[A thread on 'Zombie Startups' in Europe]
Here's a paradox: the healthier the European startup ecosystem gets, the more difficult it is to make the difference between lively startups and zombie ones.
That's because there's now much more for the zombies to feed upon 1/
When I founded my own startup back in 2010 (in Paris, France), there were zombie startups all over the place. Mine eventually became one.
The process was simple, it went through three steps.
☑️ You start thinking you're the next Google
☑️ Then you go back and forth between designing a product for consumers and selling some version of that product to a corporate client
☑️ In the end, you're just one more agency that calls itself a startup—eg a zombie!
Today, many more people are interested in startups and there are many more resources that startups can access to stay alive even when they should be dead.
Here are the steps that most zombie startups follow (checking boxes)...
☑️ The first step is inevitably to raise money from dumb/ignorant investors who couldn't care less about your startup: that would be the government / unemployment benefits in France / tax-incentivized angel investors in the UK.
It buys you 12-18 months of runway.
☑️ Once you have some version of your product, it's time to attend many pitch contests, be introduced to journalists, make yourself known.
That's when you start attracting the attention of VCs with no deal flow. You're already in talks for a seed round, even a series A.
☑️ Your product will usually hit the market following that round. Why hurry? You have a longer runway now!
But the product is a failure: consumers are not interested. And now you have real investors on board. It's time to panic. How do buy a longer runway?
☑️ Here's the secret: by refurbishing your product into an enterprise product! White-labelling it.
☑️ Also, you should hire CxOs with experience on enterprise markets, and those are actually interested in your startup—because everyone wants to work in startups now!
And because you already have a relationship with journalists, you can raise your public profile and boast about your credentials: you raised a lot of money (with lousy investors), you have a senior team (with no product to sell), you have interesting things to say (🤔).
☑️ That's the phase of what I call (in French) the "entrepreneurs de salon"—a particularly vicious kind of zombie entrepreneurs: everyone knows them in town because they're spending their time speaking about entrepreneurship to ignorant people gathered in salons.
When you're a real entrepreneur, the multiplication of zombie startups led by "entrepreneurs de salon" is particularly painful: start talking about your (lively) startup and people will inevitably reply with "Oh, you're like XXX. He/she's wonderful. Do you know him/her?".
"I read an article in the press. She won a pitch contest. I heard him speak at a conference. They raised a ton of money. They're working with corporate A or B."
☑️ Needless to say, at that stage it helps to throw fancy words around: "big data", "chatbots", "AI", "crypto"
[Note that nobody has paid for a product yet.] The next stage is usually...
☑️ A new round of financing, because those investors already on board don't want to lose their money and they somehow believe in the enterprise / white label strategy. An even longer runway!
At that stage, investors may or may not change the CEO. If the founder is really charismatic, well-liked in the press and in the corporate world, they can manage to stay on board. In most cases, they'll be removed from day-to-day management, but the startup is still alive.
And then the next stage is...
☑️ An ICO of course! Time for a payoff for your public profile. And if the ICO actually works, it buys you an even longer runway.
See @bhorowitz about bad companies having an ICO: https://www.youtube.com/watch?v=l7QdIQVTly0 …
BTW at that point those engineers you hired have had quite a lot of time to develop some kind of technological core product which in itself has some kind of value. And so it's highly probable that...
☑️ The zombie startup saves face by getting acquired at some point!
It won't be a high price, and with liquid pref the founders won't make money, but it makes it possible to hide the fact that the startup was a zombie.
Everybody's honor is safe, and most people are still unable to make the difference btwn a zombie startup and a lively one.
Now go through the list again and you'll realize that because startups are more of thing today than they were in 2010, zombie startups have a much easier time staying alive and looking like actual startups, even when they should be dead.
Hence the paradox: the healthier the ecosystem, the harder it is for lively startups to stand out because the zombies are much stronger and more numerous!
Don't forget to read Mathias's story on zombie startups 🤗