Why ‘hold Forever’ Investors Are Snapping Up Venture Capital ‘zombies’

Italian institution Bending Spoons flew mostly nether nan radar — until past month. In a span of 48 hours, nan institution announced nan acquisition of AOL and a monolithic $270 cardinal raise, quadrupling its valuation to $11 billion from $2.55 cardinal group successful early 2024.

Bending Spoons has grown quickly by acquiring stagnating tech brands for illustration Evernote, Meetup, and Vimeo, past turning them profitable done fierce cost-cutting and value increases. While nan company’s attack is akin to backstage equity, location is 1 cardinal difference: Bending Spoons has nary plans to waste these businesses.

Andrew Dumont, the laminitis and CEO of Curious, a patient that besides acquires and revitalizes what he calls “venture zombies,” is convinced this “hold forever” strategy will go progressively salient successful nan coming years arsenic AI-native startups make older VC-backed package businesses little relevant.

“Our belief is that nan task powerfulness law, successful which 80% of companies ‘fail’ produces galore awesome businesses, moreover if they’re not unicorns,” Dumont told TechCrunch.  

Dumont defines a “great business” arsenic 1 that tin beryllium purchased astatine a debased value and quickly revived to make important rate flows. This “buy, hole and hold” strategy is nan playbook for a increasing number of investors, from nan 30-year-old Constellation Software, which pioneered nan model, to newer players including Bending Spoons, Tiny, SaaS.group, Arising Ventures, and Calm Capital, according to Dumont.

“Our full exemplary is to bargain these companies, make them profitable and usage those net to turn nan business,” Dumont said.

In 2023, Curious has raised $16 cardinal successful dedicated superior for buying package companies that person stalled and tin nary longer unafraid follow-on investment.

Since then, nan patient has bought 5 businesses, including UserVoice, a 17-year-old startup that raised $9 million successful VC backing from Betaworks and SV Angel.

“It’s a awesome business, but nan headdress array wasn’t aligned pinch keeping it. These costs get old, and these companies conscionable beryllium there.” Dumont said. “We supply liquidity and besides reset these companies for profitability.”

Although Dumont didn’t disclose really overmuch he paid for UserVoice, he said that stagnant companies waste for a fraction of nan valuation commanded by patient SaaS startups, which typically waste for 4x yearly gross aliases more. Based connected our conversation, we estimate that “venture zombies” sometimes waste for arsenic debased arsenic 1x yearly revenue.

By implementing cost-cutting and value increases, Curious tin push these businesses to execute 20% to 30% profit margins almost immediately. “If you person a million-dollar business, you’re kicking disconnected $300,000 successful earnings,” he offered arsenic an example.

They execute nan turnarounds because, dissimilar nan standalone companies, they tin centralize functions for illustration sales, marketing, finance, and different admin roles, crossed each of their portfolio companies. “We’re not trying to waste nan businesses we get and don’t request VC-scale exits, truthful we tin equilibrium maturation and profitability much sustainably,” Dumont said.

When asked why VCs don’t impulse their startups to beryllium profitable for illustration Curious does, Dumont responded by saying: “Investors don’t attraction astir earnings, they only attraction astir growth. Without it, there’s nary VC-scale exit, truthful there’s nary inducement to run pinch that level of profitability.”

The rate generated from Curious’s companies is past utilized to bargain different startups, Dumont said.  

The patient plans to bargain 50 to 75 startups for illustration UserVoice complete nan adjacent 5 years, and Dumont is definite he won’t person a shortage of targets to take from. Curious is focused connected acquiring startups that make $1 to $5 cardinal successful recurring gross annually, a conception of nan package marketplace that, according to Dumont, backstage equity shops and secondary investors person historically ignored.

“We’ve been doing this for a small nether 2 years now, and we’ve astir apt looked astatine at slightest 500 companies, and we bought five,” Dumont said.

While Bending Spoons’ large valuation hike whitethorn validate nan “venture zombie” acquisition model, Dumont doesn’t expect a batch of caller competition. Turning profits retired of stagnation isn’t easy. “It’s a ton of work,” he said.