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In the coming months, the venture capital industry will be plagued with zombies
If there's one thing that European, Chinese, and Japanese economies have been plagued with for the past few decades, it's the abundant presence of zombie companies. For those that don't know, zombie companies are known as uncompetitive businesses. While they do generate revenue, after paying for their operational costs, they only have enough to pay the interest on their bonds and are unable to pay down their debts. Through government stimulus and low interest rates, these companies have been able to refinance their debts to avoid paying the balloon payment on their debts.

With rates spiking at an unprecedented pace and governments embarking on austerity measures, many of these zombie companies are going bust and many more companies will reach zombie status. For the venture capitalists that have injected capital in these zombie startups throughout the tech bubble and hoping that those companies will miraculously reach profitability, that strategy will no longer be practiced as higher rates have made it harder for them to raise capital. As startups underperform, VCs will hold back on funding startups because they no longer have the returns to attract investors and will instead, focus on managing their current portfolio of startups as they eventually wind down their operations. These VC firms will become known as zombie VCs.

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Source: Vice News

Then there's the issue of there being too many venture capitalists in the industry. Whether it's the business grads that worked as consultants at McKinsey or FAANG employees making the big bucks, many people that had money but not much experience were acting as angel investors. Even startup founders that were busy building their own business were also investing in other startups on the side. The reason for this was because being venture capitalist was considered "cool". MBAs flocked towards venture capital during the tech bubble like how they once flocked to real estate and investment banking during the housing bubble. To give perspective, the number of VC firms that have raised a fund from 2010-2022 went from 883 to 2,718.

It's expected that many VC firms will show symptoms of being a zombie in a few years. These symptoms will include:

  • haven't made big investments in the past three or four years
  • they haven't raised a new fund in a while
  • partners leave the industry and never come back and layoffs occur

Eventually, most VC firms will have very few or even one partner and a skeleton crew managing the portfolio until all the companies exit. Then, the firm shuts down and those individuals will be finding another line of work.
VCs Face an Existential Threat: There Are Too Many of Them
The venture industry needs to shrink to adjust to the new normal, and even the VCs themselves know it. “If you look at the industry as a whole, it's too big,” said one.

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