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Comment by clarkevans | Hacker News Reader

What to do when a company has found a market, reached sustainability with regard to its employees and customers, yet probably will not be providing the anticipated return for its investors? I'd like to hear about ways this has been bridged. Have there been any SV "exits" to a ESOP? Unfortunately, an ESOP requires at a minimum 30+ people to be legitimate exit option and quite a bit of administrative attention and expense. It seems an unlikely path for a technology startup.

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The dreaded "zombie". Profitable enough that the investors can't pull the plug by force. Not growing enough that anyone will make any money out of it. It is my observation that because of "natural attrition" often both the management and employees tend to get replaced with B-players over time. The investors lose interest, their money is gone, their incentive to care a whit is gone, so they apply their attention where it has the chance to make a difference.

Dreaded by everyone except the users/customers, who come to depend on the service the startup provides.

... and the people it employs? I see alot of winners in "zombie" startups. I wonder what the ROI of the average business is. Pizza places, AI shops alike.

Problem is when someone bigger comes and puts you out of business. Like a fancy new pizza place with modern decor or a Costco or amazon or Uber. You need the ROI to keep placing other bets to increase your chances of survival.

If you care for your pizza, your customers and employees, you will stay in business for a long time, regardless of who opens a shop next door. Staying power, habits: those are huge positive factors for businesses.

“Mom and pop” businesses around the country show otherwise. A few restaurants with a very loyal customer base or outlier popularity might do well, but certainly not most. Same with hotels, rental cars, airlines, retailers, etc. There’s just advantages to scale that can’t be matched, and if there’s margin, someone is going to want a piece of it.

So many people running small businesses make very good money. I hear 20% a lot for normal businesses. Mine is more computer oriented, and old school too, and it is around 45%, several hundred $K a year. Nobody advertises around those because there is no rewards to do so.

If you want to start a business and make money, do not rule out old economy, and bootstrapping. Whatever VCs say.

Only in the insane world of "startup" culture, a sustainable business that meets enough customer demand to pay their employees and make some profit, is a bad thing.

If you take money from VC’s and compensate employees with stock options then you need to show VC returns. If the company can’t provide VC returns, don’t take VC money, find another source of funding.

If you/investors are not satisfied with the current growth of the company but the company is profitable and not in danger of shutting down, it seems like it would be a wise move to invest the profits towards R&D to create some sort of product that may have better growth. You'd have the benefit of "infinite runway" for your next product and the investors have a chance at getting their money back.

On the other hand, there was recently and article in Forbes about a tech billionaire who saw this pattern (small tech companies with one main successful product that were then pouring money into other speculative as-yet unsuccessful products) and built a fortune doing the exact opposite: he'd buy the companies, basically stop all investment in new products (meaning lay most people off and outsource the maintenance to cheaper countries) and milk the maintenance revenue stream until it basically died. I think of it as "the world's most depressing business model", but it was definitely highly profitable.

https://www.forbes.com/sites/nathanvardi/2018/11/19/how-a-my...

Interesting. I found it discussed here:

https://news.ycombinator.com/item?id=18516584

Random idea.

If you have profits sufficient to fund R&D you could also potentially approach your investors about buying them out with those profits. Something like "It has become apparent that this company is never going to provide the growth you are after. Instead, every quarter the company with pay you $X in exchange for N of your shares. After two years the company will have bought back the last of your shares and you will have twice your investment. We enjoy running the company and intend to do that for the foreseeable future despite the limited growth."

The company can continue to operate, but that'll probably depend on the equity structure. Not a lot of incentive for founders and key employees to stay-on and manage a "lifestyle" business if they only hold a minority stake in the company. In that scenario, I think the investor-owners would probably want to recoup some/all of their investment quickly in a sale to a competitor rather than slowly over-time by milking and growing cashflow.

Do founders typically own a minority stake in VC-funded businesses? Even a lifestyle business may be able to throw off several million a year in disbursements beyond payroll. Sure if you own a fraction of a percent that's not much money but if you own 20% of a company disbursing $2MM+ every year that can fund quite a bit.

I know VCs are aiming for home runs and 10x+ returns but trying to get someone to shut down a business like that seems short-sighted.

If a company is throwing off profits like that (as dividends, presumably) they are in absolutely no risk of being shut down.

Absolutely - I had to rub my eyes and make sure I just read that a sustainable, profitable business (by that metric already more successful than most startups) is being referred to as a "zombie" etc.!

Anything that isn't a unicorn is a zombie if its received VC funding. Its a good reason to not take on VC unless your in a market that can magically meet the extreme growth expectations that are tied to that lump of cash.

I enjoyed this as an option and would love to see more companies doing things like this: https://wistia.com/learn/culture/taking-on-debt-to-grow-our-...

The people who invest labor in startups often have the same kind of vision of how things will go as people who invest capital, and are prone to looking to invest labor in a new startup if the old one doesn't produce as hoped. The trick is transitioning (not all at the same time, usually, but before people flee and destroy continuity) to ownership, management, and staff that are interested in a small, steady-state business.

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