Rise of ‘zombie’ VCs haunts tech investors as plunging valuations hammer the industry
An art exhibition based on the hit TV series “The Walking Dead” in London, England.
Ollie Millington | Getty Images
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.
What’s a zombie?
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 existing portfolios — while preparing to eventually wind down.
“There are definitely zombie VC firms out there. It happens during every downturn,” Michael Jackson, a Paris-based VC who invests in both startups and venture funds, told CNBC.
“The fundraising climate for VCs has cooled considerably, so many firms won’t be able to raise their next fund.”
Why VCs are struggling
VCs take funds from institutional backers known as LPs, or limited partners, and hand small amounts of the cash to startups in exchange for equity. These LPs are typically pension funds, endowments, and family offices.
If all goes smoothly and that startup successfully goes public or gets acquired, a VC recoups the funds or, better yet, generates a profit on their investment. But in the current environment, where startups are seeing their valuations slashed, LPs are becoming more picky about where they park their cash.
“We’re going to see a lot more zombie venture capital firms this year,” Steve Saraccino, founder of VC firm Activant Capital, told CNBC.
A sharp slide in technology valuations has taken its toll on the VC industry. Publicly-listed tech stocks have stumbled amid souring investor sentiment on high-growth areas of the market, with the Nasdaq down nearly 26% from its peak in November 2021.
A chart showing the performance of the Nasdaq Composite since Nov. 1, 2021.
With private valuations playing catch-up with stocks, venture-backed startups are feeling the chill as well.
Stripe, the online payments giant, has seen its internal market value drop 40% to $63 billion since reaching a peak of $95 billion in March 2021. Buy now, pay later lender Klarna, meanwhile, last raised funds at a $6.7 billion valuation, a whopping 85% discount to its prior fundraise.
Crypto was the most extreme example of the reversal in tech. In November, crypto exchange FTX filed for bankruptcy, in a stunning flameout for a company once valued by its private backers at $32 billion.
Investors in FTX included some of the most notable names in VC and private equity, including Sequoia Capital, Tiger Global, and SoftBank, raising questions about the level of due diligence — or lack thereof — put into deal negotiations.
Since the firms they back are privately-held, any gains VCs make from their bets are paper gains — that is, they won’t be realized until a portfolio company goes public, or sells to another firm. The IPO window has for the most part been shut as several tech firms opt to stall their listings until market conditions improve. Merger and acquisition activity, too, has slowed down.
New VC funds face a tougher time
In the past two to three years, a flood of new venture funds have emerged due to a prolonged period of low interest rates. A total of 274 funds were raised by VCs in 2022, more than in any previous year and up 73% from 158 in 2019, according to numbers from the data platform Dealroom.
LPs may be less inclined to hand cash to newly established funds with less experience under their belt than names with strong track records.
“LPs are pulling back after being overexposed in the private markets, leaving less capital to go around the large number of VC firms started over the past few years,” Saraccino said.
“A lot of these new VC firms are unproven and have not been able to return capital to their LPs, meaning they are going to struggle mightily to raise new funds.”
When will zombie VCs emerge?
Frank Demmler, who teaches entrepreneurship at Carnegie Mellon University’s Tepper School of Business, said it would likely take three to four years before ailing VC firms show signs of distress.
“The behavior will not be as obvious” as it is with zombie firms in other industries, he said, “but the tell-tale signs are they haven’t made big investments over the last three or four years, they haven’t raised a new fund.”
“There were a lot of first-time funds that got funded during the buoyant last couple of years,” Demmler said.
“Those funds are probably going to get caught midway through where they haven’t had an opportunity to have too much liquidity yet and only been on the investing side of things if they were invented in 2019, 2020.”
“They then have a situation where their ability to make the type of returns that LPs want is going to be close to nil. That’s when the zombie dynamic really comes into play.”
According to industry insiders, VCs won’t lay off their staff in droves, unlike tech firms which have laid off thousands. Instead, they’ll shed staff over time through attrition, avoiding filling vacancies left by partner exits as they prepare to eventually wind down.
“A venture wind down isn’t like a company wind down,” Hussein Kanji, partner at Hoxton Ventures, explained. “It takes 10-12 years for funds to shut down. So basically they don’t raise and management fees decline.”
“People leave and you end up with a skeleton crew managing the portfolio until it all exits in the decade allowed. This is what happened in 2001.”
OpenAI CEO Sam Altman speaks during the Federal Reserve’s Integrated Review of the Capital Framework for Large Banks Conference in Washington, D.C., U.S., July 22, 2025.
Ken Cedeno | Reuters
OpenAI is detailing its plans to address ChatGPT’s shortcomings when handling “sensitive situations”
following a lawsuit from a family who blamed the chatbot for their teenage son’s death by suicide.
“We will keep improving, guided by experts and grounded in responsibility to the people who use our tools — and we hope others will join us in helping make sure this technology protects people at their most vulnerable,” OpenAI wrote on Tuesday, in a blog post titled, “Helping people when they need it most.”
Earlier on Tuesday, the parents of Adam Raine filed a product liability and wrongful death suit against OpenAI after their son died by suicide at age 16, NBC News reported. In the lawsuit, the family said that “ChatGPT actively helped Adam explore suicide methods.”
The company did not mention the Raine family or lawsuit in its blog post.
OpenAI said that although ChatGPT is trained to direct people to seek help when expressing suicidal intent, the chatbot tends to offer answers that go against the company’s safeguards after many messages over an extended period of time.
The company said it’s also working on an update to its GPT-5 model released earlier this month that will cause the chatbot to deescalate conversations, and that it’s exploring how to “connect people to certified therapists before they are in an acute crisis,” including possibly building a network of licensed professionals that users could reach directly through ChatGPT.
Additionally, OpenAI said it’s looking into how to connect users with “those closest to them,” like friends and family members.
When it comes to teens, OpenAI said it will soon introduce controls that will give parents options to gain more insight into how their children use ChatGPT.
Jay Edelson, lead counsel for the Raine family, told CNBC on Tuesday that nobody from OpenAI has reached out to the family directly to offer condolences or discuss any effort to improve the safety of the company’s products.
“If you’re going to use the most powerful consumer tech on the planet — you have to trust that the founders have a moral compass,” Edelson said. “That’s the question for OpenAI right now, how can anyone trust them?”
Raine’s story isn’t isolated.
Writer Laura Reiley earlier this month published an essay in The New York Times detailing how her 29-year-old daughter died by suicide after discussing the idea extensively with ChatGPT. And in a case in Florida, 14-year-old Sewell Setzer III died by suicide last year after discussing it with an AI chatbot on the app Character.AI.
As AI services grow in popularity, a host of concerns are arising around their use for therapy, companionship and other emotional needs.
But regulating the industry may also prove challenging.
On Monday, a coalition of AI companies, venture capitalists and executives, including OpenAI President and co-founder Greg Brockman announced Leading the Future, a political operation that “will oppose policies that stifle innovation” when it comes to AI.
If you are having suicidal thoughts or are in distress, contact the Suicide & Crisis Lifeline at 988 for support and assistance from a trained counselor.
WATCH: OpenAI says Musk’s filing is ‘consistent with his ongoing pattern of harassment
Okta CEO Todd McKinnon appears on CNBC in September 2018.
Anjali Sundaram | CNBC
Okta shares rose 4% in extended trading on Tuesday after the identity software maker reported fiscal results that exceeded Wall Street projections.
Here’s how the company did in comparison with LSEG consensus:
- Earnings per share: 91 cents adjusted vs. 84 cents expected
- Revenue: $728 million vs. $711.8 million expected
Okta’s revenue grew about 13% year over year in the fiscal second quarter, which ended on July 31, according to a statement. Net income of $67 million, or 37 cents per share, was up from $29 million, or 15 cents per share, in the same quarter last year.
In May, Okta adjusted its guidance to reflect macroeconomic uncertainty. But business has been going well, said Todd McKinnon, Okta’s co-founder and CEO, in an interview with CNBC on Tuesday.
“It was much better than we thought,” McKinnon said. “Yeah, the results speak for themselves.”
U.S. government customers are being more careful about signing up for deals after President Donald Trump launched the Department of Government Efficiency in January.
“But even under that additional review, we did really well,” McKinnon said.
Net retention rate, a metric to show growth with existing customers, came to 106% in the quarter, unchanged from three months ago.
Companies will need to buy software to manage the identities of artificial intelligence agents working in their environments, which should lead to expansions with customers, McKinnon said. Selling suites of several kinds of Okta software should also boost revenue growth, he said.
Management called for 74 cents to 75 cents in adjusted earnings per share and $728 million to $730 million in revenue for the fiscal third quarter. Analysts surveyed by LSEG had expected earnings of 75 cents per share, with $722.9 million in revenue. Okta expects $2.260 billion to $2.265 billion in current remaining performance obligation, a measurement of subscription backlog to be recognized in the next 12 months, just above StreetAccount’s $2.26 billion consensus.
The company bumped up its fiscal 2026 forecast. It sees $3.33 to $3.38 in full-year adjusted earnings per share, with $2.875 billion to $2.885 billion in revenue. The LSEG consensus showed $3.28 in adjusted earnings per share on $2.86 billion in revenue. Okta’s full fiscal year guidance from May included $3.23 to $3.28 per share and $2.850 billion to $2.860 in revenue.
Late last month, Palo Alto Networks, a cybersecurity company that announced an expanded partnership with Okta in July, announced plans to acquire Okta rival CyberArk for about $25 billion.
“Palo Alto is going to be like, ‘You have to buy security from us, and your endpoint from us and your SIEM [security information and event management] from us and your network from us,’ ” McKinnon said. “We just think that’s wrong, because customers need choice. It’s very unlikely they’re going to get every piece of technology or every piece of security from one vendor.”
A Palo Alto spokesperson did not immediately respond to a request for comment.
Earlier on Tuesday, Okta said it had agreed to acquire Israeli startup Axiom Security, which sells software for managing data access. The companies did not disclose terms of the deal.
As of Tuesday’s close, Okta shares were up 16%, while the technology-heavy Nasdaq was up 11%.
Executives will discuss the results with analysts on a conference call starting at 5 p.m. ET.
WATCH: We’re moving from prototype to production when it comes to agents, says Okta CEO Todd McKinnon
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