In my continuing series on “Zombies”, I need to address the classification of Zombie companies in Silicon Valley. A Zombie company is very much like a Zombie, keeps walking around aimlessly until it dies. Once bitten, it is an “irreversible” process – the company gets infected and will never be a dynamic Silicon Valley company. I do have certain recommendations about not getting that infection.
Avoid the “Penny Stock” label – A Chicago company’s executive told me during a phone conference that he was raising $1 million or thereabouts through some “financial” firm in Queens, New York. Once he said that, I thought that the best VCs, investment banks, and Private Equity firms are all located in Manhattan, maybe Southern Connecticut – but not Queens. The “Wolf of Wall Street” movie’s company I believe was located somewhere in Queens. And as the major motivation for the lead character’s entering that business was the 50% commission. When I asked was the cost of the capital, he did confirm that it was 50%. An earlier blog states in detail that penny stock companies never graduate to join mainstream Wall Street ones. The company turns into a zombie appearing in “pink” sheets, trading a few cents a share until it shuts down. So don’t become a penny stock company.
Consider that ”if you are not first, you might as well be last” (a tribute to a Will Ferrell movie) — An East Coast leading entrepreneur described that a company must be in the top three in any industry, or it has failed. The best metaphor I use: if you cannot breathe for 3 minutes, you’re dead. If you do not drink water in 3 days, you’re dead. If you don’t eat within 3 weeks, you’re dead. And, I add, if the company is not in the top three in its industry, it is dead – or becomes a Zombie, near death.
A startup environment must behave as if you are in an NASCAR auto race where you must maximize your speed enough to beat all the other race cars without crashing into walls. And if you drive too slowly, then you lose. It is a combination of speed and risk management. The best examples of Zombie creation are those companies that file for patents, get them granted, and lolls around without marketing the product. I met with one several months ago. The law firm informs the patent owner that now that the patent has been filed, then company’s valuation is approximately $XXX. Wrong. Legal documentation does not generate revenues. Marketing does. A company’s economic valuation is determined by its cash flows derived from its IP, not the IP alone. While this company sits around, there are others with patents that has focused on revenues and seized that very same market for which that patent was developed. A year ago I met the founder of a wearable monitoring device which could measure core body temperature, hearbeats. Just the core body temperature feature would be a homerun. But the senior management included a patent lawyer, who kept filing patents from the U.S., throughout the rest of the world. All of that slowed down commercial development. And diminished financial resources that should have been invested in marketing, not USPTO/International filing and legal fees. I am not stating to not file, but file efficiently and frugally. Each dollar for a startup is dear. Investors expect ROI, not paperwork.
I have seen too many Zombies with patents. To avoid being bitten, a startup must aggressively pursue revenues as quickly as possible. It must be cognizant of the competitive environment. And the company must beat every competitor. Or it will become a Zombie.
Keep your core team together for the first few years – When a company changes senior managers in its infancy stages, replacing managers slows down growth. Or if the top dog cannot keep its talented executives in the fold (like Zynga). Sometimes I attribute this to poor leadership skills. I always revert to the American football analogy – each member of the 11 man offensive line is critical to winning. The company must do everything to make sure that the team works cohesively, or it will lose. The name of the game for any startup is to win. Period. Or the company will falter, slow down, and then, becomes a Zombie.
I am seeing a large population of Zombies in and around SIlicon Valley. Can they be fixed? Even a recent Zombie movie, “Warm Bodies,” (www.warmbodiesmovie.com) does suggest you can revert the Zombie status to a human one. I have been asked to repair a company in NYC. It does require additional cash infusion and being able to redirect the company’s original direction on a dime. However, that is a more difficult task than doing it right the first time. And a Zombie reversion discussion belongs in another blog.