Zombie VCs Take II – How to Spot an Active Firm



An entrepreneur called Danielle Morrill just kicked up a bit of a shitstorm with a nicely titled “Zombie VC” post.   It’s a nice pendant to her recent Zombie Startups post in which she deals with her own fears of becoming a living dead company after pivoting her startup, Referly.

In it she tries to define rules for entrepreneurs for spotting Zombie firms.  

Rise of the Zombie Firm

Entrepreneurs should be aware the we are, indeed, surrounded by Zombie Firms.  The largest shakeup ever  in the venture industry in resulting in:

  • firms whose numbers will never allow them to raise again but who will continue to live on fees until the last man standing turns the lights off (a Zombie Firm)
  • firms who bravely try but may take two years on the road to raise and be short of fresh cash to invest in the interim (a Trying Hard To Make It Firm).

In a newsletter from one of the most respected venture fund investors out there, the following statement was made: “in our estimation, there are only 100 truly active institutional venture firms out there“.   Whilst that number feels conservative and does not seem to include the Super Angel funds, compare that to an estimated 1,000 firms active in the early 2000.  

To give you a sense of the shift, only 55 new funds were raised last year (per Thomson Reuters).

Both Zombie firms and Trying Hard To Make It Firms are going to give the outward signs of market activity.  In fact they may have more time than their funded brethren to be a mentor at TechStars or a judge at MIT Entrepreneurship Contest.

All this leaves entrepreneurs with the difficult task of weaving their way through a morass of people who can’t actually give them, you know, actual money.

Zombie House hugh laurie 31936830 1920 1200
 
Have Suit, Won’t Invest

Finding the Active Ones

First of all let me say that I applaud Danielle’s initiative, accusations of sensationalism aside.  We are all know that countless entrepreneurs waste countless hours with folks who cannot invest.

Directionally her analysis is correct; a quickscan of your zombie VC list and one nods head in recognition.  There a few fundamental flaws with the current method though, though I am still very happy someone is getting the ball rolling in driving transparency.

She tries to use normative rules for what defines activity. Like any binary method it’s prone to fail, either because of inaccurate data or discrete / unannounced deals.  Ideally one would recognize that the data is inaccurate and instead of making an A and a B list would compute an index of activity and determine who’s “most likely a zombie” or “most likely active” instead of including teams Shasta Ventures in the “bad” list (given their new over-target fund was raised in late 2011, not a credibility builder).

Funds could be ranked according to their activity score or even better a holistic score that would take into account their own announced fundraising data combined with assumptions about investment period (few funds have more than a 5 year investment period).

Any zombie firm can make a few seed investments late in its life to maintain the semblance of activity. Conversely many highly respected firms like Benchmark indicate their strategy does not include doing seeds.   A bunch of firms will simply not do series A. How can Emergence Capital Partners appear in a blog post called Zombie Firms ?

How To Spot An Active Early Stage Firm

The bottom line : I love the initiative but the “Rules for spotting a Zombie Firm” should more accurately be turned around to say “Likely Indicators that you are talking to an active Seed or Series A investor”.  Less dramatic but probably more useful.

So how do you spot an active venture firm in the early stage world:

  • Has raised a fund in the preceding 5 years at most (most firms have a 5 year investment period)
  • Displays a regular pattern of activity in seed (if such is their strategy) and an active presence on AngelList
  • Acted as lead investor or named new investor on a number of investment in the last [12] months
  • Displays a regular pattern of thought leadership and ecosystem development activity not geared towards limited partners but towards entrepreneurs, indicating the desire to build mindshare and dealflow for the future

No hard and fast rule will tell you whether an investor is out of the market, but you’re getting the clues.  Keep an open mind and remember that people without money may be ready to help in other ways.

Last piece of advice I would not use / waste VC meetings to try and “turn the table on them” and due diligence the crap out of investors.  Do desktop research and ask market players.  

However any venture capitalist should be able to tell you exactly how much they’ve raised and how much they’re looking to invest in the coming year.

For us at Atlas Venture Tech, we’re looking at approximately 12 seeds (average check $400K) and 4 or 5 Series A investments (average check $4M) … if we can find the entrepreneurs to partner with !

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  • Jay Caplan

    Great advice Fred. For desktop research on life science VC’s, I list recently-raised life science venture funds on my blog at http://jaycaplan.com/category/fresh-money/ What other sites might be useful for desktop research?

  • http://cynthiaschames.tumblr.com/ Cynthia Schames

    Thanks for this very balanced view, Fred.

    I’ve heard a few VCs in the past couple of days say things like “we know who the zombies really are”, which is likely true, since you spend all day, every day, focused solely on this–and are privy to much more candid discussions with and about your peers than entrepreneurs will ever hear. As an entrepreneur, though, we only can dedicate a portion of our time to navigating the ecosystem–funding is obviously hugely important to us, but somebody’s also gotta build the thing, market it, maintain it, and figure out what’s next for it.

    So any and all frank discussions–whether from Danielle’s much more (unintentionally?) bombastic approach, or from your much more reasoned and likely better-informed take–are helpful for us.

  • http://twitter.com/rodley John Rodley

    Spotting a likely zombie is easy, thanks for the Field Guide. But zombie firms are made up of people, zombie vcs if you like. What goes through their heads as they’re draining the lifeblood (I.e. time) of an innocent, starry eyed entrepreneur? After all, they must have had some affinity for founders to become vcs in the first place.

  • http://twitter.com/alberthartman Albert Hartman

    While I agree with the statements that better metrics would give more accurate listing of zombie investors, and that the VC community knows much better who the real zombies are, this is of little use to the entrepreneur community. Danielle used a public database that is accessible to industry outsiders, and interpreted the data in a rational way – it’s the best info easily available. Therefore, right or wrong, these are the opinions on VCs startups looking to raise money will use until something better AND ACCESSIBLE comes along.

  • FAKE GRIMLOCK

    ASSUME EVERYONE A ZOMBIE UNTIL PROVE THEM ALIVE!

    ZOMBIEAPOCALYPE OR WHEN PICK VC.

  • http://markbivens.com/ mark bivens

    Love your post. I fear the zombie invasion is worse here in Europe. Government-sponsored funds and retail investment vehicles feed the zombies for longer too.

  • Eric Schreyer

    Hey Fred, it’s permitted to post ZOMBIE VCs at Crowdinvesting News as a guest post? I would appreciate it.
    Cheers! Eric

    http://www.parabanking.blogspot.com

  • http://www.facebook.com/bryan.shepard Bryan Shepard

    Fred, thank you so much for your honest and straightforward opinion, on a subject that should be clear to both parties. I really appreciate the information and links you’ve presented in your article, just as I valued the information that Danielle put together. Both have and will continue to be incredibly useful resources, in that we are currently raising a Series A round. Thanks again!!

  • http://twitter.com/EdGrapeNutZimm Ed Zimmerman

    Your post sure is better than the article to which it refers. That said, rating VCs by the #s doesn’t compute for me. One of my friends regularly emails me to ask: “Met ___ today. U know him/her? Good witch or bad witch?” You definitely need friends with inside scoop to apprise you of the goings on in the industry so we do need more transparency. Perhaps asking funds to show their investments (even without disclosing the name of the company) by date would be helpful. When you give investors (funds and people) a Zagat score, you do an enormous disservice to the process and the value add these groups and people provide.

    We will, for sure, discuss this tomorrow at FirstGrowthVN!

  • http://www.howardlindzon.com howardlindzon

    Tom and I at SocialLeverage are very active so while the post is interesting, there is much to much inference or drama here

  • http://www.howardlindzon.com howardlindzon

    I mean from the original post that she got this meme started with.

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