Zombie Investments, Part I
The Investments That Refuse to Die
Remember when an angel investment was supposed to exit in five to seven years?
So do we.
When our founders, Denise and Kevin, started Loon Creek Capital Group in 2010, the conventional wisdom was straightforward: an angel fund had a ten-year life. Spend the first three years investing, then allow another seven to harvest the portfolio.
It sounded perfectly reasonable.
It also turned out to be very, very wrong.
We were investors, for example, in the Boise Angel Fund, founded in 2007. It finally liquidated its last investment in 2024.
Seventeen years after it started.
That’s more than an inconvenience. Keeping a fund alive costs money. There are administrative expenses, professional services, recordkeeping and other obligations—sometimes years after most of the meaningful investments have already exited.
Meanwhile, investors remain locked into investments they expected to leave long ago.
The Four Lives of an Angel Investment
Eventually, almost every angel investment falls into one of four categories:
The Exit. The company sells or otherwise provides liquidity. We make some money (hopefully a lot of money) and we’re happy.
The Death. The company fails. We’re not happy, but at least there’s finality. We can recognize the loss and, when the requirements are met, potentially receive favorable tax treatment under IRS Section 1244.
The Long Road. The company remains viable and may eventually produce a return, but the exit keeps moving farther into the future. Five years becomes eight. Eight becomes twelve.
The Zombie. The company doesn’t exit. It doesn’t fail. It just…keeps going. And so does our investment. We can’t liquidate it, and because the company remains alive, simply writing it off may not be an option.
Numbers 3 and 4 are where angel funds go to grow old.
How Does an Investment Become a Zombie?
There are several paths.
The VC Reset. A company raises significant follow-on capital. That’s often good news for the company, but the new money extends the runway and effectively restarts the exit clock. Later rounds may also include liquidation preferences that can absorb much of the proceeds from a future sale, potentially leaving little for the original angels.
The Entrepreneur Who Won’t Say Die. Persistence is normally something we admire in entrepreneurs. But sometimes a founder keeps a marginal business going indefinitely. It generates enough revenue to stay alive, but never enough growth to become an attractive acquisition candidate.
The Accidental Lifestyle Company. Sometimes the company works just fine—for the entrepreneur. The founder enjoys the business, earns a good living and discovers there isn’t much incentive to sell.
That’s not necessarily a bad outcome for the entrepreneur.
It’s a very different outcome for investors who put money into the company expecting an exit.
So How Do You Kill a Zombie?
Simply writing off the investment on your taxes isn’t always possible. If the company is still operating, establishing that the security is economically worthless can be difficult.
But there are alternatives.
A fund may be able to abandon the security, permanently relinquishing its rights without consideration. Because of the legal and tax implications, this requires appropriate professional advice.
Another approach is to sell the security for a nominal amount—perhaps $1—in a bona fide transaction. We’ve sometimes offered these investments to fund members first. Members who want finality can recognize their losses, while someone who still believes in the company gets the opportunity to own the security and wait for a possible future payoff.
We’ve also sold stock back to the entrepreneur. In one lifestyle company, we negotiated a sale for the amount originally invested. The argument was straightforward: if the entrepreneur wants to own and operate the company indefinitely, perhaps the investors who supplied the early capital deserve an opportunity to get their money back.
The common objective isn’t necessarily maximizing the sale price. Sometimes it’s simply creating a legitimate disposition that gets the security out of the portfolio and allows the fund and its investors to move on.
If You Can’t Kill It, Make It Cheaper to Feed
Of course, not every long-lived investment is worthless.
Sometimes the last one or two companies in a fund still have genuine potential. Selling them simply to close the fund would make no sense. In that case, the problem isn’t the investment—it’s the expense of maintaining an entire fund around it.
One solution may be converting the remaining holdings into a low-cost Special Purpose Vehicle, or SPV. A passive SPV can substantially reduce the administrative burden while allowing investors to continue holding the security until it exits or becomes worthless.
Long-lived investments aren’t going away. Especially in the current low-exit market, our experience suggests angels need to assume that some investments will remain with us far longer than the five-to-seven-year horizon we once expected.
The question, then, isn’t just whether we can deal with the zombies already in our portfolios.
It’s whether we can do anything to prevent the next generation of them.
That’s the subject of Part II: What we’d do differently today.
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