Why ‘hold forever’ investors are snapping up venture capital ‘zombies’

Italian firm Bending Spoons flew largely below the radar — till final month. In a span of 48 hours, the corporate introduced the acquisition of AOL and an enormous $270 million elevate, quadrupling its valuation to $11 billion, up from $2.55 billion set in early 2024.

Bending Spoons has grown quickly by buying stagnating tech manufacturers like Evernote, Meetup, and Vimeo, then turning them worthwhile by way of aggressive cost-cutting and worth will increase. Whereas the corporate’s method is much like non-public fairness, there may be one key distinction: Bending Spoons has no plans to promote these companies.

Andrew Dumont, the founder and CEO of Curious, a agency that additionally acquires and revitalizes what he calls “enterprise zombies,” is satisfied this “maintain ceaselessly” technique will change into more and more distinguished within the coming years as AI-native startups make older VC-backed software program companies much less related.

“Our perception is that the enterprise energy regulation, by which 80% of corporations ‘fail,’ produces many nice companies, even when they’re not unicorns,” Dumont instructed TechCrunch.  

Dumont defines a “nice enterprise” as one that may be bought at a low worth and shortly revived to generate substantial money flows. This “purchase, repair, and maintain” technique is the playbook for a rising variety of traders, from the 30-year-old Constellation Software program, which pioneered the mannequin, to newer gamers, together with Bending Spoons, Tiny, SaaS.group, Arising Ventures, and Calm Capital, in keeping with Dumont.

“Our complete mannequin is to purchase these corporations, make them worthwhile, and use these earnings to develop the enterprise,” Dumont stated.

In 2023, Curious raised $16 million in devoted capital for purchasing software program corporations which have stalled and may now not safe follow-on funding.

Since then, the agency has purchased 5 companies, together with UserVoice, a 17-year-old startup that raised $9 million in VC funding from Betaworks and SV Angel.

“It’s a fantastic enterprise, however the cap desk wasn’t aligned with holding it. These funds get outdated, and these corporations simply sit there,” Dumont stated. “We offer liquidity and in addition reset these corporations for profitability.”

Though Dumont didn’t disclose how a lot he paid for UserVoice, he stated that stagnant corporations promote for a fraction of the valuation commanded by wholesome SaaS startups, which generally promote for 4x annual income or extra. Based mostly on our dialog, we estimate that “enterprise zombies” typically promote for as little as 1x yearly income.

By implementing cost-cutting and worth will increase, Curious can push these companies to attain 20% to 30% revenue margins virtually instantly. “When you have a million-dollar enterprise, you’re kicking off $300,000 in earnings,” he supplied for instance.

They obtain the turnarounds as a result of, in contrast to the stand-alone corporations, they’ll centralize capabilities like gross sales, advertising and marketing, finance, and different admin roles, throughout all of their portfolio corporations. “We’re not attempting to promote the companies we purchase and don’t want VC-scale exits, so we will stability development and profitability extra sustainably,” Dumont stated.

When requested why VCs don’t urge their startups to be worthwhile like Curious does, Dumont responded by saying: “Buyers don’t care about earnings; they solely care about development. With out it, there’s no VC-scale exit, so there’s no incentive to function with that stage of profitability.”

The money generated from Curious’ corporations is then used to purchase different startups, Dumont stated.  

The agency plans to purchase 50 to 75 startups like UserVoice over the following 5 years, and Dumont is for certain he gained’t have a scarcity of targets to select from. Curious is concentrated on buying startups that generate $1 million to $5 million in recurring income yearly, a phase of the software program market that, in keeping with Dumont, non-public fairness retailers and secondary traders have traditionally ignored.

“We’ve been doing this for a bit of below two years now, and we’ve in all probability checked out not less than 500 corporations, and we purchased 5,” Dumont stated.

Whereas Bending Spoons’ massive valuation hike could validate the “enterprise zombie” acquisition mannequin, Dumont doesn’t anticipate a variety of new competitors. Turning income out of stagnation isn’t straightforward. “It’s a ton of labor,” he stated.