while allowing cash out for the original seed and Series A investors, during the same 15 year period. The one startup in which I invested in Edinburgh pivoted 3 times without succeeding with any of those ideas, and is now a zombie. Not an incentive to do any more private investing now that I'm in the UK.
The wind beneath the wings of audaciously aspirational people - “it’s what I do”
9 个月Great read Shane Corstorphine and you have scratched a scar. It is hard to call it a day
Founder / Inventor "I have no special talents. I am only passionately curious.” An Albert Einstein quote that best describes me,
9 个月Thanks Shane, great article, I agree, too few start up Founders fail to face the challenges of reality of business, it's tough you've got to know your market inside out, know that there's a definite need for your product or service, know your competition and what differentiates you from them and why their clients / customers would choose you over them also, A Founder should really have a Board in place before even thinking about raising money, as everyone on it will believe in the Founders Vizion. I know how much I need to raise to Launch successfully but I'm wise enough to know I need the backing and support of a Board of the right people, All striving to achieve the same Vizion,