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

Italian institution Bending Spoons flew mostly nether the radar — until past month. In a span of 48 hours, the institution announced the acquisition of AOL and a monolithic $270 cardinal raise, quadrupling its valuation to $11 billion from $2.55 cardinal acceptable successful aboriginal 2024.

Bending Spoons has grown rapidly by acquiring stagnating tech brands similar Evernote, Meetup, and Vimeo, past turning them profitable done assertive cost-cutting and terms increases. While the company’s attack is akin to backstage equity, determination is 1 cardinal difference: Bending Spoons has nary plans to merchantability these businesses.

Andrew Dumont, the laminitis and CEO of Curious, a steadfast that besides acquires and revitalizes what helium calls “venture zombies,” is convinced this “hold forever” strategy volition go progressively salient successful the coming years arsenic AI-native startups marque older VC-backed bundle businesses little relevant.

“Our content is that the task powerfulness law, successful which 80% of companies ‘fail’ produces galore large businesses, adjacent if they’re not unicorns,” Dumont told TechCrunch.  

Dumont defines a “great business” arsenic 1 that tin beryllium purchased astatine a debased terms and rapidly revived to make important currency flows. This “buy, hole and hold” strategy is the playbook for a increasing fig of investors, from the 30-year-old Constellation Software, which pioneered the model, to newer players including Bending Spoons, Tiny, SaaS.group, Arising Ventures, and Calm Capital, according to Dumont.

“Our full exemplary is to bargain these companies, marque them profitable and usage those net to turn the business,” Dumont said.

In 2023, Curious has raised $16 cardinal successful dedicated superior for buying bundle companies that person stalled and tin nary longer unafraid follow-on investment.

Since then, the steadfast has bought 5 businesses, including UserVoice, a 17-year-old startup that raised $9 million successful VC backing from Betaworks and SV Angel.

“It’s a large business, but the headdress array wasn’t aligned with keeping it. These funds get old, and these companies conscionable beryllium there.” Dumont said. “We supply liquidity and besides reset these companies for profitability.”

Although Dumont didn’t disclose however overmuch helium paid for UserVoice, helium said that stagnant companies merchantability for a fraction of the valuation commanded by steadfast SaaS startups, which typically merchantability for 4x yearly gross oregon more. Based connected our conversation, we estimation that “venture zombies” sometimes merchantability for arsenic debased arsenic 1x yearly revenue.

By implementing cost-cutting and terms increases, Curious tin propulsion these businesses to execute 20% to 30% nett margins astir immediately. “If you person a million-dollar business, you’re kicking disconnected $300,000 successful earnings,” helium offered arsenic an example.

They execute the turnarounds because, dissimilar the standalone companies, they tin centralize functions similar sales, marketing, finance, and different admin roles, crossed each of their portfolio companies. “We’re not trying to merchantability the businesses we get and don’t request VC-scale exits, truthful we tin equilibrium maturation and profitability much sustainably,” Dumont said.

When asked wherefore VCs don’t impulse their startups to beryllium profitable similar Curious does, Dumont responded by saying: “Investors don’t attraction astir earnings, they lone attraction astir growth. Without it, there’s nary VC-scale exit, truthful there’s nary inducement to run with that level of profitability.”

The currency generated from Curious’s companies is past utilized to bargain different startups, Dumont said.  

The steadfast plans to bargain 50 to 75 startups similar UserVoice implicit the adjacent 5 years, and Dumont is definite helium won’t person a shortage of targets to take from. Curious is focused connected acquiring startups that make $1 to $5 cardinal successful recurring gross annually, a conception of the bundle marketplace that, according to Dumont, backstage equity shops and secondary investors person historically ignored.

“We’ve been doing this for a small nether 2 years now, and we’ve astir apt looked astatine at slightest 500 companies, and we bought five,” Dumont said.

While Bending Spoons’ large valuation hike whitethorn validate the “venture zombie” acquisition model, Dumont doesn’t expect a batch of caller competition. Turning profits retired of stagnation isn’t easy. “It’s a ton of work,” helium said.