Why ‘forever’ investors are snapping up ‘zombie’ venture capital

Italian company Bending Spoons had largely flown under the radar – until last month. Within 48 hours, the company announced AOL acquisition And a massive increase of $270 million, four times its valuation 11 billion dollars From $2.55 billion set for early 2024.

Bending Spoons grew rapidly by acquiring stagnant technology brands like Evernote, Meetup, and Vimeo, then turning them profitable by cutting costs and dramatically increasing prices. While the company’s approach is similar to private equity, there is one key difference: Bending Spoons has no plans to sell these companies.

andrew Dumont, The founder and CEO of Curious, a company that also captures and revitalizes what he calls “venture zombies,” is convinced that this “hold on forever” strategy will become increasingly prominent in the coming years as AI-driven startups make older venture capital-backed software companies less relevant.

“Our belief is that the law of the power of enterprise, in which 80% of companies ‘fail’, results in many great companies, even if they are not unicorns,” Dumont told TechCrunch.

Dumont defines “great businesses” as those that can be purchased at a low price and revived quickly to generate large cash flows. This “buy, fix and hold” strategy is the playbook for a growing number of investors, from 30-year-old Constellation Software, which pioneered the model, to newer players including Bending Spoons, Small in size, SaaS.group, Emerging projectsand Quiet capitalaccording to Dumont.

“Our whole model is to buy these companies, make them profitable and use those profits to grow the business,” Dumont said.

In 2023, Curious raised $16 million in equity capital to buy software companies that had floundered and were unable to secure follow-on investments.

Since then, the company has purchased five companies, including UserVoice, a 17-year-old startup 9 million dollars In venture capital funding from Betaworks and SV Angel.

“It’s a great business, but the cap schedule wasn’t consistent with retention. These funds are getting old, and these companies are sitting there.” Dumont said. “We are providing liquidity and also repositioning these companies to profitability.”

Although Dumont did not disclose how much he paid for UserVoice, he said that stagnant companies sell for a fraction of the valuation required by SaaS startups, which typically sell for 4x annual revenue or more. Based on our conversation, we estimate that Adventure Zombies are sometimes sold for as low as twice annual revenue.

By cutting costs and increasing prices, Curious can push these companies to achieve profit margins of 20% to 30% almost immediately. “If you had a $1 million business, you would make $300,000 in revenue,” he offered as an example.

They achieve transformations because, unlike independent companies, they can centralize functions such as sales, marketing, finance and other management roles, across all their portfolio companies. “We are not trying to sell companies we acquire nor do we need venture capital-scale exits, so we can balance growth and profitability more sustainably,” Dumont said.

When asked why VCs don’t push their startups to be profitable the way Curious does, Dumont responded: “Investors don’t care about profits, they only care about growth. Without that, there’s no exit on the VC scale, so there’s no incentive to operate at that level of profitability.”

The money generated by Curious’ companies is then used to buy other startups, Dumont said.

The company plans to buy between 50 and 75 startups like UserVoice over the next five years, and Dumont is certain he will have no shortage of targets to choose from. Curious focuses on acquiring startups that generate $1 million to $5 million in recurring revenue annually, a segment of the software market that private equity shops and secondary investors have historically ignored, according to Dumont.

“We did this a little less than two years ago, and we probably looked at at least 500 companies, and we bought five,” Dumont said.

While the spike in Bending Spoons’ valuation may validate the “adventurous zombie” acquisition model, Dumont doesn’t expect much new competition. Turning profits out of a recession is not easy. “It’s a ton of work,” he said.