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.
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  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!
Fred Destin is a Partner with Atlas Venture in Cambridge, MA. You can find this blog post, as well as additional content on his blog located here. You can also follow Fred on Twitter (@fdestin) by clicking here.