How to spot a zombie (startup) and bring it back to life

Last month, a two-year-old Indian startup raised US$7 million from top VCs and had more than half of it left in the bank. But it decided to shut shop because it could not scale.

In the southern Indian state of Kerala, about 99 percent of the startups in the state’s incubators – Startup Village and Kerala Startup Mission- are turning out to be just web design shops which barely make any money.

And then there are the many mergers – led by Flipkart’s buying of Jabong, which was earlier running the risk of running out of funds – offering the fig leaf of protection to startups that are otherwise stuck in a rut.

See: Flipkart just acquired Jabong. Here’s what it gets with the big buy

Welcome to the age of zombie startups in India – a bunch of companies that are not dead yet, but are desperately looking for a way out. Industry insiders say about 40-70 percent of the startups currently active in India would fall in the category of the un-dead.

“From an investment standpoint they should be closed down, but you can’t be absolutely sure because you don’t know, because there could be something going on,” explained Ravi Narayan, Global Director of Microsoft Accelerator, which counts ZoomCar and Voonik among its graduates.

A tell-tale sign? The sudden rise of mergers.

A rise in mergers and acquihires can point to rising zombies. Photo credit: lightwise / 123RF.

“In the last 18-24 months there have been a lot of acquihires in India. It’s not led by a Microsoft or a Google, but startups buying other small startups. That kind of a phenomenon is happening under our noses as we speak,” he said, explaining that such mergers are often a way for startups and investors to get an out when organic growth has stopped.

See: Fashion tech gets skinnier in India with ecommerce site’s fifth acquisition of the year

In 2015, Indian startups got US$62.94 million in seed funding for over 245 deals, according to Traxcn. This year till August, that figure fell to US$38.92 million, spread over 157 deals.

That lack of easy money will lead to more zombie startups in Bangalore, Delhi, and elsewhere, investors said. But there is more to be considered than just a lack of funds.

“Do remember, having money in the bank does not mean you are not in Zombieland. You can have money and zero innovation and can be a fat zombie. Founders can be very innovative [and] have money in the bank but can have such a trashy culture that smart people don’t want to join them,” explained Ravi Kiran of accelerator VentureNursery, which counts OYO Rooms as a graduate.

How to spot a zombie

The investor’s dilemma

The way out