On April 5th, Danielle Morrill wrote a post titled Zombie VCs on her personal blog. Morrill, a popular fixture in the SF tech scene, former Employee #1 at Twilio and current founder and CEO of Referly, posted a list of VCs she considered zombies. To say that the post caused a bit of an uproar in the venture space, would be an understatement.
Zombie VCs, according to Morrill, are “venture firms in which the partners are 3-5 years into investing their fund, don’t have very strong results so far, and are struggling to raise new funds.” Instead of using their remaining capital to invest in new companies, they decide instead to double-down in follow-on rounds with their existing portfolio. And yet, they still take meetings with new companies giving them the glimmer of hope for an investment. Morrill ultimately infers that these VCs take the meetings to make themselves seem relevant, rather than to actually invest in the ideas. The zombies almost always decline to invest due to the risk associated with startups.
Well-networked individuals have a sense (or can ask their network) for who would be considered a zombie investor, but those new to the scene might not have such insight. Young entrepreneurs waste time meeting these people without knowing that they will never turn into investments. In somewhat of an uproarious fashion, Morrill posted a list that pulled data from Crunchbase to find out which VC’s haven’t made Series A investments in the past six months. The list also focused on investors that haven’t invested outside their existing portfolio in the past 3 months, or claim to have begun only investing in later-stage deals / are in the midst of raising a new fund.
The findings weren’t perfect, and crunchbase is notoriously outdated. But Morrill needed to start somewhere. There were some glaring errors on the list, including very active funds like
I had a chance to connect with her to talk about the list and how it came to be.
Alex Taub (AT): What propelled you to write this post?
Danielle Morrill (DM): I've been indexing a lot of companies lately (http://www.daniellemorrill.com/the-startup-index/) and working with the Crunchbase API and data, and began to feel like I should turn the table and stack rank investors if I was going to do it to companies. I started talking to some other founders about what they wished they knew about investors before they met with them and "when was your last Series A, are you even doing new investment?"
AT: Have you had a bad zombie VC experience? How did you handle it?
DM: Not really, no. I have met with investors who I discovered were not that active (usually in the first meeting), and often we ended up having a really interesting conversation anyway. But I knew I couldn't put more time into the relationship until I was done fundraising. Introductions from an investor who isn't putting money into your company aren't helpful (they can be the opposite) so I just made a note in my spreadsheet and moved on.
AT: With regard to the post, what has the feedback been from entrepreneurs? VC's?
DM: Entrepreneurs have been generally supportive, though I think most of the strongest support is private rather than public. Founders are smart and can see that this index has ruffled feathers in investor circles, and I think a lot of them would prefer not to publicly support it (yet). As it becomes a regularly monthly index with a more credible methodology I believe that will change.
VCs have had a huge range of responses that run the gamut from accusing me of "extortion" on Hackers News to spending a couple hours on the phone with me to help me plot the course for the next index. Overall I think only 20-30% of investors even saw my post, and I expect it will have ripples of influence over the next few weeks. The reaction I am most curious about is from LPs (the limited partners at endowments, trusts, etc. who invest in VCs).
AT: Most people talk about entrepreneurs wasting VC's time. You touch on a big issue that is not spoken or written about: VC's wasting entrepreneurs time. How big of an issue do you think it is? Why don't people talk about it more?
DM: I don't know if it a big issue as a % of total investors who are wasting entrepreneurs time, but from the founders perspective every moment in the early days of getting a business going is precious. I have heard of founders driving hundreds of miles, only to get blown off 5 minutes before the meeting. I have heard of founders doing three meetings with three different partners only to be told after spending probably twenty hours on travel, prep, and the the actual meetings that the fund wasn't able to do any deals because they were in the midst of fundraising. The worst case is that an investor is not only inactive, but is taking these meetings to collect information and funnel it back to other people (investors? portfolio companies?) but I think that is the least common.
These experiences are frequent enough, and talked about in private circles enough, that they've become an open secret. This impacts first time founders who are raising their first venture round the most, since they aren't insiders and don't know who to watch out for.
AT: Is six months a good time on which to judge VCs? Considering how frothy deals were in 2011/2012, could a legitimate VC have taken a step back the past six months to see how things played out?
DM: It may be for some, but as far as a founder is concerned your strategy isn't his problem. You can't look at investors in aggregate and say "well they're stepping back so let's just wait till we're at the end of our runway". When a founder is fundraising, the clock is ticking before her company runs out of money.
This is the biggest problem in the data argument people are making, that it doesn't account for investor sentiment, trends, strategy, etc. Founders don't care about that. They are looking to raise money and I think it is fair to say "here are the investors doing deals, talk to them first.” Funds who are stepping back could say so publicly, and save founders a lot of time, but I don't think they have had a good reason to do so. Who knows, maybe that will change.
