Built to Die: The Venture Capital Zombie Trap
Many venture-backed startups are, by design, Built to Die. The relentless pressure to chase hypergrowth over profitability creates 'zombie' companies and forces even successful founders into a death spiral, constantly chasing the next funding round. But there is an escape route. This post breaks down why the VC path is often a trap and provides a founder's playbook for making the difficult but necessary pivot to a sustainable, profitable business that lasts.
A Founder's Playbook for Pivoting to Profitability and Building a Business That Lasts
The venture capital hypergrowth journey is very appealing to a lot of ambitious founders, for good reason. Who wouldn’t want to take a stab at building a category-defining unicorn on someone else’s dime? Being a venture-backed startup can however be a double-edged sword.
For instance, just two years ago, all was going swimmingly well for Frank and his team at Hapfin.ai. The compliance startup had just raised a $3 million seed round from top European and Silicon Valley VCs, valuing the then 18-month-old startup at just over $16 million. What Frank didn’t know – but any experienced founder or adviser could have told him – was that raising VC is either the fuel that shoots you to glory or a poisoned chalice that leaves a promising company a zombie.
For Hapfin.ai, the first few months after raising the round was a flurry of activity. The team had grown revenue to $350,000 ARR (annual recurring revenue) with a small team of four. However, with a target from new investors to get to magic figure of $1 million ARR within 12 – 15 months, they went on a hiring spree, expanding the team to 12 people. They also started executing on the ambitious growth plan the board had signed off on.
The messaging from the existing investors was very clear – get to $1 million ARR within 12 – 15 months and we will lead your Series A. Setting you up on the clear path to becoming a unicorn within 5 years. For new founders reading this, welcome to the venture capital treadmill where it’s 7 – 10 straight years of never-ending fundraising with all the uncertainty that involves.
Back to our good friend Frank. By dint of hard work, luck and some ballsy (borderline illegal) sales moves, they hit $1.1 million in revenue by July 2024, 13 months after their seed round. Naturally, the team was super proud of the incredible 3x year on year growth they achieved and happily started Series A fundraising, expecting a very smooth raise considering soft commitments from their existing investors.
The Venture Capital Death Spiral
It is not hard to foresee what could go wrong with Frank’s Series A fundraising. After delivering on the side of the bargain, their investors tune changed. What they expected to be a quick raise and back to executing became incredibly more complex when their existing investors came up with multiple excuses not to lead the new round.
“You’re not an AI-Native Startup”
“Your ARR is on the low-end for Series A startups”
“We have not been able to close our latest fund so cannot write cheques for a while”
Hapfin.ai eventually managed to raise an $850,000 bridge round from a corporate venture capital firm in January 2025, just two weeks before they ran out of funds and may have had to shut down. A bittersweet moment because the funds meant they remained alive but they had to cut half of the team when the initial fundraising stalled.
Their experience trying and failing to raise a Series A is not an isolated incidence at all. According to Carta’s latest data, only 21.2% of startups that raised Seed rounds in Q2 2022 have gone on to raise Series A rounds three years later. This is down from a high of 49.1% for startups that raised their Seed rounds in 2020.
This phenomenon of startups raising millions of dollars and then getting stuck after a few years is a feature and not a bug of the power-law driven venture capital system. VCs by definition, have to back only the best of the best to stand a chance of achieving the monster 100x returns required to make their fund economics work. VCs don’t care that 8 out of 10 portfolio companies they seeded end up as zombies as long as 1 or 2 remain on the venture path.
What isn’t often discussed is that the power law works for VCs because of the portfolio effect does not work for founders. When a founder accepts venture capital, you sign up to pursuing growth-at-all-costs even though that means there’s a 75% chance that ends in failure according to Havard Business School research – what I call the VC hypergrowth death spiral. Startup raises funds from investors, spends rapidly to pursue growth, runs out of money and needs to keep raising until exit or in some cases eventual profitability once the company has reached significant scale.
VC Hypergrowth Death Spiral
For venture-backed startups, the prize is a successful exit (M&A or IPO) and the resultant generational wealth that founders achieve. But the odds are really low that Frank and his cofounders end up billionaires like Dylan Field who is now worth $5 billion after Figma’s recent IPO. The Figma journey shows why failure is the default option for venture-backed startups. Figma ended up raising $750 million in 7 funding rounds before eventually listing. This brutal fundraising treadmill requires so many stars to align that majority of startups fail to raise funds and end up as zombies. Abandoned by investors who move on to the next new shiny thing. Unless the founders take destiny into their own hands, but how easy is it to make the transition?
How to Escape the VC Death Spiral
Simple answer – not easy at all. For one, the dominant thought process in venture is that if a startup isn’t working, shut it down and start again. This mindset works for investors, as mentioned earlier, their fortunes aren’t tied to that of individual startups but relies on at least one startup in the portfolio achieving outsized returns. The other reason is that in the US and other major western markets, failure is encouraged and even glorified. As such, a founder who shuts down a startup will find it relatively easy to raise funds for a new venture, perhaps in a sector that is more in vogue.
As a result of this, any founder who genuinely wants to fight to keep their dream alive will have to do it alone without their investors. There are also relatively few examples of startups that have executed the transition successfully. That’s the bad news; the good news is that it can be done. You can ditch the VC hyper-growth path if it isn’t working for you but first you need to figure out when and how to do it.
Escaping the VC Hypergrowth Death Spiral
It is often said that an essential ingredient to being a successful founder is the never-say-die spirit. Tesla is today one of the world's most valuable companies but back in 2008 it was days away from shutting down. Elon Musk (love him or hate him) is the quintessential go broke or go home entrepreneur, and he managed to pull off a restructuring and fundraise at the last minute on Christmas Eve.
But this same eternally optimistic outlook that means founders keep going when the chips are down can be their undoing. Many startups end up as zombies and shut down because founders refused to see the writing on the wall. With Frank and the Hapfin.ai team, they failed at fundraising because their VCs and the market turned against them, many more founders fail at the VC funding path because they are simply unable to hit the wild targets required to raise the next round.
There are three essential steps founder must take to be able to navigate pivot to profitability successfully:
Know your numbers: The saying "you can't manage what you don't measure" is popular for a reason. Being on top of the numbers that define your operational health -- like burn rate, runway, and unit economics -- is fundamental. But you must also be acutely aware of the different set of metrics required to stand a chance of successfully raising your next round of funding. Fundraising napkin from point nine capital is always a useful resource for venture-backed founders.
Be brutally honest: it’s easy to set targets to double revenue within a year, but a competent founding team will know halfway through if the chances of achieving those goals are next to zero. Being honest also means figuring out if founders and team are no longer up to the challenge of running a hypergrowth startup. One of the most high-profile cases of founder-initiated pivots is Pitch.com, a Berlin based startup which raised $137 million in VC funding to compete with PowerPoint. In January 2024, the team decided they didn’t want to continue the venture path so they returned unspent funds, bought back shares from investors and laid of two-thirds of the team. What made this move stand out is that it’s so rare.
Choose your poison: in this situation, there are no easy choices so you have to figure out which painful option you can rally your team behind. Once the numbers are clear and you have accepted the reality that the venture path isn’t for you, the final step is to take stock and chart a path forward. This involves a dispassionate audit of your core assets-- your team, technology, and most loyal customers --to figure out whether to pivot to profitability, pursue an M&A, or shut down. Medium faced this exact crossroads. After raising over $130 million, their data proved the ad-supported venture path was a dead end. Instead of pursuing a sale (M&A) or shutting down, founder Ev Williams chose the pivot. He laid off a third of the company to fight for a new, sustainable future built on reader subscriptions, providing a powerful example of choosing to build a durable, profitable business over an orderly exit.
From Constant Fundraising to Default Alive
Navigating the path from the VC death spiral to becoming 'default alive' is one of the hardest challenges a founder will face. While our three-step framework provides a map, executing a successful pivot requires a level of financial discipline and restructuring expertise that most hypergrowth teams don't have in-house.
For founders like Frank facing this critical juncture, the first step is an honest assessment. 23mile offers a complimentary and confidential Crossroads Consultation to help you objectively evaluate your options and map a path forward. Get in touch to schedule yours.