Imagine it’s early 2021. You are wondering if you should become an entrepreneur. It sounds exciting, and all around you, everyone seems to be doing exactly that. You’re still not sure, but there’s one message that you’re hearing again and again—there’s never been a better time than now to start up. There seem to be few barriers, and it’s easier to find early-stage funding for a startup than it is to get cabs in Bengaluru. 

So you jump in. You’ve listened to enough venture capitalists (VCs) on podcasts who say you need to pick a problem you’re passionate about. Something that drives you, makes you want to solve for in the long-run. So you pick something. Maybe you start a fintech company that does something before it decides to do lending. Or you start a YouTube channel and call it an edtech company. Or an AI company that uses AI to write short-form posts about how AI will change everything. Doesn’t matter. 

Boom. As word of your startup gets out, you raise seed funding from a prominent investor at a valuation of US$5 million. It was surprisingly easy. The deal closes over a couple of cappuccinos and a five-slide presentation at Third Wave. You write a thread on Twitter. Two weeks later, someone else approaches you asking if you’re planning to raise Series A funding. You have enough money for now, but you remember that it’s good to be well-capitalised. So you decide to raise again, but on your terms. You raise another US$10 million, but now you say your company is now valued at US$50 million. The investor says yes immediately, and sends you a term sheet the following week. You start to believe maybe you are destined for greatness. 

Then, a couple of months later, you decide to secure the future of the company. There’s no revenue yet, but that’s fine. That’ll come later. Everyone knows that valuation is everything. Even the news outlets seem to just care about who just turned a unicorn and when. So you raise a Series B round. This time, you raise US$80 million, at a valuation of US$500 million. 

You are on your way. You dream of startup awards, of podcast interviews, and wonder what it’d be like to be a LinkedIn thought leader. Unicorn status awaits you. 

Cut to today.

You’ve decided to quit your company.

And there’s never been a better time to start up again. 

In today’s edition of The Nutgraf, I’m going to write about a key trend that we’re going to see more frequently in 2023—founders quitting their existing companies. As the realisation dawns that many companies will never go back to the valuations they received in the last couple of years, founders will choose to respawn rather than resist. In video game parlance, a respawn happens when your character reenters the game after being killed or removed from play. 

Usually, respawns happen against your will, but in this case, founders are actively choosing to restart and build something new while abandoning what they’ve built earlier, which is often worth tens or even hundreds of millions of dollars. As a result, several companies right now are zombies—they are dead, and yet alive.   

But I haven’t even come to the strangest part of the story.

This is not a question of money in the bank. Most of these companies are well-capitalised. In the words of one of the founders I spoke to, “I know people who are sitting on five or six years of runway.” 

Founders aren’t walking away because they’ve run out of money. 

They’ve run out of incentives.

Photo by Shannon Rowies on Unsplash

While most founders are still sticking to resistance, the early signs of founders quitting startups they’ve founded has already begun. Aditya Kothari, who founded the short-video app Chingari, recently announced his decision to move on from the company. Around the same time, Anshuman Kumar, who founded the edtech company Teachmint, also walked away to start something else entirely from scratch.

I asked a second founder for a heuristic that could tell if a company was a zombie company. He suggested that companies that raised more than US$5 million in the last couple of years as part of their pre-seed to series A would fall in the consideration set. One consequence of having crazy liquidity in the market was that unlike earlier times, product-market-fit (PMF) stopped becoming a criteria to raise series A rounds. “In fact, Series B was also make-believe PMF, but that’s a different debate,” said the founder. 

So I tried to find out how big this was. To do this, I got in touch with Traxcn, a startup data platform, and asked for a list of companies that raised more than US$5 million in 2021 and 2022 as part of their pre-seed, seed, or series A stage. 

Soon enough, I had my answer. There were close to 270 deals in 2021, and almost the same number in 2022. 

I’m not the first person to make the observation that valuations went so out-of-whack over the last two years that it no longer became viable for founders to stick on. Nithin Kamath, founder and CEO of Zerodha, noticed it last month and even wrote a brief thread about it. In his thread, he attributed the cause to something specific, i.e., liquidation preferences, and suggested that this would happen with late-stage startups.

Here’s Kamath’s argument in a nutshell: all startup investors are in the game of waiting for a big payout, which is more or less how things work. However, what also matters is who’s ahead of the queue to receive it when it happens, either through a funding round or an acquisition. And right now, because they raised multiple times at ridiculous valuations, founders are at the back of the line. Normally, this wouldn’t be a big deal as long as a company continually grows in valuation. Everyone gets a slice, and the queue order wouldn’t matter much. But when funding becomes scarce, liquidation preferences matter considerably. 

And right now, founders are realising that their companies will take years (if ever) to return to the valuations they claimed in 2021 and 2022. There’s little chance of this happening.