Rise of 'zombie' VCs haunts tech investors as plunging valuations hammer the industry

cnbc.com:

For some venture capitalists, we're approaching a night of the living dead.

Startup investors are increasingly warning of an apocalyptic scenario in the VC world — namely, the emergence of «zombie» VC firms that are struggling to raise their next fund.

Faced with a backdrop of higher interest rates and fears of an oncoming recession, VCs expect there will be hundreds of firms that gain zombie status in the next few years.

«We expect there's going to be an increasing number of zombie VCs; VCs that are still existing because they need to manage the investment they did from their previous fund but are incapable of raising their next fund,» Maelle Gavet, CEO of the global entrepreneur network Techstars, told CNBC.

«That number could be as high as up to 50% of VCs in the next few years, that are just not going to be able to raise their next fund,» she added.

In the corporate world, a zombie isn't a dead person brought back to life. Rather, it's a business that, while still generating cash, is so heavily indebted it can just about pay off its fixed costs and interest on debts, not the debt itself.

Life becomes harder for zombie firms in a higher interest rate environment, as it increases their borrowing costs. The Federal Reserve, European Central Bank and Bank of England all raised interest rates again earlier this month.

In the VC market, a zombie is an investment firm that no longer raises money to back new companies. They still operate in the sense that they manage a portfolio of investments. But they cease to write founders new checks amid struggles to generate returns.

Investors expect this gloomy economic backdrop to create a horde of zombie funds that, no longer producing returns, instead focus on managing their