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Zombie Startups: Should They Shut Down or Keep Going?

Zombie Startups are startups that aren't on the verge of dying, but they aren't really growing either. A zombie startup is caught somewhere between the living and the dead. If you are a founder or employee of a zombie startup what do you do? In this episode of Dalton + Michael, the two discuss what the options are if a startup is a zombie: shut down, get acquired, or keep going with a new sense of purpose and direction. Dalton + Michael is brought to you by @Standard_Cap Dalton Caldwell on X: https://x.com/daltonc Michael Seibel on X: https://x.com/mwseibel

Michael SeibelhostDalton Caldwellhost
Mar 30, 202617mWatch on YouTube ↗

EVERY SPOKEN WORD

  1. 0:00 – 1:22

    Defining a “zombie startup”: alive on paper, dead in momentum

    1. MS

      If none of your current efforts have worked, you need to do something that you would never do on your own.

    2. DC

      Take the next swing.

    3. MS

      You need to do something so uncomfortable-

    4. DC

      Yes

    5. MS

      ... 'cause your current tactics haven't worked.

    6. DC

      Yes.

    7. MS

      Right? 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?"

    8. DC

      [upbeat music] This is Dalton + Michael, and today we're gonna talk about zombie startups. Dalton, tell me, what is a zombie startup?

    9. MS

      Okay, yeah. So this is another one of those where we're gonna kinda use our own internal lingo that we've been using for a long time.

    10. DC

      Yes.

    11. MS

      And maybe it'll, it'll resonate with the world, maybe it won't. So a zombie startup is a startup that is not dead.

    12. DC

      Nope.

    13. MS

      Um, like it's, there's money in the bank.

    14. DC

      Yep.

    15. MS

      Like, they're making payroll.

    16. DC

      Yep.

    17. MS

      They have revenue, they have customers.

    18. DC

      Yes.

    19. MS

      Um, but it's not really growing.

    20. DC

      Not growing quickly, no.

    21. MS

      It might be growing a little bit-

    22. DC

      Yeah

    23. MS

      ... but it's not growing fast.

    24. DC

      Yep.

    25. MS

      And so it's not living per se.

    26. DC

      Yes.

    27. MS

      It's in a s- interesting state between living and dying.

    28. DC

      Yeah.

    29. MS

      Um, hence the name zombie. Usually the mentality of a zombie startup is different than a super fast growing one.

    30. DC

      Mm-hmm.

  2. 1:22 – 2:35

    How slow growth invites bureaucracy (and planning becomes the “work”)

    1. DC

      I also 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 think.

    2. MS

      Yep.

    3. DC

      And the slowing down of, of dev cycles. It's almost like the metabolism of, of the company is slowing down. It's like the cell is aging, it's less efficient.

    4. MS

      Yeah.

    5. DC

      It's like-

    6. MS

      Well, when you have PMF and you're growing really fast, your job is just to hold on.

    7. DC

      Yes.

    8. MS

      And you're like, "Oh, this is chaos." Every day is like a fire fight-

    9. DC

      Yes

    10. MS

      ... and you're just trying to make it.

    11. DC

      Yes.

    12. MS

      When you're not growing that fast, what will often happen is process seeps in-

    13. DC

      Yes

    14. MS

      ... and everyone's like, "Oh, it's time for our quarterly planning meeting." And like-

    15. DC

      Yes

    16. MS

      ... like suddenly we get-

    17. DC

      Yes.

    18. MS

      There is no chaos, there is no excitement.

    19. DC

      Yep.

    20. MS

      And parts of the company that are more process oriented tend to take over.

    21. DC

      Yes. Yes.

    22. MS

      Um, and so it can feel really slow.

    23. DC

      Well, and, and arguably the planning is the thing that's exciting.

    24. MS

      Yeah.

    25. DC

      Like, the product's [laughs] not that exciting.

    26. MS

      Yep.

    27. DC

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

    28. MS

      Yeah.

    29. DC

      What does it mean to shut down?

  3. 2:35 – 3:31

    The three doors: shutdown, acquisition, or IPO (and what’s most common)

    1. MS

      Yeah. I think to speak to that, um, you know, every time you start a startup, there's only a s- a few things that can happen, which is you shut it down.

    2. DC

      Expected outcome. [laughs]

    3. MS

      Which is you shut down, you get acquired-

    4. DC

      Yep

    5. MS

      ... or you IPO.

    6. DC

      Yep.

    7. MS

      Isn't that weird? There's only three doors you ever really can go down.

    8. DC

      And let's not talk like those doors are, like, equal in terms of frequency. [laughs]

    9. MS

      Well, how many people go through the IPO door? We know, you know, it's-

    10. DC

      [laughs] No

    11. MS

      ... not a lot. Acquired, okay, it's, it's a decent amount.

    12. DC

      Some.

    13. MS

      And then shut down is, is, is up there. Um, and I think a lot of folks-

    14. DC

      Dalton, shut down is the expected outcome. [laughs]

    15. MS

      It's somewhere. It's somewhere in the-

    16. DC

      It's, it's up there. It's up there. [laughs]

    17. MS

      It's in the top three, Mike. Um.

    18. DC

      [laughs] It's in the t- it's the top three outcomes.

    19. MS

      I don't know where it ranks, but, uh-

    20. DC

      [laughs]

    21. MS

      Look, people don't talk about it a lot. Again, this is not the most engaging content of this, but like let's-

    22. DC

      Yeah

    23. MS

      ... because I haven't seen much content about shutting down, let's just talk about it for a second.

    24. DC

      Yes. Yeah.

    25. MS

      Um, what does that actually mean?

  4. 3:31 – 5:04

    The real barrier to shutting down: guilt, obligation, and perceived failure

    1. DC

      So I think that, um, the most common, two emotions that I see amongst founders, the first is the kind of personal failure emotion, but I'd also... but I'd argue that, like, by the time I'm talking to them they've kind of processed that. The second set of emotion are their obligations to others, and that really grinds on founders. Like, I made an obligation to my employees.

    2. MS

      Yep.

    3. DC

      And I made an obligation to my investors, and I've let them down. And the most common thing that I say is, um, in that situation is, one, like, "Did you act ethically?"

    4. MS

      Yep.

    5. DC

      "Did you work hard? Did you lie to people?" It's like, "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.

    6. MS

      Yeah.

    7. DC

      Your obligation to all of these people wasn't to win, right? Because the expected outcome is not winning.

    8. MS

      Yep.

    9. DC

      Right? The obligation was to try hard and try smart and try ethically. When I can break through with the founder, you can kinda see the relief, like, "Oh, you know, I did try hard." Like, you [laughs] know? Like, I did. Like, and I try to kinda 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 I try 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.

    10. MS

      Yep.

    11. DC

      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.

    12. MS

      Yep.

    13. DC

      'Cause the actual kind of mechanisms are not that hard.

  5. 5:04 – 6:16

    Shutdown mechanics: make it concrete, use advisors, set a timeline

    1. MS

      Yeah. Like, I think, again, it's, there's not much content about it, but one, the hard part is emotions.

    2. DC

      Yes.

    3. MS

      If you can get through them, the mechanics are easy.

    4. DC

      Yeah.

    5. MS

      And you probably have a lawyer if you've raised money.

    6. DC

      Yeah.

    7. MS

      So you can get advice from your lawyers.

    8. DC

      Yes.

    9. MS

      And if you have an investor who's sophisticated and done a lot of investments, and you're just like, "Hey, we, we're gonna shut down and here's why," they'll be like, "Okay."

    10. DC

      Yep.

    11. MS

      And they'll give you advice.

    12. DC

      Yeah.

    13. MS

      And so I do a lot of those office hours-

    14. DC

      Yes

    15. MS

      ... with founders-

    16. DC

      Yes

    17. MS

      ... where I kind of walk through the mechanics. And again, the key thing is to get really clear and to put a timeline on it.

    18. DC

      Yes.

    19. MS

      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.

    20. DC

      Yeah.

    21. MS

      And that never works.

    22. DC

      Yeah.

    23. MS

      And so if someone decides it's not working and they're a zombie startup, it's like, okay, well, give yourself two months to try to get acquired.

    24. DC

      Yeah.

    25. MS

      Put, 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.

    26. DC

      Yeah.

    27. MS

      And it's totally cool, and it's almost like a relief for them to hear-That it's not this, like, endless process [laughs]

    28. DC

      Yeah, yeah

    29. MS

      It's actually straightforward. That doesn't mean there's gonna be a great outcome, but-

    30. DC

      Yeah

  6. 6:16 – 7:54

    Acquisition reality check: rarer than it seems and often not lucrative

    1. DC

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

    2. MS

      Yep.

    3. DC

      And then there's an-

    4. MS

      It's 'cause you only hear about the ones that worked. They're like, "Congratulations, we failed to get acquired." [laughs]

    5. DC

      Yeah, yeah.

    6. MS

      Right? And so there, there's a big warping-

    7. DC

      Yes

    8. MS

      ... of how common these are.

    9. DC

      And then I think the second one is the number of acquisitions where, like, there are tech crunch post, an asset sale, and a job offer.

    10. MS

      Yep.

    11. DC

      Where suddenly it's like, oh, like, the, the... You thought that when you read about an acquisition, you thought everyone got rich.

    12. MS

      Yep.

    13. DC

      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-

    14. MS

      Yep

    15. DC

      ... to an acquisition in two months.

    16. MS

      Yes.

    17. DC

      So it's like there's a set of companies maybe you've been interacting with or they've been interacting with you, and so on and so forth. Those are all great conversations to have. But to have in your mind this will almost be like a fundraising process, and like I'll go from like not knowing this investor to, like, this investor being on my board in three weeks.

    18. MS

      Yep.

    19. DC

      Way less common in the, um, acqui-hire world. And the last thing I talk about is just, like, does your revenue matter to an acquirer?

    20. MS

      Yep.

    21. DC

      Like, if you're a, let's say a $1 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-

    22. MS

      I think that-

    23. DC

      It doesn't move their stock price. It doesn't do any- Like, the revenue doesn't do anything. Like, so shouldn't I be valued at 10X my revenue?

    24. MS

      Yeah.

    25. DC

      It's like, ah.

  7. 7:54 – 8:50

    Reframing the payoff: opportunity cost and the ‘adult’ decision to stop

    1. MS

      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.

    2. DC

      Yes.

    3. MS

      And so the actual reward is to do something else.

    4. DC

      Yes. Yeah, yes.

    5. MS

      And [laughs] just, and like-

    6. DC

      Yeah. Not get all stuck in acqui-hire

    7. MS

      ... again, I was telling... 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.

    8. DC

      Yeah.

    9. MS

      And they ended up getting a very good job at one of the labs, and I'm sure they're very happy.

    10. DC

      Yeah.

    11. MS

      Like, this was, they, they made the decision to shut down like four years ago.

    12. DC

      Yes.

    13. MS

      And yeah, I think that was pretty smart. [laughs]

    14. DC

      I think that we are independently thinking of people who maybe [laughs]

    15. MS

      Yeah, I'm not, I'm, again, I'm changing some details, but-

    16. DC

      Yes, yes

    17. MS

      ... I, that was a very adult decision to make.

    18. DC

      Yes.

    19. MS

      And like, yeah, that was, that was the smart move.

  8. 8:50 – 9:01

    Shutting down well preserves reputation—and can help fund the next startup

    1. DC

      And then also we, we've been remiss to say that if you wanna 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.

    2. MS

      Yep.

  9. 9:01 – 10:10

    What won’t save a zombie: headcount splurges, ‘growth execs,’ spam, or trend-pitch fundraising

    1. DC

      Um, so we've talked about shutting down. Let's, um, now address the people who don't wanna shut down. I've got this thing going.

    2. MS

      Yep.

    3. DC

      I love it. Help me figure out how to make it work. And I think to start there, I kinda wanna talk about the things that won't rescue you and just get them out of the way.

    4. MS

      Yep.

    5. DC

      Um, hiring a bunch more people, like some last kind of splurge.

    6. MS

      Let's burn all the money before [laughs]

    7. DC

      Yeah. [laughs]

    8. MS

      That's, that's the ticket.

    9. DC

      Yep. The secret executive, it's really the chief of growth or the chief of monetization who's gonna turn this thing around. You know, they'll tell you to send more push notifications. Um, 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-

    10. MS

      Yeah, we'll just-

    11. DC

      Then we'll grow

    12. MS

      ... pretend like we're growing. They won't notice that we're not growing, and they'll give us money, right? [laughs]

    13. DC

      Yeah, especially if we're pitching something that's, like, on trend.

    14. MS

      Yeah.

    15. DC

      We have this cool AI idea. They'll just give us money for that, right? That's what investors do. So false escape paths. What are good escape paths?

  10. 10:10 – 11:20

    The real escape path: admit it’s broken and make a radical, uncomfortable change

    1. MS

      I think that, like a lot of things in life, step one is to admit you have a problem.

    2. DC

      Mm-hmm, mm-hmm.

    3. MS

      [laughs] And to be honest about it.

    4. DC

      Mm-hmm.

    5. MS

      And it's, it's surprising how often people are just in denial-

    6. DC

      Yeah

    7. MS

      ... where, like, part of their brain knows they're 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.

    8. DC

      Yeah. Yes.

    9. MS

      And so I think you just have to, like-

    10. DC

      Yeah

    11. MS

      ... get real. This isn't working.

    12. DC

      Yes.

    13. MS

      We're not on the right trajectory.

    14. DC

      Yes.

    15. MS

      And then what I would usually tell people is to kinda, like, have, like, a come to Jesus moment about how you're gonna radically change something about the business.

    16. DC

      Yeah.

    17. MS

      Because a bunch of small incremental changes that you've been trying for the past year or two, that hasn't been working, right?

    18. DC

      [laughs] Yeah.

    19. MS

      So you need to do something radical.

    20. DC

      Yes.

    21. MS

      And there is a risk that you do something that's radically wrong, but I'm arguing you're kinda dead anyway.

    22. DC

      Yeah.

    23. MS

      So again, this is the logic is if it, if it's, if none of your current efforts have worked, you need to do something that you would never do on your own.

    24. DC

      Take a big swing.

    25. MS

      You need to do something so uncomf- uncomfortable-

    26. DC

      Yes

    27. MS

      ... 'cause your current tactics haven't worked.

    28. DC

      Yes.

    29. MS

      Right? And so I'll encourage founders to be like, what's something that seems way too radical or scary that you never would've thought trying before? This is permission. Why don't you try it?

  11. 11:20 – 11:56

    Shrink the ship: reduce team/complexity to regain agility

    1. DC

      And I would say often what's the challenge with that is sometimes these teams are too big.

    2. MS

      Yes.

    3. DC

      And, you know, the feedback we get from a founder is like, "Oh, well, like, this person would say," or, "What about this department?" or da, da, da.

    4. MS

      Yeah, or director level.

    5. DC

      Yeah. Yeah, yeah. I'm gonna have some... And it's like you have permission to maybe ask some of those people to leave.

    6. MS

      Yeah.

    7. DC

      Because, hey, the ship's going down, and, like, they're not helping right the ship. And so often it's easier to steer a smaller ship.

    8. MS

      [laughs]

  12. 11:56 – 13:40

    Return to the pre-PMF playbook: challenge sacred cows and rebuild broken flows

    1. DC

      Um, I think the other thing I like to talk about when I see founders in this situation is, like, let's bring back the pre-product market fit playbook. Like, 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 mean, 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 had tested it, they AB tested it. It was like this is the local maxima of this bad s- this, uh, onboarding flow. And crazy enough, they were working on a completely different kind of product as just like an offshoot for a, a couple weeks, so they had to build a new onboarding flow from scratch. And then they were like, "Oh, we can, like [laughs] 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 'cause they were like, "Oh, that means our current onboarding flow could be like 10X better." [laughs]

    2. MS

      [laughs]

    3. DC

      And so to me it's like can I try to find some of the sacred cows-

    4. MS

      Yeah

    5. DC

      ... and like unsacred cow- them. Like, look at them with fresh eyes.

    6. MS

      Yeah, you almost wanna get them to name what are the sacred cows.

    7. DC

      Yeah, yeah.

    8. MS

      Like let's do a thought experiment. Let's pretend you weren't afraid. What would you change about your business?

    9. DC

      Yeah.

    10. MS

      Let's do the exercise.

    11. DC

      Yeah.

    12. MS

      And they, and they, people can always come up with ones like, "Oh, I hate that, but I can't" You, you have all these justifications that those are unfixable or immovable.

    13. DC

      Yeah.

    14. MS

      But hey, if you're already dead, what, what's the harm of changing [laughs] some of those things, right?

    15. DC

      You know? Break glass in times of emergency.

    16. MS

      Yeah.

    17. DC

      [laughs]

  13. 13:40 – 14:52

    Why zombies happen: too much runway dulls urgency; conviction beats hedging

    1. DC

      Like, and I think what's, what's interesting and, 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 like the moment where you actually realize.

    2. MS

      You're like, [laughs] "Time to get real."

    3. DC

      Yeah. [laughs]

    4. MS

      [laughs] All those half measures, we can't do those anymore.

    5. DC

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

    6. MS

      Well, that's the irony is over-funding causes zombies, like all the, the unicorn stuff where there's-

    7. DC

      Yes.

    8. MS

      You know?

    9. DC

      Yes.

    10. MS

      It's way more likely to end up with a zombie-

    11. DC

      Yes

    12. MS

      ... when you've raised way more than you thought you needed.

    13. DC

      Yes.

    14. MS

      Right?

    15. DC

      Yes. Last one on this 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.

    16. MS

      Yeah.

    17. DC

      Right? And what do you say to the founder who's like, "Okay, you know, I, 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?"

  14. 14:52 – 17:34

    Conviction, recalibration, and earned insight: why the ‘big swing’ is more likely now

    1. MS

      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.

    2. DC

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

    3. MS

      [laughs] But it, but it's true 'cause, like, imagine working for someone, and the person you're working for doesn't seem like they have a clue, right? Imagine you're an investor in someone, and the people you're investing in doesn't seem to have a clue.

    4. DC

      Yeah.

    5. MS

      And they have no vision.

    6. DC

      Yeah.

    7. MS

      And so if you truly have no idea what to do, it's very hard, like, I don't know how to advise you.

    8. DC

      Yeah.

    9. MS

      But I have seen people that have strong conviction in a wrong-

    10. DC

      Yeah

    11. MS

      ... motivate the people around them-

    12. DC

      Yeah

    13. MS

      ... and then recalibrate.

    14. DC

      Shift the company, yeah. [laughs]

    15. MS

      [laughs] Like, like keep changing the thing that they're strong conviction about.

    16. DC

      Yes.

    17. MS

      That totally works.

    18. DC

      That counterintuitively works, right?

    19. MS

      Right.

    20. DC

      Starting in the wrong direction [laughs]

    21. MS

      But, like, being really hardcore about it.

    22. DC

      [laughs]

    23. MS

      You can get people to follow you-

    24. DC

      Yeah

    25. MS

      ... and you can, like, make stuff happen-

    26. DC

      You can live on that

    27. MS

      ... if you're wrong.

    28. DC

      Yes.

    29. MS

      But if you're just completely lost.

    30. DC

      Lost, yeah. It's funny 'cause when I find founders in that situation, oftentimes what I try to communicate to them is that, 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, like, you have so many more raw materials to h- have conviction about something now than you did when we funded you at YC. And, like, it's almost like, yeah, your startup might not be working, but you are 10X smarter about this. And, like, if we were to flip this, right, and you were an investor, you'd be able to look at other companies in this space, and you'd have some opinions about, like, what users want and what's big and what's not. I try to give the founder confidence, like, that work that they did was useful. Like, 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.

Episode duration: 17:35

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