Zombie unicorns are haunting Silicon Valley

This is I think a very common issue. The term "startup" has two connotations: a nascent business trying to find its product/market fit and "a private business whose capital structure is dominated by VC money"

Companies that fall out of the first definition -- they've found their market, such as it is, but it's smaller, more competitive etc., than is needed for hypergrowth -- but are still in the second definition are in a bind. They've generally used up all their ideas, and have created a nice, small business. This should be a win, but in SV it's the worst kind of failure. The VCs aren't going to want to book a loss, so the company thrashes about trying to figure what else to do while trying to keep its business running. They should and ought to be evaluated using normal accounting, but that would mean the value of the business is a fraction of its "valudation"

This ends in the company being strangled by its own mal-investment, or sheer exhaustion when everyone, the management and the VCs, face reality, take the L, and leave the business for private equity to run off the remaining terminal value. Maybe sometimes this becomes a lifestyle business, but more than likely it's just a transition from the washing machine of "this month's great idea for growth" (they never pan out) to the grind of cost-cutting and extracting any customer surplus out of the system, leaving everyone miserable.

It also peaked during the COVID lockdowns, lots of actors needed alternative sources of funds. Maybe the numbers for 1BN came from multiplying revenue into the future, or hell, expecting it to grow even.

I'm assuming there is a lot of local competition to Cameo in other countries?

As it has a large potential market if it did dominate globally.

I know a few who are really feeling the pressure from customers now being able to vibe code part or their product and also their cloud bill is about to explode because hardware prices are through the roof

To soon be scooped up by bending spoons

Yeah, but burn rates are high. The money is mostly gone by now, and the run way is approaching its end in the next 12-18 months. Hence the “great devaluation “ they are predicting

do startups typically receive interest on their investment rounds?

> There's no interest rate on VC investment, and if profitable it can run forever.

This isn't how VC funding works. The fund has a time limit, usually ten years, and has to wrap up and pay back in that time limit.

If your company is not profitable in that time limit, tough. The VC will exercise whatever rights they have and pull whatever they can out of it.

> Of course the VC investment model is high risk. That's kinda the point. It's a bet on IPO or (valuable) acquisition. Most companies end up as neither.

Cynically, I wonder how much of the insane (even in the moment) valuations were driven by VC firms trying to commit capital so they could collect management fees?

Even if a company is profitable, depending on voting interest and board control the investors may be able to force a sale.

> If the company itself is profitable, then typically it can continue.

I only wish, but rarely. This is one of the great tragedies of the grow at all cost system. There have been so many great profitable companies, where the product is great, customers love it, employees love it, everyone is happy.. except it's not growing fast enough to satisfy the leeches so it gets destroyed.

As a society we should be supportive of small companies that make a great product that everyone loves, pays good salaries and makes a profit. The more of those, the merrier. But no, unless growth is on the hockeystick curve, private equity will destroy it sooner or later.

> Indeed it may start to lead to saner valuations along the way.

SpaceX’s valuation + “data centers in space” being taken as a serious pitch leads me to think it’s only getting worse.

> Companies being devalued is not news. It happens on the stock market everyday

TFA points specifically at "recent funds" that have underperformed public markets.

  More recently launched funds have been returning markedly less money to investors than those of earlier vintages, according to the World Economic Forum. They have also underperformed the S&P 500 by a wide mark, particularly those that did not invest in a small club of artificial-intelligence superstars, says Mr Cohan.

Power law at play, apparently: High risk with high rewards only for the top 5%.

  ... already, just 5% of them produce 90% of its profits.

Agreed. It's gonna be space, then robotics, then quantum robotics, then quantum solar nuclear robotics.

I think it depends way more on where and how much the wealth is concentrated than anything else

I'd be interested in any examples where a "zombie" company in the US was sloshing around for a few years and then finally found product market fit. I think it's probably incredibly rare, and I don't think it's really that hard to identify weak companies that have been treading water for years as you appear to think.

Down-rounds are very undesirable though. So those 332 likely have not had other options. True number of companies that wouldn't really be valued as high as their peak raise is probably higher, but some of them have been able to find enough revenue or other sources of funding in order not to raise and be valued down.

Worse is if you paid taxes on that $100k valuation but it is only worth $25k now.

If this is your situation consider asking for an ISO to NSO conversion. Many companies these days will allow you to do this, as they’ve realized it’s in their best interest to not retain checked out employees

thanks

> There valuations are always based on expectations of huge growth, not current value.

They're primarily a function of fund size. Everything else that can be fudged is fudged in order to make it look sane.

Funds make their money by taking a cut of AUM. Thus, they're incentivized to make bigger funds. They also can't spread out their portfolio over hundreds of tiny investments without losing control, so they need to write big checks. When you write a big check, the founders need a big post-money number to maintain a reasonable percentage of the cap table. It doesn't hurt that big valuations make everyone look better.

As money flooded into VC, the funds got bigger, the checks got larger, and the number of unicorns shot up in direct proportion to the number of large funds competing for their equity. The revenue projections used to justify this charade were never really important, and couldn't be proven in any case.

It's indeed not that black and white. Growth and revenue can happen quite early and they are usually seen as signs that a company might eventually become profitable. The whole point of VC funding is to put all available resources in growth, not in profit. Investments in profitable companies aren't really venture capital investments. Different class of investors that do that, generally.

Where the whole thing starts looking like gambling is when companies get huge rounds based on essentially no proof whatsoever that the thing will ever grow or have revenue. And when the idea is basically "we'll pay famous people to send greetings to people" we're in obviously stupid money territory. That was never going to have the revenues to back up the inflated valuation. And somebody still sank a few tens of millions in that to find that out the hard way. That company had a paper valuation of a billion. But it doesn't necessarily mean all those tens of millions were spent and lost. Investors might commit the money but it's usually conditional on growth targets and milestones. When shit goes south, they'll pull the brakes and the money stops flowing. Good investors wouldn't wait until all the money is gone to do that.

The reason these investments happen is that VCs mostly aren't investing their own cash. They are being paid to make investments and to inflate their portfolios. By the time the shit hits the fan, they'll have gotten their payoff. It all looks great until it doesn't. And inflated valuations make them look shit hot even when they are clearly not. This attracts more capital for them to invest.

Of course at some point the shit does hit the fan and the money evaporates. That's when you get acqui-hires and other constructions that are usually portrayed as a successful exit that, again, makes the VCs look like they know what they are doing. This is all about damage control that is about both financials and reputations. Never mind that it's effectively a fire sale at that point. But investors get to swap their bad shares for good shares, and founders get to work in somebody else's company for stock options. And the "buying" company gets some nice people and they stay best buddies with the investors they just bailed out who might typically also be investors in those companies. In the end the madness gets written off against the overall fund performance. It only takes a few good gambles to work out for everybody to come out smelling like roses.

> It's like asking someone playing roulette to value "13 black", after they bet on it.

Even worse, because you don't get better odds or payouts by persuading others to bet on 13 black, but you do when they invest in the company you've backed.

I have a few friends who have gone into VC either starting their own or an existing. Hearing about some of the companies they are invested in makes me realize that half of these show HN posts are legit multi billion companies already with 2-5 person teams. As you’ve said, low to zero profit, and seemingly no corner on the market.

It’s like coin collecting, without the currency part - just hoping someone one day sees it, and wants to put them on their coin on their shelf. I can’t make sense of it, maybe that’s the point. I miss when VCs cared about helping people change the world, better or worse (ideally better).

>Their valuations are always based on expectations of huge growth, not current value. Growth predictions with an extremely low confidence level. VCs make up for it by making a lot of bets.

all valuations are based on expectations of the future, that's what the stock market is. Except VC valuations which are based on how much money was invested, extended to cover all the equity rather than just what was purchased. However, the amount of money invested was calculated based on expectations for the future.

the definition of the term "asset" is "something expected to have a value in the future"

current profits (The actual measure of value) that would justify their valuation

That's...not how value works at all. If it was, all of these rapidly growing companies that haven't made a profit yet would be worth zero. Would you pay $1 for any of the big AI labs? I sure as fuck would.

Value is more about the present value of future cashflows. And it turns out that estimating future cashflows of extremely fast growing companies is really hard.

This is why, all these people are called founders and never entrepreneurs an almost dirty word in VC circles...

I think you are missing the point. I think the software business has become undesirable for VC investment. I am seeing that in the market from the otherside. People think there is no moat. Which I absolutely disagree but yea.

VC invest is same as buying a house. Someone has valued your house is worth x, thats why it is valued at x. There were people willing to invest at 1B valuation now they are not. Market has moved. Imagine, if the area where you bought the house, suddenly is not desirable or theres no one willing to pay for it, then value of your house will go down, in some scenarios to zero. It is as simple as that.

This is not the whole story. While there may be some value in terms of marketing to claim a higher valuation there are also many downsides to a higher valuation which in turn for example leads to a higher fair market value that makes executing stock options on a private company extraordinarily costly from a tax perspective. Admittedly the holders of the preferred stock like investors might not have the same incentives as the people who are given stock options but their interests are largely aligned in that they're both interester in retaining great talent and making the company successful (eg valuation higher) but later

NO. You need to stop pretending that gambling is good and take some social responsibility for the massive class of people in the second-tier service economy because of chronic under-investment in "low growth" industries.

>> The companies NEVER have current profits (The actual measure of value) that would justify their valuation.

Lol. "Profits" is old person talk. Nobody needs profits. The most valuable company in the world hasnt shown a dime in profit. That doesnt mean everyone cannot get rich. You just have to know the right people. That is all that matters these days. Having profits also means paying taxes... a fools game. Profits are just a sign of a weak expansion strategy and so will generally reduce valuations!

[dead]

> 17 black

Let it ride !

> We need to stop pretending the VC valuations are meaningful.

When I was a kid, the valuation of a company was based on the amount of profit that it did taking into account the cost of getting it.

The day that the USA abandoned capitalism for speculative-finance was a bad day for the world economy.

It's funny you say that because you can absolutely value 13 black after it's been bet on. It's actually really easy, I would expect a middle schooler to be able to do so and intuitive understand the concept.

Follow-up question: why upvote an article that you probably can't read?

You can do anything with Zombicorn. The sky is the limit, with Zombicorn. Welcome, to Zombicorn.

I think you're right in a sense. But some of these "healthy companies serving customers and creating jobs" have taken a 50% haircut on their valuation, which puts them in a difficult position regardless of how reasonably they are doing operationally.

Yeah, that really is a horror show. The hidden problem with the zombie firms is that as the liquidity dries up larger VC's firm will end up becoming private equity firms.

Can you give some examples of companies that are series J that you see as having a realistic chance of IPO?

now this wants me to scan a QR code with a mobile device?

You need a better explanation of why you think the market isn’t functioning here.

Seems like a classic case of “putting your money where your mouth is” - if you think the valuation is wrong, don’t invest.

(Of course that only applies to those able to invest, but the same principle applies.)