Why ‘hold forever’ investors are buying up venture capital zombies | TechCrunch

Italian company Bending Spoons largely flew under the radar – until last month. In the span of 48 hours, the company announced the acquisition of AOL and a massive $270 million raise, quadrupling its valuation from $2.55 billion in early 2024 to $11 billion.

Bending Spoons has grown rapidly by acquiring stagnant technology brands like Evernote, Meetup and Vimeo and then turning them profitable through aggressive cost cuts and price increases. While the company’s approach is similar to that of private equity, there is one key difference: Bending Spoons has no plans to sell these companies.

Andreas Dumont, The founder and CEO of Curious, a company that also acquires and revives what he calls “venture zombies,” is confident that this “hold forever” strategy will become increasingly prominent in the coming years as AI-native startups make older, VC-backed software companies less relevant.

“Our belief is that the venture law, where 80% of companies ‘fail,’ is creating a lot of great companies, even if they aren’t unicorns,” Dumont told TechCrunch.

Dumont defines a “great company” as one that can be purchased at a low price and quickly revived to generate significant 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, SaaS.group, Emerging companiesAnd Quiet capitalDumont said.

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

In 2023, Curious has raised $16 million in dedicated capital to buy software companies that have stalled and can no longer secure follow-on investments.

Since then, the company has acquired five companies, including UserVoice, a 17-year-old startup that raised $9 million in venture capital funding from Betaworks and SV Angel.

“It’s a great company, but the cap table wasn’t aligned to sustaining it. These funds are getting old and these companies are just sitting there.” Dumont said. “We provide liquidity and also reset these companies to profitability.”

While Dumont didn’t disclose how much he paid for UserVoice, he said stagnant companies sell at a fraction of the valuation of healthy SaaS startups, which typically sell for four times annual revenue or more.. Based on our conversation, we estimate that “venture zombies” sometimes sell for as little as one times annual revenue.

By implementing cost savings and price increases, Curious can help these companies achieve a 20% to 30% profit margin almost immediately. “If you have a multi-million dollar company, you start with $300,000 in revenue,” he gave as an example.

They achieve this turnaround because, unlike standalone companies, they can centralize functions such as sales, marketing, finance and other administrative functions across their portfolio companies. “We are not trying to sell the companies we acquire and do not require venture capital-scale exits so that we can balance growth and profitability more sustainably,” Dumont said.

When asked why VC firms don’t push their startups to be profitable like Curious does, Dumont responded by saying, “Investors don’t care about the bottom line, they just care about growth. Without that, there’s no exit at 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 50 to 75 startups like UserVoice over the next five years, and Dumont is confident 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, according to Dumont, private equity shops and secondary investors have historically ignored.

“We’ve been doing this for a little less than two years now, and we’ve probably looked at at least 500 companies and bought five of them,” Dumont said.

While Bending Spoons’ big valuation increase could validate the “venture zombie” acquisition model, Dumont doesn’t expect much new competition. It is not easy to extract profit from stagnation. “It’s a lot of work,” he said.