Zombie Startups: Should They Shut Down or Keep Going?

Summary

In this conversation, Dalton and Michael explore the concept of 'zombie startups'—companies that are operational but stagnant, with revenue and customers yet lacking growth and energy. They discuss the emotional and practical challenges of shutting down, ethical obligations to employees and investors, and the limited paths of exit: shut down, acquisition, or IPO. For startups that choose to persist, the hosts emphasize the need for radical, uncomfortable changes, questioning assumptions, and leading with conviction. Key insights highlight how urgency, focus, and bold experimentation can revitalize a struggling company or guide founders toward a responsible exit.

Takeaways

• 😀 A zombie startup is one that is not dead but lacks rapid growth, making it feel stuck in a state between life and death.
• 😀 Zombie startups often have low energy, with bureaucracy creeping in and processes slowing down, making it hard to regain momentum.
• 😀 Founders of zombie startups should not feel guilty about shutting down if they’ve tried their best and acted ethically—failure is often a part of the journey.
• 😀 Shutting down a startup can offer relief, as it frees both the founder and employees to move on to new opportunities, with a clear plan and timeline.
• 😀 Investors usually expect the startup to fail at some point, and if the founder has worked hard and smart, they have fulfilled their obligations to investors and employees.
• 😀 Raising more funds to cover up a lack of growth or hiring more people won’t fix a zombie startup—doing so is a false escape path.
• 😀 The most effective way to rescue a zombie startup is by radically changing something about the business, not relying on incremental changes that have already proven unsuccessful.
• 😀 Founders should embrace uncomfortable actions and explore radical ideas they’ve previously avoided to break free from stagnation.
• 😀 In zombie startups, there are often sacred cows (unchallenged practices or features), and questioning these assumptions can lead to surprising improvements.
• 😀 When facing a zombie startup scenario, having strong conviction in a course of action, even if it’s wrong, is often more effective than indecision and hedging across multiple options.
• 😀 Even if a startup isn’t working, the founder’s knowledge and experience in the industry and with users is invaluable, and their next venture is likely to benefit from that accumulated wisdom.

Q & A

What is a zombie startup?

A zombie startup is a company that is neither dead nor thriving. It has enough resources to stay afloat—such as revenue, customers, and payroll—but it is not growing quickly or at all. The company is stuck in a state between success and failure.

What are the signs that a startup is in zombie mode?

Zombie startups typically show signs of low energy, lack of excitement, and a heavy focus on processes rather than growth. There’s often a sense of waiting for something external to trigger a turnaround, and dev cycles slow down.

Why does the bureaucracy increase in zombie startups?

As a startup slows down, it often adopts more bureaucratic processes typical of larger companies. These processes—like quarterly planning meetings—slow down decision-making and dev cycles, as there is less urgency and fewer immediate goals to focus on.

What is the emotional toll on founders of a zombie startup?

Founders of zombie startups often feel the weight of personal failure and the burden of letting down their employees and investors. While they may have processed their personal failure, they still feel obligated to fulfill their commitments to others.

Should a zombie startup shut down?

Shutting down may be a responsible decision if the startup is no longer growing and all efforts have been exhausted. If a founder has acted ethically, worked hard, and tried smart, they’ve fulfilled their obligation—even if the outcome was not a success.

How can a founder decide whether to shut down or keep going?

The decision comes down to honestly assessing the situation. Founders should evaluate their company’s trajectory, ask themselves if they’ve exhausted all options, and consider a clear timeline for shutting down or trying something radical.

Is it possible to turn around a zombie startup through fundraising?

Fundraising is not a reliable way to save a zombie startup. Simply getting more money doesn't fix fundamental issues, especially when the company is not growing quickly or innovating. Many founders mistakenly believe that just pitching a trendy idea can attract investors.

What is the importance of conviction in a struggling startup?

Conviction is crucial for a founder. Even if a decision is wrong, strong belief in that decision can rally the team and push the company forward. A founder must show clear direction and belief in their vision, even in uncertain times.

What role does radical change play in reviving a zombie startup?

Radical change is often necessary to break out of zombie mode. Small incremental improvements usually don’t work, so founders should look for drastic, uncomfortable changes that might radically shift the business trajectory.

What is the value of having a clear timeline when trying to get acquired or shutting down?

A clear timeline is essential for making decisive actions. Without it, the process becomes amorphous and can drag on endlessly. Setting a deadline for acquisition talks or shutdown ensures that the founder has a concrete plan and knows when to move on.