A growing trend in the tech world involves acquiring struggling software companies – often dubbed “venture zombies” – and revitalizing them for profitability. Italian firm Bending Spoons recently highlighted this strategy with the acquisition of AOL and a substantial funding round, demonstrating the potential of this “buy, fix, and hold” approach. This movement is attracting attention as an alternative to traditional venture capital models focused on rapid growth and large exits.
The Rise of “Venture Zombie” Acquisitions
Bending Spoons’ recent activity – acquiring AOL and raising $270 million at an $11 billion valuation – has put a spotlight on a previously under-the-radar investment tactic. The company has been proactively acquiring established but stagnant tech brands like Evernote, Meetup, and Vimeo. Unlike traditional private equity, which typically aims to quickly flip investments, Bending Spoons intends to hold these businesses indefinitely.
This “hold forever” strategy is gaining traction, according to Andrew Dumont, founder and CEO of Curious, another firm specializing in the acquisition and turnaround of underperforming software companies. Dumont believes the increasing prominence of artificial intelligence is fundamentally shifting the landscape, making older, VC-backed software less competitive and creating opportunities for companies that can streamline and efficiently operate established platforms.
Identifying ‘Great Businesses’
Dumont defines a “great business” as one available at a reduced price with the ability to generate substantial cash flow after a focused turnaround effort. He points to Constellation Software, a 30-year-old company, as a pioneer of this model. However, the pool of potential acquisitions extends beyond the radar of large private equity firms.
Curious, for instance, targets companies generating between $1 million and $5 million in annual recurring revenue, a segment traditionally overlooked by bigger investors. Since raising $16 million in 2023 specifically for acquiring stalled software companies, Curious has already completed five acquisitions, including UserVoice, a platform which previously secured VC funding from Betaworks and SV Angel.
According to Dumont, these “venture zombies” often sell for significantly less than thriving SaaS startups, potentially as low as 1x annual revenue compared to the typical 4x or higher valuation for healthy businesses. This lower entry point is crucial to the model’s success.
Profitability Through Centralization and Cost Control
The success of this acquisition strategy hinges on rapidly improving profitability. Companies like Curious and Bending Spoons achieve this through a combination of aggressive cost-cutting and strategic price increases. Dumont estimates that successful turnarounds can yield profit margins of 20% to 30% almost immediately.
A key element in this turnaround is centralizing administrative functions – sales, marketing, finance, and HR – across their portfolio of acquired companies. This allows for economies of scale and reduces redundant costs. Instead of relying on continuously raising venture capital for growth, these firms focus on self-funding through the earnings of their established businesses.
This approach contrasts sharply with the traditional venture capital model, where growth is prioritized over profitability. Dumont explains that investors in high-growth startups are primarily focused on potential exit opportunities, creating little incentive to maximize short-term earnings. This difference in philosophy allows the “buy, fix, and hold” firms to operate more sustainably.
The capital generated from these profitable businesses is then reinvested into acquiring additional startups, creating a flywheel effect. This allows the firms to continue expanding their portfolio without relying on external funding.
The Future of Software Acquisition
While Bending Spoons’ high-profile moves may attract more attention to this niche market, Dumont doesn’t anticipate an influx of competition. He emphasizes that successfully turning around stagnant companies requires substantial effort and expertise.
However, the underlying factors driving this trend – the increasing number of VC-backed companies failing to achieve desired growth and the potential for AI to disrupt established software – suggest that “venture zombie” acquisition will remain a viable strategy. A core tenet of this strategy is software revitalization, offering a lifeline to businesses that might otherwise fade away. The long-term impact on the SaaS market remains to be seen.
Looking ahead, Curious plans to acquire 50 to 75 more startups over the next five years. The company will likely continue to focus on businesses that generate between $1 million and $5 million in recurring revenue, seeking opportunities overlooked by larger investors. Whether this trend will inspire a broader shift away from traditional high-growth VC models remains uncertain, but it’s a space worth watching as the tech landscape continues to evolve.
