Cameo (an example in the article) is an interesting one. It seems like a stable, steady business, making money, should be easy to accurately value if you have access to the financials. No surprise that the "It's $1bn!!!" valuation came from Softbank Vision Fund. https://en.wikipedia.org/wiki/Cameo_(website)
This is I think a very common issue. The term "startup" has two connotations: a nascent business trying to find its product/market fit and "a private business whose capital structure is dominated by VC money"
Companies that fall out of the first definition -- they've found their market, such as it is, but it's smaller, more competitive etc., than is needed for hypergrowth -- but are still in the second definition are in a bind. They've generally used up all their ideas, and have created a nice, small business. This should be a win, but in SV it's the worst kind of failure. The VCs aren't going to want to book a loss, so the company thrashes about trying to figure what else to do while trying to keep its business running. They should and ought to be evaluated using normal accounting, but that would mean the value of the business is a fraction of its "valudation"
This ends in the company being strangled by its own mal-investment, or sheer exhaustion when everyone, the management and the VCs, face reality, take the L, and leave the business for private equity to run off the remaining terminal value. Maybe sometimes this becomes a lifestyle business, but more than likely it's just a transition from the washing machine of "this month's great idea for growth" (they never pan out) to the grind of cost-cutting and extracting any customer surplus out of the system, leaving everyone miserable.
> they've found their market, such as it is, but it's smaller, more competitive etc., than is needed for hypergrowth... so the company thrashes about trying to figure what else to do while trying to keep its business running
In a lot of cases I think it's even worse than that-- VCs advise their portcos to keep swinging for the fences, even if it means pivoting away from their modestly successful niche, since a single and a strikeout are effectively the same to them.
It also peaked during the COVID lockdowns, lots of actors needed alternative sources of funds. Maybe the numbers for 1BN came from multiplying revenue into the future, or hell, expecting it to grow even.
Absolutely right, but you can also see how this can be a sustainable if not spectacular business going forward even in normal times. There are plenty of "resting" actors and grifting politicians who don't mind doing 60 seconds of work for the price of a round of drinks.
I feel like there is a business in taking successful startups-gone-lifestyle, buying the name and IP from the “rocket ship” and letting them have more funds for a pivot.
The very concept is quite culturally contingent - both in how much buyers would care about getting such a service, and in how much celebrities would be willing to engage in this type of fan service. Going global would also require a huge amount of celebrity contractors, a big problem for scaling.
Companies being devalued is not news. It happens on the stock market everyday.
For companies that rely on outside investment to survive however it can become a slide to oblivion.
If the company itself is profitable, then typically it can continue. There's no interest rate on VC investment, and if profitable it can run forever. Customers, employees, users and so on are all fine. Investors? Well, they're potentially getting some returns through dividends, but its minor and not what they were chasing.
Of course the VC investment model is high risk. That's kinda the point. It's a bet on IPO or (valuable) acquisition. Most companies end up as neither.
Will this affect new VC funds in the future? Maybe in the short term. But there are still enough IPOs (like SpaceX now) and still enough greedy people willing to play the lottery. Sure the absolute amount of VC money may come down, but I don't think the model is going away.
Indeed it may start to lead to saner valuations along the way.
They might not easily be able to cash out, but they often have more options than people realise.
VCs will sometimes invest ‘convertible notes’ which start as debt and “convert” into equity in favourable scenarios.
‘Swamp’ and ‘drag’ clauses are also commmon: if a management team/CEO doesn’t meet their goals as set by the board (like give investors a meaningful exit) then investors can take over and replace that team, or force a sale.
Illiquid private equity in an early stage business, especially one that isnt growing, is hard to get rid of. That’s why investors derisk with terms that massively favour them at the expense of the business they invest in.
In our case, the VC's merged us with our biggest competitor and then sold that to a PE fund. Nothing we could do about it. I took voluntary redundancy and got out asap.
I've been in a startup that was operating at ~breakeven and did layoffs to actually be profitable, and at ~10 years in the VCs forced an acquihire since they wanted out.
> Companies being devalued is not news. It happens on the stock market everyday
TFA points specifically at "recent funds" that have underperformed public markets.
More recently launched funds have been returning markedly less money to investors than those of earlier vintages, according to the World Economic Forum. They have also underperformed the S&P 500 by a wide mark, particularly those that did not invest in a small club of artificial-intelligence superstars, says Mr Cohan.
> Of course the VC investment model is high risk.
Power law at play, apparently: High risk with high rewards only for the top 5%.
... already, just 5% of them produce 90% of its profits.
And VC even historically has not performed especially well. And just to take an anecdotal example, I have a friend who did some angel investing. He still does a bit on companies he believes in but admits he's have done a lot better putting a lot of the money into NASDAQ or some other index, much less some of the big tech firms.
> Of course the VC investment model is high risk. That's kinda the point. It's a bet on IPO or (valuable) acquisition. Most companies end up as neither.
Cynically, I wonder how much of the insane (even in the moment) valuations were driven by VC firms trying to commit capital so they could collect management fees?
The point isn't necessarily to get buyers to pay more than fair market value. Most VC firms run a series of separate funds, each with a target date to return cash to limited partners. So at some point the VCs need liquidity even if the valuation isn't great. This is a normal and expected part of the business model.
In some cases a VC can kind of "extend and pretend" by getting one of their other portfolio companies to do the acquisition in an all stock deal.
The controlling voters don't really need to force a sale; they could force a wind-up of the business.
"Sure, we invested $100m, but you are still only breaking even. May as well close up shop, sell the data for as much as we can get and split the proceeds amongst us investors" is just as possible.
> If the company itself is profitable, then typically it can continue.
I only wish, but rarely. This is one of the great tragedies of the grow at all cost system. There have been so many great profitable companies, where the product is great, customers love it, employees love it, everyone is happy.. except it's not growing fast enough to satisfy the leeches so it gets destroyed.
As a society we should be supportive of small companies that make a great product that everyone loves, pays good salaries and makes a profit. The more of those, the merrier. But no, unless growth is on the hockeystick curve, private equity will destroy it sooner or later.
Poor metaphor. If you decide to play with sharks which demonstrate how to eat, you shouldn't be disappointed when you find out they are cold-blooded killers.
The reason hockey stick growth is required is because the “leeches” are putting up the capital to build the profitable company and if the profits dont significantly outpace the risk free rate it’s a very bad investment.
The founders and employees and even the customers are accruing all the benefits of that capital so of course they are happy.
How else do you propose funding the quite expensive and risky enterprises that venture backs? Taxes? Paying employees less before profitability? Charging early customers a lot more? Clearly you can see the downsides of those approaches.
> How else do you propose funding the quite expensive and risky enterprises that venture backs?
Easy: Risk. When you invest in a small private startup, accept that it's a crazy risky bet that will probably fail. So those investors should accept that the risk is there instead of trying to push too hard to the point of destroying the company that could've continued on a happy path of slow growth.
I think they completely accept there is risk of failure. That doesnt mean they have to hand the company over to founders when they could just as easily sell it to PE or another company.
Founders could also buy it back if they can find a lender, but if they are profitable enough for one to be interested, but the financials rarely work out for that.
I would propose not funding them at all, because so much of the system has turned into outright grift, with wildly implausible "companies" receiving brain-melting sums so investors can pay themselves huge fees.
The companies all do things like "Pitch decks as a service" or "Coworker cafes in space" or "Fusion permanently two years from now, until we spend the money on drugs then pivot to military contracting" or "AI-powered gig economy pet sitters for the Bay Area".
There's a lot of happiness around, but there are also more useful things everyone could be doing.
That’s already an option? You can get small business loans, bootstrap, get grants etc that don’t require massive growth.
You can found or work for a company like this anytime you like. But the “leeches” the op mentions are a voluntary funding mechanism for a particular kind of company. If you found or work for one of those the trade off is clear.
You can’t have it both ways though. As an employee you can’t live off the largesse of investors as you build the business and then not expect them to want an elevated return on that risk.
My impression is a lot of these companies raised mega rounds right before interest rates went up, and are now able to tread water by cutting headcount enough that their revenue + interest can sustain them. To what end? Who knows...
I know a few who are really feeling the pressure from customers now being able to vibe code part or their product and also their cloud bill is about to explode because hardware prices are through the roof
yeah got a buddy at a startup unicorn, moved from Canada to work down in the Valley, and he said basically the same: no moat, and AI could hack together 80% of their product... since it already is...
strong argument to me made for the support, dev, and long-term angle, but if any of the FAANGs or big players decided to eat their lunch they probably could.
He reckoned they could get something comprehensive and mature enough, with a real customer base, to offset the build effort and thus get acquired.
Everyone says support but great support requires culture of excellence and customer obsession and that were the first things to go when those zirp-era scaleups went on hiring sprees
SaaS was always destined for this, with or without AI. Excluding the small subset with network effects, the nominal nature of a remote execution aid in basic business process was always semi-farcical.
Yeah, but burn rates are high. The money is mostly gone by now, and the run way is approaching its end in the next 12-18 months. Hence the “great devaluation “ they are predicting
Zero interest rates kept many weak companies alive but they also have give great companies time to find product market fit, and the hard part is to separate the two in hind sight
I'd be interested in any examples where a "zombie" company in the US was sloshing around for a few years and then finally found product market fit. I think it's probably incredibly rare, and I don't think it's really that hard to identify weak companies that have been treading water for years as you appear to think.
>By May 2026, 332 of the 1,900 unicorns in a database maintained by Ilya Strebulaev of Stanford University had raised money at a valuation at or below their peak (see chart). Of those, 212 were valued at under $1bn. As many as 383 had disclosed no new funding in the previous three years; 41 of these had lost unicorn status
332 out of 1900 isn't that bad?
Even the further 338 if confirmed would still be less a minority of the overall 1900
Down-rounds are very undesirable though. So those 332 likely have not had other options. True number of companies that wouldn't really be valued as high as their peak raise is probably higher, but some of them have been able to find enough revenue or other sources of funding in order not to raise and be valued down.
if you're a current equity holder they're undesirable. If you're buying in or buying more, no real reason to avoid a down round so long as the company is viable
I was an early employee (#20-something) at a company that peaked at just over a billion dollar valuation during Covid and that now sits at somewhere between 1/2 and 1/3 of that depending on who you talk to.
I'm still really close with a lot of early employees and while I was lucky enough to have a liquidity event happen shortly after I left that allowed me to cash out for a decent, but not life changing, return, many of my friends were not.
One of the things I think a lot of people may not realize is how badly this zombiecorn state fucks employees with stock options. A lot of startups will give you a limited amount of time after you leave to exercise your stock options (90 or 180 days is common based on my experience). If you don't exercise your stock options and buy your stock within that time period the options expire and you get nothing. The problem is that if you buy the stock, you won't be able to sell until there's a liquidity event (usually a new funding round or IPO) and current investors don't want to take investment at a lower price unless they absolutely have to.
I know some other early employees who were laid off who had to make the choice between dropping $75k or $100k to buy stock that is worth 10x that on paper (even at the current valuation) and praying for a liquidity event that will probably never arrive or letting go of shares that just a few years before seemed like they would be a life changing amount of money. I know people who've done both and neither route leaves people feeling good about their decision.
I know common wisdom is that you should treat that stock like it's worth nothing until they day you sell, but when you've worked at somewhere for 5-10 years and seen the on-paper value of your stock rise to a life changing amount of money, I think it's hard not to assume that you'll be able to cash that out one day.
One of the people I know had that happen and didn't realize it. Between the exercise cost and taxes I think it ended up costing them nearly a quarter million.
I know that seems insane, but even at a $500m valuation their potential payout is enough to retire on.
If this is your situation consider asking for an ISO to NSO conversion. Many companies these days will allow you to do this, as they’ve realized it’s in their best interest to not retain checked out employees
lol I work for one of these still. It was an auto ML product, so the company is desperately trying to pivot to Genai and agents. Trying to catch the wave. I don’t know how well it’s working though. Churn keeps happening in the core business, processes meant for a large corporation are slowing progress in developing the new platform, and leadership has churned till only west coast AI pilled Amazon alums are left.
We need to stop pretending the VC valuations are meaningful.
It's like asking someone playing roulette to value "13 black", after they bet on it.
There valuations are always based on expectations of huge growth, not current value. Growth predictions with an extremely low confidence level. VCs make up for it by making a lot of bets.
The companies NEVER have current profits (The actual measure of value) that would justify their valuation.
So, it's comparing gambling payouts to corporate valuations, aka "apples to oranges", which are not related.
When the predicted growth doesn't occur, the companies valuation becomes based on its actual value (profits).
> There valuations are always based on expectations of huge growth, not current value.
They're primarily a function of fund size. Everything else that can be fudged is fudged in order to make it look sane.
Funds make their money by taking a cut of AUM. Thus, they're incentivized to make bigger funds. They also can't spread out their portfolio over hundreds of tiny investments without losing control, so they need to write big checks. When you write a big check, the founders need a big post-money number to maintain a reasonable percentage of the cap table. It doesn't hurt that big valuations make everyone look better.
As money flooded into VC, the funds got bigger, the checks got larger, and the number of unicorns shot up in direct proportion to the number of large funds competing for their equity. The revenue projections used to justify this charade were never really important, and couldn't be proven in any case.
It's indeed not that black and white. Growth and revenue can happen quite early and they are usually seen as signs that a company might eventually become profitable. The whole point of VC funding is to put all available resources in growth, not in profit. Investments in profitable companies aren't really venture capital investments. Different class of investors that do that, generally.
Where the whole thing starts looking like gambling is when companies get huge rounds based on essentially no proof whatsoever that the thing will ever grow or have revenue. And when the idea is basically "we'll pay famous people to send greetings to people" we're in obviously stupid money territory. That was never going to have the revenues to back up the inflated valuation. And somebody still sank a few tens of millions in that to find that out the hard way. That company had a paper valuation of a billion. But it doesn't necessarily mean all those tens of millions were spent and lost. Investors might commit the money but it's usually conditional on growth targets and milestones. When shit goes south, they'll pull the brakes and the money stops flowing. Good investors wouldn't wait until all the money is gone to do that.
The reason these investments happen is that VCs mostly aren't investing their own cash. They are being paid to make investments and to inflate their portfolios. By the time the shit hits the fan, they'll have gotten their payoff. It all looks great until it doesn't. And inflated valuations make them look shit hot even when they are clearly not. This attracts more capital for them to invest.
Of course at some point the shit does hit the fan and the money evaporates. That's when you get acqui-hires and other constructions that are usually portrayed as a successful exit that, again, makes the VCs look like they know what they are doing. This is all about damage control that is about both financials and reputations. Never mind that it's effectively a fire sale at that point. But investors get to swap their bad shares for good shares, and founders get to work in somebody else's company for stock options. And the "buying" company gets some nice people and they stay best buddies with the investors they just bailed out who might typically also be investors in those companies. In the end the madness gets written off against the overall fund performance. It only takes a few good gambles to work out for everybody to come out smelling like roses.
I have a few friends who have gone into VC either starting their own or an existing. Hearing about some of the companies they are invested in makes me realize that half of these show HN posts are legit multi billion companies already with 2-5 person teams. As you’ve said, low to zero profit, and seemingly no corner on the market.
It’s like coin collecting, without the currency part - just hoping someone one day sees it, and wants to put them on their coin on their shelf. I can’t make sense of it, maybe that’s the point. I miss when VCs cared about helping people change the world, better or worse (ideally better).
> It's like asking someone playing roulette to value "13 black", after they bet on it.
Even worse, because you don't get better odds or payouts by persuading others to bet on 13 black, but you do when they invest in the company you've backed.
>Their valuations are always based on expectations of huge growth, not current value. Growth predictions with an extremely low confidence level. VCs make up for it by making a lot of bets.
all valuations are based on expectations of the future, that's what the stock market is. Except VC valuations which are based on how much money was invested, extended to cover all the equity rather than just what was purchased. However, the amount of money invested was calculated based on expectations for the future.
the definition of the term "asset" is "something expected to have a value in the future"
companies spend money on things, but those things need to be classified as expenses or assets. Items that are not expected to have a value in the future (box of post-it notes, pencils, electricity...) are expensed in the present. Assets are longer term items that will be involved in the creation of wealth/value, so they appear on the balance sheet of a company to give investors an idea of the value of the "wealth creating assets".
"Assets are the resources that have future economic value and they are belong and under the control of the company. They are expected to provide future economic benefits to the company. Assets are presented on the balance sheet which can be current assets and noncurrent assets."
"Assets are things your business owns that have long-term value, like property or equipment. Their cost is spread out over time. Expenses are costs of daily operations that are used up quickly, such as rent or utilities, and are fully deducted when they occur."
current profits (The actual measure of value) that would justify their valuation
That's...not how value works at all. If it was, all of these rapidly growing companies that haven't made a profit yet would be worth zero. Would you pay $1 for any of the big AI labs? I sure as fuck would.
Value is more about the present value of future cashflows. And it turns out that estimating future cashflows of extremely fast growing companies is really hard.
This is not the whole story. While there may be some value in terms of marketing to claim a higher valuation there are also many downsides to a higher valuation which in turn for example leads to a higher fair market value that makes executing stock options on a private company extraordinarily costly from a tax perspective. Admittedly the holders of the preferred stock like investors might not have the same incentives as the people who are given stock options but their interests are largely aligned in that they're both interester in retaining great talent and making the company successful (eg valuation higher) but later
NO. You need to stop pretending that gambling is good and take some social responsibility for the massive class of people in the second-tier service economy because of chronic under-investment in "low growth" industries.
I think you are missing the point. I think the software business has become undesirable for VC investment. I am seeing that in the market from the otherside. People think there is no moat. Which I absolutely disagree but yea.
VC invest is same as buying a house. Someone has valued your house is worth x, thats why it is valued at x. There were people willing to invest at 1B valuation now they are not. Market has moved. Imagine, if the area where you bought the house, suddenly is not desirable or theres no one willing to pay for it, then value of your house will go down, in some scenarios to zero. It is as simple as that.
>> The companies NEVER have current profits (The actual measure of value) that would justify their valuation.
Lol. "Profits" is old person talk. Nobody needs profits. The most valuable company in the world hasnt shown a dime in profit. That doesnt mean everyone cannot get rich. You just have to know the right people. That is all that matters these days. Having profits also means paying taxes... a fools game. Profits are just a sign of a weak expansion strategy and so will generally reduce valuations!
> The most valuable company in the world hasnt shown a dime in profit.
NVidia is quite profitable (it may not be enough to justify its current market cap), so is Aramco. Which is the most valuable in the world is up to you.
I don’t think conventional finance theory was ever to conflate stock price and valuation the way you just did there. Nor did it only include dividends in NPV calculations.
And I’d argue that valuation based on NPV of future profits hasn’t fallen apart at all, it’s just become harder to estimate future profits, and the discount rate has changed.
It's funny you say that because you can absolutely value 13 black after it's been bet on. It's actually really easy, I would expect a middle schooler to be able to do so and intuitive understand the concept.
It's simple really. If the VC's don't move the money, then it's dead money to them. These are calculated risks that they absorb under the premise of regret minimization. They don't really have a choice but to take occasional losses. It's nearly intentional.
For the sake of mythological accuracy, I hope that Unicorns sunk by debt and managing to pull into negative ARR (due to overhead costs) will get called Nightmares.
But Zombie Unicorns being an accurate term is enough to make me happy today.
Quick warning that finance bros call any healthy company that isn't on an extreme growth path "zombies". In VC eyes they're "undead" because that big fat exit is not likely to come, but actually in reality many of these are perfectly healthy companies doing fine. The journalist who wrote this clearly walks in the same circles cause they're happy to call healthy companies that are alive and kicking, serving their customers, creating jobs and so on, "zombies".
That's not to say that surely there's also plenty of once-unicorns which really are borderline bankrupt, and that lots of these companies were extremely overvalued and VCs made bad deals in the ZIRP. But the term "zombie" is a derogatory anti-entrepreneur term invented by VCs who try to encourage founders to "go big or go bust", quietly disregarding the huge incentive mismatch they got. Because unlike the VCs, the founder has all their eggs in one basket.
I think you're right in a sense. But some of these "healthy companies serving customers and creating jobs" have taken a 50% haircut on their valuation, which puts them in a difficult position regardless of how reasonably they are doing operationally.
This article focuses on "VCs wringing their hands" about zombie unicorns, but I'm kinda baffled at what the employees are thinking.
For an employee, it would seem like the only (financial) reason to stay at one of these companies is if you didn't have any other options - which I imagine is reasonably common these days with the tech job market being in the shitter. But stock options at these places are nearly guaranteed to be worthless, with any sales proceeds going to investors with preferred shares.
I think a lot of employees may stick around for social/personal reasons ("I helped build this company and I want to see it have a successful exit"), but speaking from experience, it's better to cut ties and move on. Time is your most precious resource, and using your time on a slowly dying company is usually a poor use of that resource.
This will only get worse as the AI bubble pops or cools and generates a ton more AI zombicorns too.
It really sucks for employees as their equity stake gives reason to stick around if there’s a good exit, but as every day passes odds increase that either the company goes bust or gets sold in some aqui-hire or salvage sale that gets investors something back but tends to leave employee shareholders with nothing.
There are post IPO tech zombies as well. Companies that IPOed and aren’t at serious risk of bankruptcy as they have cash, but aren’t profitable and nothing they seem to do changes the trajectory of the company. They could coast for years to come just slowly burning cash but have no clear prospects either to be anything more than a has-been just coasting along the train of irrelevance.
Falling valuations spell horror for vcs. More recently launched funds have been returning markedly less money to investors than those of earlier vintages, according to the World Economic Forum. They have also underperformed the s&p 500 by a wide mark, particularly those that did not invest in a small club of artificial-intelligence superstars
If you think it's haunting Silicon Valley, wait til you see what's on the balance sheets of Private Equity, which holds these and many, many more overvalued companies!
Yeah, that really is a horror show. The hidden problem with the zombie firms is that as the liquidity dries up larger VC's firm will end up becoming private equity firms.
Cameo (an example in the article) is an interesting one. It seems like a stable, steady business, making money, should be easy to accurately value if you have access to the financials. No surprise that the "It's $1bn!!!" valuation came from Softbank Vision Fund. https://en.wikipedia.org/wiki/Cameo_(website)
This is I think a very common issue. The term "startup" has two connotations: a nascent business trying to find its product/market fit and "a private business whose capital structure is dominated by VC money"
Companies that fall out of the first definition -- they've found their market, such as it is, but it's smaller, more competitive etc., than is needed for hypergrowth -- but are still in the second definition are in a bind. They've generally used up all their ideas, and have created a nice, small business. This should be a win, but in SV it's the worst kind of failure. The VCs aren't going to want to book a loss, so the company thrashes about trying to figure what else to do while trying to keep its business running. They should and ought to be evaluated using normal accounting, but that would mean the value of the business is a fraction of its "valudation"
This ends in the company being strangled by its own mal-investment, or sheer exhaustion when everyone, the management and the VCs, face reality, take the L, and leave the business for private equity to run off the remaining terminal value. Maybe sometimes this becomes a lifestyle business, but more than likely it's just a transition from the washing machine of "this month's great idea for growth" (they never pan out) to the grind of cost-cutting and extracting any customer surplus out of the system, leaving everyone miserable.
> they've found their market, such as it is, but it's smaller, more competitive etc., than is needed for hypergrowth... so the company thrashes about trying to figure what else to do while trying to keep its business running
In a lot of cases I think it's even worse than that-- VCs advise their portcos to keep swinging for the fences, even if it means pivoting away from their modestly successful niche, since a single and a strikeout are effectively the same to them.
Its like giving every monkey in the zoo a gun and expecting it to become an Olympic-level competitive shooter and not just blow its own foot off.
That's an interesting and novel analogy
Ahh so true.
I can almost hear this in George Carlin's voice.
It also peaked during the COVID lockdowns, lots of actors needed alternative sources of funds. Maybe the numbers for 1BN came from multiplying revenue into the future, or hell, expecting it to grow even.
Absolutely right, but you can also see how this can be a sustainable if not spectacular business going forward even in normal times. There are plenty of "resting" actors and grifting politicians who don't mind doing 60 seconds of work for the price of a round of drinks.
It's not a failure even if VCs think it is.
I feel like there is a business in taking successful startups-gone-lifestyle, buying the name and IP from the “rocket ship” and letting them have more funds for a pivot.
No need for "maybe". We know by now how these people think
I'm assuming there is a lot of local competition to Cameo in other countries?
As it has a large potential market if it did dominate globally.
The very concept is quite culturally contingent - both in how much buyers would care about getting such a service, and in how much celebrities would be willing to engage in this type of fan service. Going global would also require a huge amount of celebrity contractors, a big problem for scaling.
Companies being devalued is not news. It happens on the stock market everyday.
For companies that rely on outside investment to survive however it can become a slide to oblivion.
If the company itself is profitable, then typically it can continue. There's no interest rate on VC investment, and if profitable it can run forever. Customers, employees, users and so on are all fine. Investors? Well, they're potentially getting some returns through dividends, but its minor and not what they were chasing.
Of course the VC investment model is high risk. That's kinda the point. It's a bet on IPO or (valuable) acquisition. Most companies end up as neither.
Will this affect new VC funds in the future? Maybe in the short term. But there are still enough IPOs (like SpaceX now) and still enough greedy people willing to play the lottery. Sure the absolute amount of VC money may come down, but I don't think the model is going away.
Indeed it may start to lead to saner valuations along the way.
> There's no interest rate on VC investment, and if profitable it can run forever.
This isn't how VC funding works. The fund has a time limit, usually ten years, and has to wrap up and pay back in that time limit.
If your company is not profitable in that time limit, tough. The VC will exercise whatever rights they have and pull whatever they can out of it.
Typically, what can they pull out? don't they only have equity?
They might not easily be able to cash out, but they often have more options than people realise.
VCs will sometimes invest ‘convertible notes’ which start as debt and “convert” into equity in favourable scenarios.
‘Swamp’ and ‘drag’ clauses are also commmon: if a management team/CEO doesn’t meet their goals as set by the board (like give investors a meaningful exit) then investors can take over and replace that team, or force a sale.
Illiquid private equity in an early stage business, especially one that isnt growing, is hard to get rid of. That’s why investors derisk with terms that massively favour them at the expense of the business they invest in.
In our case, the VC's merged us with our biggest competitor and then sold that to a PE fund. Nothing we could do about it. I took voluntary redundancy and got out asap.
I've been in a startup that was operating at ~breakeven and did layoffs to actually be profitable, and at ~10 years in the VCs forced an acquihire since they wanted out.
> Companies being devalued is not news. It happens on the stock market everyday
TFA points specifically at "recent funds" that have underperformed public markets.
> Of course the VC investment model is high risk.Power law at play, apparently: High risk with high rewards only for the top 5%.
And VC even historically has not performed especially well. And just to take an anecdotal example, I have a friend who did some angel investing. He still does a bit on companies he believes in but admits he's have done a lot better putting a lot of the money into NASDAQ or some other index, much less some of the big tech firms.
> Indeed it may start to lead to saner valuations along the way.
SpaceX’s valuation + “data centers in space” being taken as a serious pitch leads me to think it’s only getting worse.
> Of course the VC investment model is high risk. That's kinda the point. It's a bet on IPO or (valuable) acquisition. Most companies end up as neither.
Cynically, I wonder how much of the insane (even in the moment) valuations were driven by VC firms trying to commit capital so they could collect management fees?
That post about GenieDB the other day has certainly opened my eyes to the sausage making behind the scenes.
Ohh, you're more cynical than me! My idea was that it's mostly early investors using FOMO to fleece later investors.
Even if a company is profitable, depending on voting interest and board control the investors may be able to force a sale.
True. Assuming there are buyers. And I'm not sure why buyers would pay more than value.
In other words, the sale wouldn't really achieve anything other than lock in the capital write-off. The return would be trivially small.
The point isn't necessarily to get buyers to pay more than fair market value. Most VC firms run a series of separate funds, each with a target date to return cash to limited partners. So at some point the VCs need liquidity even if the valuation isn't great. This is a normal and expected part of the business model.
In some cases a VC can kind of "extend and pretend" by getting one of their other portfolio companies to do the acquisition in an all stock deal.
The controlling voters don't really need to force a sale; they could force a wind-up of the business.
"Sure, we invested $100m, but you are still only breaking even. May as well close up shop, sell the data for as much as we can get and split the proceeds amongst us investors" is just as possible.
> If the company itself is profitable, then typically it can continue.
I only wish, but rarely. This is one of the great tragedies of the grow at all cost system. There have been so many great profitable companies, where the product is great, customers love it, employees love it, everyone is happy.. except it's not growing fast enough to satisfy the leeches so it gets destroyed.
As a society we should be supportive of small companies that make a great product that everyone loves, pays good salaries and makes a profit. The more of those, the merrier. But no, unless growth is on the hockeystick curve, private equity will destroy it sooner or later.
> satisfy the leeches
Poor metaphor. If you decide to play with sharks which demonstrate how to eat, you shouldn't be disappointed when you find out they are cold-blooded killers.
So you can take advantage of the money but cry when ROI comes?
The reason hockey stick growth is required is because the “leeches” are putting up the capital to build the profitable company and if the profits dont significantly outpace the risk free rate it’s a very bad investment.
The founders and employees and even the customers are accruing all the benefits of that capital so of course they are happy.
How else do you propose funding the quite expensive and risky enterprises that venture backs? Taxes? Paying employees less before profitability? Charging early customers a lot more? Clearly you can see the downsides of those approaches.
> How else do you propose funding the quite expensive and risky enterprises that venture backs?
Easy: Risk. When you invest in a small private startup, accept that it's a crazy risky bet that will probably fail. So those investors should accept that the risk is there instead of trying to push too hard to the point of destroying the company that could've continued on a happy path of slow growth.
I think they completely accept there is risk of failure. That doesnt mean they have to hand the company over to founders when they could just as easily sell it to PE or another company.
Founders could also buy it back if they can find a lender, but if they are profitable enough for one to be interested, but the financials rarely work out for that.
Growth != Profits
I would propose not funding them at all, because so much of the system has turned into outright grift, with wildly implausible "companies" receiving brain-melting sums so investors can pay themselves huge fees.
The companies all do things like "Pitch decks as a service" or "Coworker cafes in space" or "Fusion permanently two years from now, until we spend the money on drugs then pivot to military contracting" or "AI-powered gig economy pet sitters for the Bay Area".
There's a lot of happiness around, but there are also more useful things everyone could be doing.
That’s already an option? You can get small business loans, bootstrap, get grants etc that don’t require massive growth.
You can found or work for a company like this anytime you like. But the “leeches” the op mentions are a voluntary funding mechanism for a particular kind of company. If you found or work for one of those the trade off is clear.
You can’t have it both ways though. As an employee you can’t live off the largesse of investors as you build the business and then not expect them to want an elevated return on that risk.
Agreed. It's gonna be space, then robotics, then quantum robotics, then quantum solar nuclear robotics.
I think it depends way more on where and how much the wealth is concentrated than anything else
My impression is a lot of these companies raised mega rounds right before interest rates went up, and are now able to tread water by cutting headcount enough that their revenue + interest can sustain them. To what end? Who knows...
I know a few who are really feeling the pressure from customers now being able to vibe code part or their product and also their cloud bill is about to explode because hardware prices are through the roof
yeah got a buddy at a startup unicorn, moved from Canada to work down in the Valley, and he said basically the same: no moat, and AI could hack together 80% of their product... since it already is...
strong argument to me made for the support, dev, and long-term angle, but if any of the FAANGs or big players decided to eat their lunch they probably could.
He reckoned they could get something comprehensive and mature enough, with a real customer base, to offset the build effort and thus get acquired.
Everyone says support but great support requires culture of excellence and customer obsession and that were the first things to go when those zirp-era scaleups went on hiring sprees
SaaS was always destined for this, with or without AI. Excluding the small subset with network effects, the nominal nature of a remote execution aid in basic business process was always semi-farcical.
To soon be scooped up by bending spoons
Yeah, but burn rates are high. The money is mostly gone by now, and the run way is approaching its end in the next 12-18 months. Hence the “great devaluation “ they are predicting
do startups typically receive interest on their investment rounds?
Zero interest rates kept many weak companies alive but they also have give great companies time to find product market fit, and the hard part is to separate the two in hind sight
I'd be interested in any examples where a "zombie" company in the US was sloshing around for a few years and then finally found product market fit. I think it's probably incredibly rare, and I don't think it's really that hard to identify weak companies that have been treading water for years as you appear to think.
>By May 2026, 332 of the 1,900 unicorns in a database maintained by Ilya Strebulaev of Stanford University had raised money at a valuation at or below their peak (see chart). Of those, 212 were valued at under $1bn. As many as 383 had disclosed no new funding in the previous three years; 41 of these had lost unicorn status
332 out of 1900 isn't that bad?
Even the further 338 if confirmed would still be less a minority of the overall 1900
Down-rounds are very undesirable though. So those 332 likely have not had other options. True number of companies that wouldn't really be valued as high as their peak raise is probably higher, but some of them have been able to find enough revenue or other sources of funding in order not to raise and be valued down.
if you're a current equity holder they're undesirable. If you're buying in or buying more, no real reason to avoid a down round so long as the company is viable
I was an early employee (#20-something) at a company that peaked at just over a billion dollar valuation during Covid and that now sits at somewhere between 1/2 and 1/3 of that depending on who you talk to.
I'm still really close with a lot of early employees and while I was lucky enough to have a liquidity event happen shortly after I left that allowed me to cash out for a decent, but not life changing, return, many of my friends were not.
One of the things I think a lot of people may not realize is how badly this zombiecorn state fucks employees with stock options. A lot of startups will give you a limited amount of time after you leave to exercise your stock options (90 or 180 days is common based on my experience). If you don't exercise your stock options and buy your stock within that time period the options expire and you get nothing. The problem is that if you buy the stock, you won't be able to sell until there's a liquidity event (usually a new funding round or IPO) and current investors don't want to take investment at a lower price unless they absolutely have to.
I know some other early employees who were laid off who had to make the choice between dropping $75k or $100k to buy stock that is worth 10x that on paper (even at the current valuation) and praying for a liquidity event that will probably never arrive or letting go of shares that just a few years before seemed like they would be a life changing amount of money. I know people who've done both and neither route leaves people feeling good about their decision.
I know common wisdom is that you should treat that stock like it's worth nothing until they day you sell, but when you've worked at somewhere for 5-10 years and seen the on-paper value of your stock rise to a life changing amount of money, I think it's hard not to assume that you'll be able to cash that out one day.
Worse is if you paid taxes on that $100k valuation but it is only worth $25k now.
One of the people I know had that happen and didn't realize it. Between the exercise cost and taxes I think it ended up costing them nearly a quarter million.
I know that seems insane, but even at a $500m valuation their potential payout is enough to retire on.
If this is your situation consider asking for an ISO to NSO conversion. Many companies these days will allow you to do this, as they’ve realized it’s in their best interest to not retain checked out employees
lol I work for one of these still. It was an auto ML product, so the company is desperately trying to pivot to Genai and agents. Trying to catch the wave. I don’t know how well it’s working though. Churn keeps happening in the core business, processes meant for a large corporation are slowing progress in developing the new platform, and leadership has churned till only west coast AI pilled Amazon alums are left.
https://archive.is/UCJUJ
thanks
We need to stop pretending the VC valuations are meaningful.
It's like asking someone playing roulette to value "13 black", after they bet on it.
There valuations are always based on expectations of huge growth, not current value. Growth predictions with an extremely low confidence level. VCs make up for it by making a lot of bets.
The companies NEVER have current profits (The actual measure of value) that would justify their valuation.
So, it's comparing gambling payouts to corporate valuations, aka "apples to oranges", which are not related.
When the predicted growth doesn't occur, the companies valuation becomes based on its actual value (profits).
> There valuations are always based on expectations of huge growth, not current value.
They're primarily a function of fund size. Everything else that can be fudged is fudged in order to make it look sane.
Funds make their money by taking a cut of AUM. Thus, they're incentivized to make bigger funds. They also can't spread out their portfolio over hundreds of tiny investments without losing control, so they need to write big checks. When you write a big check, the founders need a big post-money number to maintain a reasonable percentage of the cap table. It doesn't hurt that big valuations make everyone look better.
As money flooded into VC, the funds got bigger, the checks got larger, and the number of unicorns shot up in direct proportion to the number of large funds competing for their equity. The revenue projections used to justify this charade were never really important, and couldn't be proven in any case.
It's indeed not that black and white. Growth and revenue can happen quite early and they are usually seen as signs that a company might eventually become profitable. The whole point of VC funding is to put all available resources in growth, not in profit. Investments in profitable companies aren't really venture capital investments. Different class of investors that do that, generally.
Where the whole thing starts looking like gambling is when companies get huge rounds based on essentially no proof whatsoever that the thing will ever grow or have revenue. And when the idea is basically "we'll pay famous people to send greetings to people" we're in obviously stupid money territory. That was never going to have the revenues to back up the inflated valuation. And somebody still sank a few tens of millions in that to find that out the hard way. That company had a paper valuation of a billion. But it doesn't necessarily mean all those tens of millions were spent and lost. Investors might commit the money but it's usually conditional on growth targets and milestones. When shit goes south, they'll pull the brakes and the money stops flowing. Good investors wouldn't wait until all the money is gone to do that.
The reason these investments happen is that VCs mostly aren't investing their own cash. They are being paid to make investments and to inflate their portfolios. By the time the shit hits the fan, they'll have gotten their payoff. It all looks great until it doesn't. And inflated valuations make them look shit hot even when they are clearly not. This attracts more capital for them to invest.
Of course at some point the shit does hit the fan and the money evaporates. That's when you get acqui-hires and other constructions that are usually portrayed as a successful exit that, again, makes the VCs look like they know what they are doing. This is all about damage control that is about both financials and reputations. Never mind that it's effectively a fire sale at that point. But investors get to swap their bad shares for good shares, and founders get to work in somebody else's company for stock options. And the "buying" company gets some nice people and they stay best buddies with the investors they just bailed out who might typically also be investors in those companies. In the end the madness gets written off against the overall fund performance. It only takes a few good gambles to work out for everybody to come out smelling like roses.
I wish I could not just like something, but mark it as "Authoritative" or something like that, this post is basically it to a T.
I have a few friends who have gone into VC either starting their own or an existing. Hearing about some of the companies they are invested in makes me realize that half of these show HN posts are legit multi billion companies already with 2-5 person teams. As you’ve said, low to zero profit, and seemingly no corner on the market.
It’s like coin collecting, without the currency part - just hoping someone one day sees it, and wants to put them on their coin on their shelf. I can’t make sense of it, maybe that’s the point. I miss when VCs cared about helping people change the world, better or worse (ideally better).
> It's like asking someone playing roulette to value "13 black", after they bet on it.
Even worse, because you don't get better odds or payouts by persuading others to bet on 13 black, but you do when they invest in the company you've backed.
>Their valuations are always based on expectations of huge growth, not current value. Growth predictions with an extremely low confidence level. VCs make up for it by making a lot of bets.
all valuations are based on expectations of the future, that's what the stock market is. Except VC valuations which are based on how much money was invested, extended to cover all the equity rather than just what was purchased. However, the amount of money invested was calculated based on expectations for the future.
the definition of the term "asset" is "something expected to have a value in the future"
an asset is an item of value owned. it may or may not be expected to be valuable in the future, but is known to be valuable today.
companies spend money on things, but those things need to be classified as expenses or assets. Items that are not expected to have a value in the future (box of post-it notes, pencils, electricity...) are expensed in the present. Assets are longer term items that will be involved in the creation of wealth/value, so they appear on the balance sheet of a company to give investors an idea of the value of the "wealth creating assets".
https://accountinguide.com/difference-between-assets-and-exp...
"Assets are the resources that have future economic value and they are belong and under the control of the company. They are expected to provide future economic benefits to the company. Assets are presented on the balance sheet which can be current assets and noncurrent assets."
also
https://quickbooks.intuit.com/learn-support/en-us/help-artic...
"Assets are things your business owns that have long-term value, like property or equipment. Their cost is spread out over time. Expenses are costs of daily operations that are used up quickly, such as rent or utilities, and are fully deducted when they occur."
https://www.uschamber.com/co/run/finance/assets-vs-expenses
"To be considered an asset, the item must maintain its worth for at least one year after acquisition."
current profits (The actual measure of value) that would justify their valuation
That's...not how value works at all. If it was, all of these rapidly growing companies that haven't made a profit yet would be worth zero. Would you pay $1 for any of the big AI labs? I sure as fuck would.
Value is more about the present value of future cashflows. And it turns out that estimating future cashflows of extremely fast growing companies is really hard.
This is why, all these people are called founders and never entrepreneurs an almost dirty word in VC circles...
This is not the whole story. While there may be some value in terms of marketing to claim a higher valuation there are also many downsides to a higher valuation which in turn for example leads to a higher fair market value that makes executing stock options on a private company extraordinarily costly from a tax perspective. Admittedly the holders of the preferred stock like investors might not have the same incentives as the people who are given stock options but their interests are largely aligned in that they're both interester in retaining great talent and making the company successful (eg valuation higher) but later
NO. You need to stop pretending that gambling is good and take some social responsibility for the massive class of people in the second-tier service economy because of chronic under-investment in "low growth" industries.
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I think you are missing the point. I think the software business has become undesirable for VC investment. I am seeing that in the market from the otherside. People think there is no moat. Which I absolutely disagree but yea.
VC invest is same as buying a house. Someone has valued your house is worth x, thats why it is valued at x. There were people willing to invest at 1B valuation now they are not. Market has moved. Imagine, if the area where you bought the house, suddenly is not desirable or theres no one willing to pay for it, then value of your house will go down, in some scenarios to zero. It is as simple as that.
>> The companies NEVER have current profits (The actual measure of value) that would justify their valuation.
Lol. "Profits" is old person talk. Nobody needs profits. The most valuable company in the world hasnt shown a dime in profit. That doesnt mean everyone cannot get rich. You just have to know the right people. That is all that matters these days. Having profits also means paying taxes... a fools game. Profits are just a sign of a weak expansion strategy and so will generally reduce valuations!
> The most valuable company in the world hasnt shown a dime in profit.
NVidia is quite profitable (it may not be enough to justify its current market cap), so is Aramco. Which is the most valuable in the world is up to you.
They think it's Spacex
Its not about how much you earn, its about what you're worth. And who's worth the most? Companies that lose money.
I don't want to make a little bit of money every day. I wanna make a fuck ton of money all at once.
https://www.youtube.com/watch?v=BzAdXyPYKQo
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> 17 black
Let it ride !
> We need to stop pretending the VC valuations are meaningful.
When I was a kid, the valuation of a company was based on the amount of profit that it did taking into account the cost of getting it.
The day that the USA abandoned capitalism for speculative-finance was a bad day for the world economy.
The valuation of a company was never based solely on its current profits.
Conventional finance theory was that stock price/valuation was based on the net present value of the current/future dividend stream.
That has of course largely fallen apart in practice.
I don’t think conventional finance theory was ever to conflate stock price and valuation the way you just did there. Nor did it only include dividends in NPV calculations.
And I’d argue that valuation based on NPV of future profits hasn’t fallen apart at all, it’s just become harder to estimate future profits, and the discount rate has changed.
It's funny you say that because you can absolutely value 13 black after it's been bet on. It's actually really easy, I would expect a middle schooler to be able to do so and intuitive understand the concept.
It's simple really. If the VC's don't move the money, then it's dead money to them. These are calculated risks that they absorb under the premise of regret minimization. They don't really have a choice but to take occasional losses. It's nearly intentional.
Bezos has something to say about this - which unfortunately has skipped over the whole industry.
you only raise money to grow "cash flows". if you can turn $1 into $3 do it. otherwise don't.
unfortunately SV tends to do the opposite - turn $3 into $1.
For the sake of mythological accuracy, I hope that Unicorns sunk by debt and managing to pull into negative ARR (due to overhead costs) will get called Nightmares.
But Zombie Unicorns being an accurate term is enough to make me happy today.
Why post a link that people have to pay to read?
Same article:
https://www.businesstimes.com.sg/opinion-features/zombie-uni...
Follow-up question: why upvote an article that you probably can't read?
I didn't upvote it.
Zunicorn
Zune-icorn?
Zombicorn!
I know of some actual in use Microsoft Zune that have outlasted many companies that were predicted to become unicorns.
You can do anything with Zombicorn. The sky is the limit, with Zombicorn. Welcome, to Zombicorn.
The liquidation event is unattainable at Zombicorn!
Except keep Flash alive apparently.
Just realized zombo.com recently got a major update
Yeah I can’t decide whether the new song is ai slop or a banger
html5 version still has the original
Quick warning that finance bros call any healthy company that isn't on an extreme growth path "zombies". In VC eyes they're "undead" because that big fat exit is not likely to come, but actually in reality many of these are perfectly healthy companies doing fine. The journalist who wrote this clearly walks in the same circles cause they're happy to call healthy companies that are alive and kicking, serving their customers, creating jobs and so on, "zombies".
That's not to say that surely there's also plenty of once-unicorns which really are borderline bankrupt, and that lots of these companies were extremely overvalued and VCs made bad deals in the ZIRP. But the term "zombie" is a derogatory anti-entrepreneur term invented by VCs who try to encourage founders to "go big or go bust", quietly disregarding the huge incentive mismatch they got. Because unlike the VCs, the founder has all their eggs in one basket.
I think you're right in a sense. But some of these "healthy companies serving customers and creating jobs" have taken a 50% haircut on their valuation, which puts them in a difficult position regardless of how reasonably they are doing operationally.
2015 era VC isn't aging well
This article focuses on "VCs wringing their hands" about zombie unicorns, but I'm kinda baffled at what the employees are thinking.
For an employee, it would seem like the only (financial) reason to stay at one of these companies is if you didn't have any other options - which I imagine is reasonably common these days with the tech job market being in the shitter. But stock options at these places are nearly guaranteed to be worthless, with any sales proceeds going to investors with preferred shares.
I think a lot of employees may stick around for social/personal reasons ("I helped build this company and I want to see it have a successful exit"), but speaking from experience, it's better to cut ties and move on. Time is your most precious resource, and using your time on a slowly dying company is usually a poor use of that resource.
This will only get worse as the AI bubble pops or cools and generates a ton more AI zombicorns too.
It really sucks for employees as their equity stake gives reason to stick around if there’s a good exit, but as every day passes odds increase that either the company goes bust or gets sold in some aqui-hire or salvage sale that gets investors something back but tends to leave employee shareholders with nothing.
There are post IPO tech zombies as well. Companies that IPOed and aren’t at serious risk of bankruptcy as they have cash, but aren’t profitable and nothing they seem to do changes the trajectory of the company. They could coast for years to come just slowly burning cash but have no clear prospects either to be anything more than a has-been just coasting along the train of irrelevance.
So, series h, i, j companies are worthless?
Can you give some examples of companies that are series J that you see as having a realistic chance of IPO?
Stripe is at I. I think they’ll ipo.
Falling valuations spell horror for vcs. More recently launched funds have been returning markedly less money to investors than those of earlier vintages, according to the World Economic Forum. They have also underperformed the s&p 500 by a wide mark, particularly those that did not invest in a small club of artificial-intelligence superstars
If you think it's haunting Silicon Valley, wait til you see what's on the balance sheets of Private Equity, which holds these and many, many more overvalued companies!
Yeah, that really is a horror show. The hidden problem with the zombie firms is that as the liquidity dries up larger VC's firm will end up becoming private equity firms.
children of the zombie corn
https://archive.is/9mfzD
now this wants me to scan a QR code with a mobile device?
Google reCAPTCHA is a joke.
I’ve got one “scan to unlock” recently too but there was an option to switch to audio captcha at the bottom. I hope it stays this way.
Thank goodness for the ADA.
I’m a bit worried they might try to pull it off in other markets though.
My first attempt to open the archive link took me to a Brazilian radio station that wanted me to install Adobe Flash. Second try worked fine.
Eventual consistency is enough for everybody.
Being redirected to an unknown website by QR code (no visible URL)?
Where is the worst you could end up!
They should be measuring valuation inflation and the Fed should intervene to prevent the debasement of VC
You need a better explanation of why you think the market isn’t functioning here.
Seems like a classic case of “putting your money where your mouth is” - if you think the valuation is wrong, don’t invest.
(Of course that only applies to those able to invest, but the same principle applies.)