Why ‘Hold Forever’ Investors Are Buying Venture Capital Zombies
▼ Summary
– Bending Spoons recently gained attention by acquiring AOL and raising $270 million, quadrupling its valuation to $11 billion in early 2024.
– The company grows by purchasing stagnating tech brands like Evernote and Vimeo, then makes them profitable through cost-cutting and price increases without plans to sell them.
– Andrew Dumont of Curious predicts this “hold forever” strategy will become more common as AI-native startups reduce the relevance of older VC-backed businesses.
– Curious acquires “venture zombies” at low prices, revives them for immediate profitability, and uses the earnings to fund further acquisitions.
– This model involves centralizing functions across portfolio companies to achieve 20-30% profit margins, focusing on sustainable growth rather than VC-scale exits.
A new breed of investor is quietly reshaping the technology landscape by acquiring what they term “venture capital zombies”, startups that once showed promise but have since stalled, unable to secure further funding or achieve significant growth. These investors, adopting a “hold forever” strategy, purchase these companies at attractive prices, implement rigorous operational improvements, and retain them indefinitely to generate steady cash flow, rather than seeking rapid exits through sales or public offerings.
The Italian firm Bending Spoons recently captured headlines with its acquisition of AOL and a substantial funding round that pushed its valuation to $11 billion. This company has built its reputation by taking over well-known but underperforming tech brands such as Evernote, Meetup, and Vimeo. Through aggressive cost reduction and strategic price increases, Bending Spoons revives these assets, yet unlike traditional private equity, it has no intention of selling them off.
Andrew Dumont, founder and CEO of Curious, operates on a similar principle. His firm specializes in identifying and revitalizing venture zombies, which he describes as solid businesses trapped by misaligned incentives or aging investment funds. Dumont believes the rise of AI-native startups will make older, venture-backed software companies increasingly obsolete, creating more opportunities for his “buy, fix, and hold” approach.
He explains that the venture capital power law, where a small percentage of companies deliver outsized returns, leaves many potentially profitable businesses in its wake. “Our belief is that the venture power law, in which 80% of companies ‘fail,’ actually produces many great businesses, even if they’re not unicorns,” Dumont stated. For him, a great business is one acquired cheaply and quickly turned into a cash-generating asset.
This model isn’t entirely new. Constellation Software has practiced it for three decades. Now, newer entrants like Bending Spoons, Tiny, SaaS.group, Arising Ventures, and Calm Capital are following suit. In 2023, Curious raised $16 million specifically to purchase software companies that have plateaued and can no longer attract follow-on investments. Since then, the firm has acquired five businesses, including UserVoice, a 17-year-old startup previously backed by Betaworks and SV Angel.
Dumont points out that stagnant companies often sell for a fraction of the valuation of healthy SaaS startups. While thriving firms might command four times annual revenue or more, venture zombies can sometimes be purchased for as little as one times yearly revenue. After acquisition, Curious centralizes support functions like sales, marketing, and finance across its portfolio, enabling swift profitability. The firm aims for profit margins between 20% and 30% shortly after taking over.
“If you have a million-dollar business, you’re kicking off $300,000 in earnings,” Dumont illustrated. This profitability allows Curious to reinvest earnings into acquiring additional startups, creating a self-sustaining cycle. The firm plans to acquire between 50 and 75 startups over the next five years, focusing on those with annual recurring revenue of $1 million to $5 million, a segment often overlooked by private equity and secondary investors.
Why don’t venture capitalists push their portfolio companies toward profitability in a similar way? Dumont suggests their incentives differ fundamentally. “Investors don’t care about earnings, they only care about growth. Without it, there’s no VC-scale exit, so there’s no incentive to operate with that level of profitability,” he noted.
Although Bending Spoons’ soaring valuation may lend credibility to this acquisition model, Dumont doesn’t anticipate a flood of new competitors. Transforming stagnant companies into profitable enterprises demands intense effort and operational expertise. “It’s a ton of work,” he admitted, underscoring that success in this niche requires more than just capital, it demands a disciplined, long-term commitment to rebuilding and holding.
(Source: TechCrunch)
