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

Bending Spoons, an Italian tech firm, recently made headlines with a remarkable 48-hour period during which it acquired AOL and raised an impressive $270 million. This funding surge catapulted the company’s valuation from $2.55 billion to an astonishing $11 billion, marking a significant milestone in its rapid growth strategy. The company has adeptly focused on revitalizing underperforming tech brands, such as Evernote, Meetup, and Vimeo, turning them into profitable entities through stringent cost-cutting measures and strategic price increases. Unlike traditional private equity firms, Bending Spoons has no intention of selling these businesses, instead opting for a long-term investment approach. Andrew Dumont, CEO of Curious, a firm that specializes in acquiring and rejuvenating what he terms “venture zombies,” believes this “hold forever” strategy will gain momentum as AI-driven startups render older VC-backed software less relevant. Dumont asserts that while many companies may fail, numerous viable businesses can still emerge from this landscape, even if they aren't unicorns. Dumont explained his definition of a “great business” as one that can be acquired inexpensively and quickly restored to generate significant cash flow. This “buy, fix, and hold” model is gaining traction among investors, ranging from seasoned players like Constellation Software to newer entrants such as Bending Spoons and Calm Capital. In 2023, Curious raised $16 million specifically for acquiring stalled software companies that struggle to attract further investment. So far, the firm has successfully purchased five businesses, including UserVoice, a 17-year-old startup that previously secured $9 million in VC funding. Dumont highlighted that stagnant companies often sell for a fraction of the value of thriving SaaS startups. While he didn’t disclose the purchase price for UserVoice, he noted that these “venture zombies” can sometimes be acquired for as little as one times their annual revenue. Through strategic enhancements in cost management and pricing, Curious can achieve profit margins of 20% to 30% almost immediately. By centralizing functions such as sales and marketing across its portfolio, Curious can streamline operations and enhance profitability without the pressure to achieve VC-scale exits. Dumont remarked that traditional investors prioritize growth over earnings, which creates a disincentive for startups to focus on profitability. The cash flow generated by Curious’s acquisitions is reinvested into acquiring more startups. Dumont aims to acquire between 50 and 75 firms like UserVoice over the next five years, confident in the availability of potential targets. Curious is particularly interested in companies generating $1 to $5 million in recurring annual revenue, a segment often overlooked by larger private equity firms. While Bending Spoons’ recent valuation increase may lend credibility to the venture zombie acquisition strategy, Dumont doesn't foresee a surge in competitors. He emphasizes that transforming stagnant businesses into profitable ones is a complex and demanding endeavor.