I see dead people: The case of Zombie companies
A zombie company is a company that generates just enough revenue to cover its expenses. When referring to startups, zombie startups are startups that are not profitable, unable to grow rapidly, and so are unable to attract further funding. In the case of more established firms, they are companies that only generate enough revenue to cover the interest on their debt. These companies are unable to fund expansion, innovation or drive real growth.
The inability to make a profit and the constant fight to stay afloat means the company produces subpar returns on investments. There is no space to invest in research and development. So have argued that these companies are a parasite to the economy. This is because they lock up talent, funding and resources that more successful companies could have utilized.
Sometimes these companies can turn around and become profitable, through effective cost-cutting and successful restructuring. But more often than not, once the money raised finishes or the cost of serving their debt goes up, they pack up.
To learn?
No matter how they come, whether as a startup or an established firm. Zombie companies have an underlying similarity. They failed to create value with their funding. They both had funds and did not use them optimally.
The presence of zombies highlights the importance of strategy before funding. You don’t raise money and then think of what to do with it or borrow just because interest rates are low. You need to clearly understand what you are doing and where you are as a firm. When you have a clear strategy, you can achieve an ideal capital mix and grow sustainably.
As people, this also applies to our personal finances. Before you take that loan, think, do I really need it? What is the loan funding, and what are the other options? These questions will ensure you avoid regret and unnecessary debt burden, and anxiety.