The rise of 'zombie' VCs puts startups that took funding from them in a difficult spot

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Welcome back! If you're eating eggs this morning, here's hoping they're free of eggshells. But don't be surprised if some snuck in. There's a reason shells are more likely to chip these days.

In today's big story, we're looking at the impact of the growing number of venture firms quietly running out of money.

What's on deck

• Markets: Billionaire investor Ray Dalio isn't worried about a stock-market bubble.

• Tech: A wave of AI-powered devices that'll save you time and boost productivity.

• Tech: A wave of AI-powered devices that'll save you time and boost productivity.

But first, zombie, zombie, zombie-ie-ie-ie. 

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The big story

The VC Walking Dead

Perception can overshadow reality in the image-conscious world of venture capital. But some funds are running out of money to keep the facade going. 

So-called "zombie VCs" — or venture funds that don't have enough cash to cut deals — are set to become a big issue this year, writes Business Insider's Ben Bergman.

Plenty has been written about startups facing a mass extinction event as funding dries up and the economic environment remains tough. But venture investors aren't immune to choppy waters.

The comedown has been abrupt. The number of active traditional VCs in US deals went from 18,504 in 2021 to 9,966 last year, according to PitchBook data shared with BI. Many funds launched during the pre- and post-pandemic boom times won't be able to raise more capital. 

With the help of PitchBook data, Ben was able to identify some of the most inactive VC funds.  

Of course, it's not like investors had many good options last year. Except for companies using those two magic letters — AI — the market for backing startups was bleak in 2023. 

That's why zombie VCs pose such a problem for the industry. 

Sussing out the prudent investor from the penniless one takes time and effort, two things startups can't necessarily afford when times are tough.

Zombie VCs' demise will have wide-reaching impacts.

Their employees and the firms that backed them will obviously be affected. But what's most interesting is what it means for startups that took money from the zombies.

Is having a zombie VC as an investor the equivalent of a scarlet letter?

High-profile investors give young companies a level of legitimacy, deserved or not, in the chummy world of Silicon Valley. Can the opposite be true of having a zombie VC on the cap table?

I posed this question to Ben, who said the implications are huge. If a partner jumps ship from a zombie VC, startups they backed will be in a tough spot. Without their point-of-contact at the fund, they won't have an advocate.

More broadly, having a zombie VC as an investor won't necessarily be a death knell for a startup, Ben said, especially if they have many other investors. But it's also not a great signal to the wider VC community. 

And with limited funding still available, most startups can't afford any perceived knocks against them.

Your Monday headline catchup

• Nikki Haley just won her first primary victory in DC, but Trump is still crushing the GOP race.

• Silicon Valley moguls are weighing in on Elon Musk's battle with OpenAI and it's getting cattier than a 'Real Housewives' reunion.

• Former 'apprentices' and Trump Media cofounders file lawsuit claiming company execs tried to dilute their stake ahead of a potential merger.

• Israel may have just torched its relationship with Russia, promising to supply Ukraine with 'early-warning systems'.

• Check out some of the best and most daring looks at Ambani's pre-wedding bash — from Rihanna to Mark Zuckerberg.

3 things in markets

1. Here's how market experts see AI impacting stocks for years to come. It's often been compared to the internet boom of the 1990s. Top commentators see it boosting stocks 30% in 2025 and serving as "business oxygen" for years to come. From Morgan Stanley to Goldman Sachs, Wall Street weighs in on the AI effect. 

2. Ray Dalio isn't buying the concerns about a stock market bubble. The billionaire investor said the current market environment doesn't meet the criteria for a bubble. The Bridgewater founder acknowledged the Magnificent 7 is "a bit frothy," but doesn't see "excessive leverage or a flood of new and naïve buyers," he wrote in a note. 

3. Patents show how big banks are thinking about AI. Capital One and Bank of America are leading the pack when it comes to AI-related patent filings, according to data from Evident, a consultancy. Trading and UX are the top two areas where banks are trying to use the technology, the data shows.

3 things in tech

1. The AI gadgets are coming. The launch of ChatGPT set off an arms race between companies to launch AI devices — from personal assistants to headbands they claim can help control your dreams. Check out five devices that have already been announced. 

2. Calls are growing for a change at the top of Google. The debacle of its AI model Gemini has led some to call for CEO Sundar Pichai to step down. The chatter has gotten so loud that even Marissa Mayer, Yahoo's former CEO and Google's 20th employee, chimed in.

3. Cory Doctorow has a theory for why tech platforms always get worse. The Canadian-British author told BI that platforms like Amazon and Uber play nice to lock in customers, then deliberately worsen the user experience. He's coined the term "enshittification" to describe that process.

3 things in business

1. Turns out sports gambling was a gateway drug. Apps like DraftKings and FanDuel have exploded since 2018, when the Supreme Court struck down a federal law prohibiting sports betting. Now, online-gambling companies are placing their bets beyond football and basketball.

2. S'more, please! Smashmallow was everywhere in the years before the pandemic. Now, they've ceased to exist. The problem wasn't the marshmallows — by all accounts, they were delicious. It was trying to scale them.

3. Singapore gets its fix of Swiftonomics. The southeast Asian country is hosting six "Eras Tour" concerts this month — and some of its neighbors aren't happy about that. The culture ministry hopes the shows will provide an economic boost and make Singapore more attractive as a tourist destination.

In other news

• One woman could have prevented the 2008 financial crash — if only the Wall Street Boys Club had listened.

• Why 7 prominent VCs are investing millions in new social startups like Diem, Lex, and 222.

• Satellites burning up in our atmosphere may not be as harmless as first thought.

• Why Republicans are fighting the basic-income programs many cities and states are adopting: 'Is money a birthright now?'

What's happening today

• Today marks the 150th day of the Hamas-Israel conflict.

• There will be a hearing for Jack Teixeira, the national guardsman charged with leaking military documents.

The Insider Today team

Dan DeFrancesco, deputy editor and anchor, in New York. Jordan Parker Erb, editor, in New York. Hallam Bullock, editor, in London. George Glover, reporter, in London. Grace Lett, associate editor, in Chicago.

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