This is Dalton plus Michael. And today we're going to talk about zombie startups. Dalton, tell me, what is a zombie startup?

Okay. Yeah. So this is another one of those where we're going to kind of use our own internal lingo that we've been using for a long time. And maybe it'll, it'll resonate with the world and maybe it won't. So a zombie startup is a startup that is not dead. Nope. Like it's there's money in the bank, like they're making payroll, they have revenue, they have customers. But it's not really growing. Not growing quickly. It might be growing a little bit, but it's not growing fast. And so it's not living per se. It's in a interesting state between living and dying, hence the name zombie. Usually the mentality of a zombie startup is different than a super fast growing one where there's kind of like low energy. There's sort of just like going through the motions. Nothing that exciting is happening. And it's always like, it's like you're waiting for something to happen. There's a lot of stalling for some event, external event to happen.

I honestly think one of the things that characterizes zombie startups after a while is like the creep of bureaucracy and planning and the kind of big company thing. And the slowing down of of death cycles. It's almost like the metabolism of the company is slowing down. It's like the cell is aging. It's less efficient...

Yeah. When you have PMF and you're growing really fast, your job is just to hold on. And you're like, oh, this is chaos. Every day is like a firefight, and you're just trying to make it. When you're not growing that fast, what will often happen is process seeps in. And everyone's like, oh, it's time for our quarterly planning meeting. And suddenly, there is no chaos. There is no excitement. And parts of the company that are more process-oriented tend to take over. And so it can feel really slow.

Well, and arguably the planning is the thing that's exciting. Like the products, not that exciting. The user growth is not that exciting. The planning becomes the thing that's exciting. So, you know, when there's in the state, it would be remiss for us to not talk about like, should a company in the state shut down? Does it mean to shut down?

Yeah, I think to speak to that, you know, Every time you start a startup, there's only a few things that can happen, which is you shut down. You get acquired or you IPO. Isn't that weird? There's only three doors you ever really can go down.

And let's not talk to like those doors are like equal in terms of frequency.

Well, how many people go through the IPO door? We know, you know, it's not a lot. acquired? Okay, it's a decent amount. And then shut down is up there. And I think a lot of folks...

Dalton, shut down is the expected outcome. ItIt's up there.

You're int the top three, Michael. I don't know where it ranks. Look. People don't talk about it a lot. Again, this is not the most engaging content of this, but like let's, because I haven't seen much content about Shutting Down, let's just talk about it for a second. What does that actually mean?

So I think that the most common two emotions that I see amongst founders, the first is the kind of personal failure emotion. But I'd argue that like by the time I'm talking to them, they've kind of processed that. The second set of emotions are their obligations to others. And that really grinds on founders. Like I made an obligation to my employees and I made an obligation to my investors and I've let them down. And the most common thing that I say is in that situation is one, like, did you act ethically? Did you work hard? Did you lie to people? Did you run the experiment that you tried to run? And like, if the box is checked on all those four, like you fulfilled your obligation. Your obligation to all of these people wasn't to win, right? Because the expected outcome is not winning, right? The obligation was to try hard and try smart and try ethically.

When I can break through with the founder, you can kind of see the relief like, oh, you know, I did try hard, like, you know, like I did, like, and I try to kind of convince them on the investor side, hey, the investor's hedged. no good investor is making their hay on you winning or losing, right? And we're trying to convince them on the employee side. It's like giving the employee the freedom to do the next thing in their career is a gift versus strapping them into a zombie startup is not really a gift. So to me, when they're considering the shutdown, it's a lot about getting through these emotions because the actual kind of mechanisms are not that hard.

Yeah. Like I think, Again, there's not much content about it, but the hard part is emotions. If you can get through them, the mechanics are easy. And you probably have a lawyer if you raise money, so you can get advice from your lawyers. And if you have an investor who's sophisticated and done a lot of investments, and you're just like, hey, we're going to shut down. Here's why. They'll be like, OK. And they'll give you advice. And so I do a lot of those office hours with founders, where I kind of walk through the mechanics.

Again, the key thing is to get really clear and to put a timeline on it. And so sometimes people have these really amorphous ideas to get acquired, but they have no idea how to begin and there's no timeframe on it. And that never works. And so if someone decides it's not working in their zombie startup, it's like, okay, well, give yourself two months to try to get acquired, put a timeframe on it. Let's go through the mechanics of doing introductions to potential acquirers and talking to people, try it. But then once you hit that timeline, If you don't get acquired by that date, you should just shut down. And it's totally cool. And it's almost like a relief for them to hear that it's not this like endless process. It's actually straightforward. Doesn't mean this can be a great outcome, but the way to get out of a zombie startup is not that hard.

I think that speaking on acquisitions, I think one of the challenging things that I do when I give advice is, I think there's an assumption that acquisitions are far more common.

It's because you only hear about the ones that worked. They're like, congratulations, we failed to get acquired. There's a big warping of how common these are.

Then I think the second one is, the number of acquisitions where there are tech crunch posts, an asset sale, and a job offer. Where suddenly it's like, oh, you thought that when you read about an acquisition, you thought everyone got rich. It's like, mm, that's even less common.

The other thing I talk about a lot with acquisitions is that it's really hard to go from no relationship with a potential acquirer to an acquisition in two months. So it's like there's a set of companies maybe been interacting with, that they've been acting with you and so forth. Those are awkward conversations to have, but to have in your mind, there's almost be like a fundraising process and like I'll go from like not knowing this investor to like this investment being on my board in three weeks. way less common in the AccuHire world.

And the last thing I talk about is just like, does your revenue matter to an acquirer? Like if you're, let's say a one to $20 million revenue company that's growing less than 10% year over year, and the company that's buying you generates a billion plus in revenue. it doesn't move their stock price, it doesn't do anything. Like the revenue doesn't do anything. Like, so shouldn't I be valued at 10 X my revenue? It's like, ah.

I think the real talk is like, once you're to the point of being a zombie, the odds that you will get rich from an acquisition are effectively nil. And I would actually frame it in a different way, which is if you're working at a place that is not growing, you're taking an opportunity cost on your life by continuing to work there versus doing something else. And so the actual reward is to do something else.

Yes, yes. And like, not getting out, probably an aqua hire.

Yeah, let me anonymize a couple of details, but I can think of someone that made this choice not because they were out of money. And they ended up getting a very good job at one of the labs. and I'm sure they're very happy. Like they made the decision shut down like four years ago. And yeah, I think that was pretty smart.

I think that we are independently thinking of people.

Yeah, I'm changing some details, but that was a very adult decision to make. And like, yeah, that was the smart move.

And then also we'd be risk to say that if you want to start another company, Oftentimes those same people, if you shut down your company responsibly and well and you communicate clearly those same people often want to invest in your next company.

So we've talked about shutting down. Let's now address people who don't want to shut down. I've got this thing going, I love it. Help me figure out how to make it work. And I think to start there, I kind of want to talk about the things that won't rescue you and just get them out of the way. Hiring a bunch more people like some last kind of splurge.

Let's burn all the money before. That's the ticket.

Yep. The secret executive, it's really the chief of growth or the chief of monetization who's going to turn this thing around. You know, they'll tell you to send more personifications. Spam or other kind of low ethics way of juicing sales. Like, hey, we have this leaky bucket. Let's just shove as much top of funnel as possible. Fundraising, well, if investors just give us...

yeah, we'll just then pretend like we're growing. They won't notice that we're not growing and they'll give us money, right?

Yeah, especially if we're pitching something that's like on trend. We have this cool AI idea. But let's give us money for that, right? That's what investors do. So false escape paths. What are good escape paths?

I think that like a lot of things in life step one is to admit you have a problem and to be honest about it and it's surprising how often people are just in denial where like part of their brain knows there was a zombie startup and part of them is like well you know but but there's like all these excuses there's all this cope yeah and so I think you just have to like yeah get real this isn't working we're not on the right trajectory yes and then what I would usually tell people is to kind of like have like a come to Jesus moment about how you're gonna radically change something about the business. Because a bunch of small incremental changes that you've been trying for the past year or two, that hasn't been working, right? So you need to do something radical. And there is a risk that you do something that's radically wrong, but I'm arguing you're kind of dead anyway. So again, this is the logic. If none of your current efforts have worked, you need to do something that you would never do on your own. You need to do something so uncomfortable. Because your current tactics haven't worked. And so I'll encourage founders to be like, what's something that seems way too radical or scary that you never would have thought trying before? This is permission, why don't you try it?

And I would say, often what's the challenge with that is sometimes these teams are too big. And, you know, the feedback we get from the founders, like, oh, well, like this person would say, or what about this department?

Yeah, our director level.

Yeah, yeah, I'm gonna have someone. And it's like, you have permission to maybe ask some of those people to leave. Because, hey, the ship's going down and like, They're not helping write the ship. And so, often it's easier to steer a smaller ship.

I think the other thing I like to talk about when I see founders in situations like, let's bring back the pre-product market fit playbook. I think very few things about a product should be sacred when a company is pre-product market fit. Everything should be questioned. And oftentimes in the zombie company, they're just assumptions about how the product should work that like haven't been questioned in years.

I was talking to a startup the other day and they were showing me their onboarding flow and it was a fucking, it was just like a nightmare. And they tested it, the AB test, this is the local maxima of this bad onboarding flow. And crazy enough, they were working on a completely different kind of product as just like an offshoot for a couple of weeks. So they had to build a new onboarding flow from scratch. And then they were like, oh, We can, like, our onboarding doesn't have to have all this stuff. We don't have to ask 65 questions about this. Like, we don't actually have to do it this way. And you could see them being excited because they were like, oh, that means our current onboarding flow could be like 10x better. And so to me it's like, can I try to find some of the sacred cows and like unsacred cow them? Like, look at them with fresh eyes.

Yeah, you almost want to get them to name, what are the sacred cows? Like, let's do a thought experiment. Let's pretend you weren't afraid. what would you change about your business? Let's do the exercise. And then people can always come up with ones like, oh, I hate that, but I can't. You have all these justifications that those are unfixable or immovable. But hey, if you're already dead, what's the harm of changing? Some of those things, right?

No, break glass in times of emergency. And I think what's interesting, and oftentimes we joke that we see companies make the most progress when they have low runway. I think when you have low runway, that's the moment where you actually realize.

You're like, haha, it's time to get real. All those half measures, we can't do those anymore.

And I feel like if I could bottle that up, and give that feeling to the companies in the zombie mode who like, you know, oftentimes they have years of runway.

Well, let's see, irony is overfunding causes zombies, like all the unicorn stuff where there's, you know, it's way more likely to end up with a zombie when you've raised way more than you thought you needed.

Last one was point about conviction. I see a lot of founders in this position who are like, I don't know what to do. And so the solution is to hedge across five different things, right? And what do you say to the founder who's like, okay, you know, I acknowledge I'm in zombie mode. I'm gonna make a good plan. Like we're gonna figure this out. But like Dalton rationally, we don't know which one of these to do. Like I can't like, you know, shouldn't we be trying a bunch of stuff?

At the end of the day, the real job of a founder is to point the way forward and to believe harder than everybody else.

You mean it's not to sit back and send scouts out?

But it's true because like imagine working for someone and the person you're working for doesn't seem like they have a clue. Imagine you're an investor in someone and the people you're investing in doesn't seem to have a clue. And they have no vision. And so if you truly have no idea what to do, it's very hard. I don't know how to advise you. But I have seen people that have strong conviction and are wrong. motivate the people around them and then re-calibrate. Like keep changing the thing that they're strong conviction about. That totally works.

That counter-intuitively works. Starting in the wrong direction.

But like being really hardcore about it, you can get people to follow you and you could like make stuff happen if you're wrong. But if you're just completely lost.

Yeah. It's funny because when I find founders in that situation, oftentimes when I try to communicate to them, it's like, you know so much more about the user than you did when you started. You know so much more about the industry than you do. You have so many more raw materials to have conviction about something now than you did when we funded you at YC. And it's almost like, Yeah, your startup might not be working, but you are 10x smarter about this. And if we were to flip this and you were an investor, you'd be able to look at other companies in this space and you'd have some opinions about what users want, what's big and what's not. I try to give the founder confidence like that work that they did was useful. Even though that work they've done so far might not have produced a billion dollar company, it was useful and their ideas are weirdly more likely to work.

Yeah. Cause they know something. It's way more likely. Well, that's why often if they're like, I don't see it. I don't believe in the space at all. I believe them. Like he just worked on this for two years and you're telling me there's nothing here.

Yeah. I have no argument. Yes.

And so I think that's like the cool thing is that if you give yourself permission to take the big swing, it's counterintuitively more likely that swing will work because you know what you're doing now. And man, like knowing what you're doing is pretty helpful.

I'd recommend it.

Yeah, all things being equal.