That friendly VC you met on Zoom might not be what he seems. He might be…the undead!
Zombie venture firms are firms that can’t raise a new fund. So, they have no money to make new investments.
Zombies proliferate in every down market. But they’re not easy to spot.
They continue taking meetings and even diligencing companies. But the check never comes.
As a founder, you don’t have time to waste with the undead. So how do you spot them?
Let’s assume you’re raising a Series A. Here are some red flags to look for, from Danielle Morrill’s excellent blog:
• They haven’t made any series A investments in the past 6 months
• They haven’t invested outside their existing portfolio in the past 3 months
• They haven’t made ANY investment in the past 3 months (after a more regular pace in the past)
• They tell you they’re re-focusing on later stage deals, or raising a new fund
If someone says he’s a Series A investor but never makes any Series A investments, you’re wasting your time. And with runway more precious than ever, you can’t afford it.
There’s also nothing wrong with asking the VC to connect you to the founders of their recent investments. You should diligence them just as carefully as they diligence you.
After all, this could be a ten year relationship!
Making sure you’re talking to active firms matters most in a down market.
New managers raised tons of new funds at the peak. Many invested at the top of the market and will struggle to show returns.
Even worse, investors in venture (known as Limited Partners or LP’s) are pulling back. They’ve been clobbered in the public markets and have little spare cash.
Bad returns and a weak LP market means many newer venture funds are walking dead.
But no one wants to be embarrassed! So zombie VC’s often act like normal ones, taking meetings and diligencing deals.
In reality, they’re counting the days until their firm is no more.
I have compassion for the zombies — it’s a hard position to be in. But as a founder, the VC’s problem isn’t your problem, and you have no time for it.
Stick to the active players, raise your round, and get back to work!
Have you met a zombie VC? Leave a comment and let me know!
More on tech:
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