We Must Kill Zombie Companies

December 15, 2010 by Ben Yoskovitz 27 Comments

zombies

There are too many zombie companies. It’s quite prevalent in Montreal, and I’m certain it exists elsewhere as well. A zombie company is one that can essentially run forever but never really gains any traction. The company may be leveraging tax credits (which some argue is doing more harm than good) or other financial incentives from the government to “survive”, but it’s survival to zombie land. And for startups that’s not good enough.

I’ve run zombie companies. I know what they look like, why we do it, and how damaging they can be. Before Standout Jobs (which itself had moments of zombification), I ran a company for about 10 years. It went through a couple iterations, so it wasn’t a simple, shuffling along kind of path. But at some point, probably in year seven or so, the company became a zombie. I blinked, time passed by, and I was still running the same old company. A zombie. Ugh.

We need to kill zombie companies. We need to kill them faster and more aggressively.

This isn’t a rant about failing fast. It’s a plea with entrepreneurs that deep down in their hearts know they’re running a zombie company to take out their giant axe, the one they used in the first place with all that awesome mojo to start the company, and hack it to pieces. Kill the company now. Don’t wait. Don’t watch (or look away and fool yourself) as your company succumbs slowly and painfully to the inevitable doom of being a zombie. Zombie companies can live so long … and they add nothing of value. As an entrepreneur you can create more value for yourself and for others. Just do it.

A fear of failure is definitely part of the problem. Admitting defeat too. Both can be crippling, but many others before you have failed and admitted defeat, only to go on and succeed incredibly well.

I also believe that a stronger startup ecosystem can encourage more zombie company killing. When you’re sitting alone in your office desperately trying to figure out whether or not you can reverse the zombification of your company, it’s almost impossible to take the necessary action. It’s also easier to pretend that things are OK. But with a strong, vibrant startup ecosystem, there’s a very good chance that you can lean on others (for advice, moral support) and spend more productive time brainstorming new, interesting ideas for new, hopeful startups. I know that I was often hesitant to leave or kill something because I wasn’t sure what I was going to do next. In a startup ecosystem that fosters constant networking, connections, opportunities, brainstorming, breakneck speed and action there’s no shortage of new opportunities to jump on. So you can kill a zombie company more quickly and aggressively, because there are plenty of options that are going to almost immediately reinvigorate you.

Zombie companies are death traps for entrepreneurs. But it’s so easy to run a zombie company and keep plodding along year after year that we sometimes forget we’re even in one. As the Montreal startup ecosystem (and others) continue to evolve and scale, I hope we’ll see more startup churn; people will kill their zombie companies faster because they’ve already jumped onto the next opportunity, found new co-founders, new ideas and are re-energized to take on the world again.

Death to the zombies!

Image courtesy of Shutterstock.

George Favvas

I totally agree, Ben. Montreal needs more failures — I mean that in a positive way.
Robert Saric

Interesting article Ben. So, my question is, how does one discover if they are in a “zombie company”? Burning cycles year-after-year and achieving the same results? I’m a big believer in the saying, “win fast, and never lose slowly” — and this article touches that nicely. This phenomenon is quite prevalent in Ottawa as well.
Anonymous

That’s exactly what I’m doing now! This post vibrates with me well.
Helge Seetzen

Great post. I think zombies are a “feature” of the current confusion between “entrepreneurship” and “small business”. The lower cost of Web2.0 business has particularly blurred the line between those two to the casual observer.

Entrepreneurship is the conversion of ideas, people and capital into massively more capital in a short period of time (under conditions of risk if you are in a free market). That’s not the same as running a small business (or “life-style” start-up). Building the later is just fine if that’s your goal, but then you shouldn’t think of yourself as an entrepreneur (and shouldn’t apply entrepreneurial thinking and structures).
Helge Seetzen

To be a viable non-zombie start-up I would think that you need at least 50% increase of your capital/valuation – either through revenue or investor valuation gains. 50% IRR gives you 5x in 4 years. Anything below that you are sliding off the radar of the venture market and into the domain of SME’s. That ought to be easy to check, though I fully admit that it is hard to make the adjustment emotionally. We value entrepreneurs because of their persistent vision, but that implicitly makes it harder for them to abandon that vision.
Craig

OK but if you have a company that got to $8mm revenue and flatlined do you kill it? What if it’s breaking even and doesn’t need any more capital? What about the 40 people who work there – do they mind that they work at a zombie company? What about the customers who believed you three years ago when you said you’ll still be here to support them?

Or by killing do you mean find a new home for the company? Sell it or get someone to run it who is fine with managing a flat business?
Mark Zohar

Ben,

I understand where you’re coming from but I strongly disagree with your black and white prescription. Let’s start with the basics: 9.9 out of 10 start-up companies will never achieve hyper-growth. 8 out 10 start-up companies will probably fail (e.g., outright closure or negative returns) in the long run. As a result, the vast majority of start-up companies will end up as “zombies”.

Now to the core point. “Zombie” companies, as you call them, may have a range of attributes and characteristics. Some of them may be lifestyle businesses that offer local employment opportunities, serve a small niche and have no aspiration of growing beyond a small scale. Others may be research focused companies that receive federal assistance. Still others may be struggling through their various iterations and pivots with the ultimate goal of finding ways to grow their businesses in a tough economy.

In all instances, these companies have founders, employees, investors, shareholder agreements, customers and service contracts that they must account for and comply with. It’s not that simple to just say, “kill the company.” There are many stakeholders and many external factors that need to be considered. Moreover, I’m not sure what you mean by “kill the company”? Are you suggesting to fire the employees, return capital to investors and terminate existing agreements? Or, are you suggesting looking to monetize certain of the assets of the company through an intellectual property, technology or business sale?

Listen, we all want our start-ups to be rock stars. But the reality is that most of them will turn out to be amateur Karaoke singers. Let’s not dump on those companies that are struggling, breaking even or not achieving hyper-growth. These companies may not end up changing the world but they do continue to employ Canadians and hopefully provide services or products that are of value to a small set of users.

Finally, to recommend that these founders kill their existing company in order to get re-energized and start a new venture that has an 80-90% chance of ending up as a zombie is akin to advising perennial “zombies” like the Toronto Maple Leafs to quit hockey and start an NFL team. Not sure that’s a good idea.
Benjamin Yoskovitz

A lifestyle business isn’t a zombie company. If the goal of the founders was to start a lifestyle business or small business, and they achieve that, then fantastic! I’m all for it.

But if your goal is to build a successful (i.e. reasonably rapidly scaling) startup, and you’ve been at it for a couple years and it’s not going anywhere, I’d say kill it. That might mean shut it down (happens all the time), or do your best to extract as much value as you can through an asset sale or some other form of exit.

We cling too long to things that aren’t working when we could be trying again, fresh start, and taking another crack at it. And if it works, you’ll hire more people and create more wealth (for you and others).
Benjamin Yoskovitz

A company doing $8MM in revenue, assuming it’s profitable, not relying on government subsidies to survive, isn’t necessarily a zombie even if it’s flatlined. The founders have a few choices: keep going, if everyone is reasonable happy and getting something out of the experience, try and innovate out of the flatlined business into something else, leveraging existing assets.
Benjamin Yoskovitz

Helge provides a formula … I see it more as a gut check. If you went into the startup with big aspirations, and it’s not working, you don’t know where to pivot and you’re skating along, surviving off government tax credits, a bit of revenue and little else — you’re a zombie.

If you’ve lost your personal drive to scale something and dream, you’re a zombie.

If you went into a startup with the goal of creating a job for yourself and building a small business and that’s what you have, great, it’s not a zombie and best of luck to you. And congrats, because doing that isn’t easy.
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Andy Nathan

Fear is a huge challenge in any business. I had a real estate business that my partner feared not releasing and turned the company into a zombie company, because he was not ready to move forward.
izle

we have avoided an economic apocalypse and a form of recovery is perhaps imminent, but we must prepare ourselves to live in a world dominated by powerful forces of half dead, half alive zombies. These zombies are banks, governments, consumers and companies staggering along and struggling to function in the new world.
That SEO guy

Kill the zombie! Really nice blog, just added you to my bookmarks
Guest

Very very interesting post.. I like it so much, especially the title ‘we must kill zombie companies’, thanks..
Steve Rynolds

Interesting post but may be theme companies do have some motive. Just killing them is not in our hands and if we kill them it might affect some1′ business.
Steve Rynolds

Nice post specially the “Zombie companies are death traps for entrepreneurs” section
cupcake

seems delicious like my cupcakes
Lucy McNerney

Zombies huh? Read the Zombie Survival Guide…seems to me they need to update it. Great post. Brilliant idea.

Lucy (http://welcome2nernia.blogspot.com)
Bret Hart

Thanks! Great post. Every time I read your blog, I get some new valuable info. Keep on posting!
Earl Nunes

A zombie is asserted to be a reanimated corpse, or a human who is being controlled by someone else by use of magic with some media renditions using a pandemic illness to explain their existence. Stories of zombies originated in the West African spiritual belief system of voodoo, which told of the people being controlled as laborers by a powerful wizard.
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Vista

No soubt that zombie companies will go bankrupt very soon !
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