Summary of Key Points
The current global venture capital (VC) markets, particularly in Silicon Valley and China, are plagued by a large number of “zombie unicorns”: companies that once had a book value of over $1 billion but now experience no capital inflows or business growth. They are unable to go public or get acquired, yet they remain alive due to the complex interest arrangements between VCs and founders (specific terms in Silicon Valley and buyback agreements in China). These zombies occupy top-tier talent and financial resources, hindering the development of new innovative companies. This creates a situation where old bubbles do not burst, making it difficult for new startups to emerge. It is urgent to break this pretense of vitality and allow the companies that should exit the market to do so.
1. What are “Zombie Unicorns”? —— Shiny On the Surface, but Empty on the Inside
“Zombie unicorns” refer to companies with a book value exceeding $1 billion (the standard for being classified as unicorns) that are actually in trouble:
- Lack of Funds: More than half (51.2%) of active unicorns have not raised any capital since 2024; most of them reached this status during the bubble period in 2020-2021.
- No Growth: 332 unicorns (about 17%) have a new round of financing at a value equal to or below their historical peak, indicating a devaluation of their worth.
- Incompetent to Survive: They cannot go public due to poor performance and are also unable to be sold; they merely maintain a facade of operation by scaling back operations, earning the ridicule of the industry as “unicorn corpses.”
These companies are like dead trees in a forest—physically standing but essentially decaying.
2. Silicon Valley: Why Can Unicorns Not Die? —— The “Don’t Look Away” Game Due to Contractual Restrictions
Silicon Valley’s zombie unicorns survive because of two protective clauses signed during the 2021 bubble period:
1. Liquidation Preference: If the company is sold at a low price, later investors receive priority in receiving their investment back, sometimes even double the amount they invested. For example, if a company valued at $5 billion is sold for $1.5 billion, the money might only cover the returns for later investors, leaving the founders, employees, and early investors with nothing.
2. Anti-Dilution Clauses: If the company needs to raise funds at a reduced price (a “blood-letting” financing round), previous investors must contribute shares to offset their losses. For instance, if the initial investment was $2 per share in Series A and $1 per share in Series B, the cost for Series A investors could drop to $1 per share, significantly diluting their stake.
As a result, founders prefer to minimize the company’s operations (e.g., by keeping only a few employees) rather than accept a lower valuation for financing or selling the company, fearing they will have worked for nothing. VCs also avoid losses because reducing the company’s value would damage their fund’s performance and make it harder to raise future funds. Both parties tacitly agree to “extend the situation and pretend” that everything is normal.
3. China: The Survival Logic of Zombie Unicorns —— “Personal Bondage” through Buyback Agreements
China’s zombie unicorns mostly emerged during the boom in semiconductors and new energy technologies between 2021-2023, thanks to government-backed funds. They cannot die because of buyback agreements:
- The contracts stipulate that if the company fails to go public on time or does not meet performance targets, the founder must personally pay to buy back the investors’ shares, plus interest.
- If the company goes bankrupt, the founder faces huge debts (e.g., a $1 billion company might be insolvent) and could be listed as a dishonest entity, with restrictions such as being unable to take high-speed trains or travel abroad.
Therefore, founders can only “pretend to operate” by engaging in fraudulent transactions to inflate revenue, creating misleading PPTs for government inspections, and maintaining an empty shell—this is the only way to avoid personal bankruptcy. Government funds are also reluctant to admit losses for fear of being criticized for wasting state assets, so they continue to support these companies.
4. The Harm Caused by Zombie Unicorns —— “Parasites” That Waste Talent and Resources
These undead companies act like parasites, consuming market resources:
1. Locking Up Top Talent: Silicon Valley’s zombie companies keep thousands of skilled engineers working on maintenance tasks; Chinese zombie companies use hundreds of PhDs to create useless prototypes that waste creative energy.
2. Stealing Financial Resources: Funds intended for new innovative companies (e.g., AI and advanced technologies) are instead used to support these zombies, preventing new startups from getting the necessary capital and dying in their early stages.
3. Reverse Selection: Established companies, grown through bubbles, occupy market space, preventing truly promising new businesses from thriving—this is a devastating blow to innovation.
5. The Way Forward: Letting the “Dead” Really Die
The Austrian economist Schumpeter discussed the concept of “creative destruction”—the death of old firms being essential for the emergence of new ones. To address the problem of zombie unicorns, we need to:
- For VCs: Accept that some investments will fail and reallocate resources towards new opportunities.
- For Founders: Stop pretending to be successful and allow companies to exit the market in a timely manner.
- For Policy Makers: Adjust buyback agreements (e.g., reducing personal liability) and allow governments to accept losses reasonably, creating space for market clearance.
Only by letting the failing companies die can the new, innovative forces (such as AI and cutting-edge technologies) gain the necessary support to thrive.
In Summary: Unless zombie unicorns are eliminated, innovation will be stifled. The market needs the courage to “clear away the dead trees” so that new growth can flourish.