How ‘Zombie’ Startups Can Bring Themselves Back to Life

These aren’t the best of times for consumer and e-commerce startups.

Night of the Living DeadAfter years of seemingly unbridled access to venture capital, many have seen funding slow to a trickle. For some, investors are wary of their slow growth. For others, investors are wary of pretty much everything, and so won’t put in any money at all. Either way, investors’ caution is threatening a number of these companies, “zombies,” in Silicon Valley parlance.

It’s unclear how many of these startups are in such straits. Anecdotal evidence suggests it’s a pretty significant percentage. Many are coming up with new strategies to reinvent themselves. They’re offering new services, restructuring their operations or tweaking their business models.

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Danielle Morrill, co-founder of Referly, a San Francisco-based venture that helps consumers make money by referring products to others, has been one of the most vocal voices in calling attention to the zombies’ challenge through articles for high-profile national news outlets. The fundamental problem, she says, is that many of their business models simply aren’t working.

“The other part is they’re in denial,” she says. “These people fundamentally have businesses not generating value. The cost of acquisition might be too high. The market might be smaller than they’ve realized or it’s more competitive than they’ve realized. Also, they might not be executing very well and might not be capturing opportunities.”

When was her company started, and how much money has it raised to date? Did she have difficulty raising it, or run into some of the VC objections you mention in the story?

Plain Old Business Challenges

Is this a new problem, unique to tech startups? No, Morrill says. It’s been going on forever. “I just think people are talking about it now. Most of the venture capitalists I’ve spoken to say, ‘Thanks for writing something I’ve known for a long time.’ It’s an important conversation. It’s like the conversation you have if you’re dating.”

Morrill knows of what she speaks. Referly has had to do some tweaking of its own. To date, the company has raised $1 million in venture capital. While many VCs balked at her business plan, Morrill points out that what matters is she was able to raise the money. In April 2012, the company purchased LaunchGram, a zombie service that keeps people informed about new product releases. “So far it seems like the right decision,” Morrill says, though she admits it’s too early to predict success. “It leaves room for us to do things people do want.”

Martin Pichinson, co-managing partner of Sherwood Partners LLC, a technology re-structuring firm in Mountain View, Calif., believes the term “zombie” is a misnomer. What we’re witnessing with these startups, he says, is natural for the business cycles of emerging industries.

These startups struggle because “they didn’t hit the tipping point at the appropriate time, or should have changed direction a little sooner,” Pichinson explains. “Palm was successful in the early days,” he notes. “Because they weren’t successful didn’t make them a failure. Everyone was experimenting at the time.”

To avoid a living-dead fate, young companies have to focus and believe in what they’re doing and where they’re going. “It takes a lot of time, fortitude and a lot of belief, and you’ve got to watch the money you’re going to spend,” Pichinson says. “The key to the validation process of a company isn’t the first order. It’s the second and third orders.”

Image: Fearnet