Zombie startups are known as companies without any kind of growth or evolution that simply continue to exist.
After the pandemic, according to a study carried out by Informa, there are 39,560 zombie companies in Spain, 90.8% of which are considered microenterprises. What is the origin of the term zombie companies? , what are the main characteristics of this type of company? , what does the existence of companies that do not show any type of growth mean for the economy?
In today's article, we analyze in detail the situation of zombie companies in the Spanish ecosystem. The use of the term zombie to refer to an entity with economic activity owes its origin to when the expression “zombie company” was adopted to refer to those insolvent banks, unable to continue operating except for government support and public funding.
Later, the concept was introduced into the business ecosystem to refer to those companies or startups unable to continue growing well either due to the lack of customers or activity, but at the same time unable to end their activity formally due to lack of economic resources.
The fact that a company comes to be considered a zombie company depends not only on internal factors, there are times when conjunctural factors play a big role in the journey that a company may have in the market.
Thus, according to Iberoform, with the outbreak of Covid-19, in 2020, the number of Spanish companies considered as zombie companies was expected to double, placing us, together with Italy, as one of the European countries with the highest number of companies in insolvency for two consecutive years.
What can an insolvency company do to revive and leave behind its zombie status?
Despite the fact that, in the long term, in most cases, companies that stop growing end up dying (according to a study carried out by the Corporate Strategy Board only 4% of the Fortune 50 companies that stopped growing, managed to reverse their situation and grew again), pivoting the business model is the main strategy used by companies considered to be zombies to improve their situation in the market.
Often, although a company comes to the market with a very innovative solution, the need or market is not large enough to ensure the growth and consolidation of that project. Therefore, Intelectium recommends carrying out a prior market and viability analysis to ensure that the company will find the necessary conditions to grow in a sustained manner over time, once adequate resources have been invested.
What are the main reasons that lead companies to become zombie companies?
Although the causes for a company's growth to stop tend to be infinite, the following stand out:
- The inability to increase the critical mass of customers.
- The stagnation in sales volume.
- Costs of acquiring customers much higher than the revenues derived from them.
- High burn rate.
- Etc.
In addition, once the insolvency situation a company has reached is irreversible, it is important for entrepreneurs to know, however difficult it may seem, to close stages before it is too late.
Often, the fear of failure and the reluctance of entrepreneurs to accept reality and part with a project in which so many resources have invested, spend more time than desired waiting for market trends to change in favor of their proposal or business model, without great success in most cases.
Finally, the fact that a startup remains in an insolvency situation for a prolonged period of time has consequences for different stakeholders of the startup. While workers must face the difficulty of carrying out their work with the minimum available resources, investors who are part of the shareholding of companies find it impossible to disburse the investments made and to generate any return, at the same time that the country's economy is harmed given the large amount of economic resources that are consumed by companies that, after all, are unable to increase the country's competitiveness.
