VCs ask founders a lot of questions. It’s a big part of their job. They’re deploying other people’s money and just as founders have an obligation to make money for their investors, venture firms have an obligation to bring preferably significant returns to theirs.

Founders need to ask investors questions, too. The most important one (or two): are you still deploying funds/when was the last time you made an investment?

PitchBook recently reported that the number of VCs in US deals peaked at 18,504 in 2021 and fell to 9,966 last year.

The real question, which Business Insider did ask, is “what happened to the 8,538 VCs that stopped investing in the last two years?” in a must-read article entitled ‘2024 will be the year of the zombie VC reckoning.’ The first wave of walking-dead venture firms is here and it’s already causing headaches for tech founders.

“Many funds have deliberatively pulled back on investing as they wait on the sidelines for more attractive deals, stretching out the time they have to invest to three years versus the two- or even one-year deployment seen in the boom,” Ben Clarkson (partner, Sapphire Ventures) said. “But others are zombies, depleted of cash and unable to raise new funds.”

While failure seems to be a badge of honor in the startup world, or so went the mantra for a long time although lately, not so much, it’s anything but that in the venture world.

“Funds don’t like to admit that they’re zombies, because it immediately brandishes them as lame ducks and makes it almost impossible to raise money or find new jobs,” said Roy Bahat who heads up Bloomberg Beta. Or to “get invited to the glitzy parties and conferences.”

OMG! Not that of all things! Better to deceive founders et al and cling to the perks.

“Founders end up wasting a lot of time because they’ll go research the firms and meet with them and the firms don’t even tell them they’re not actively investing,” said Bahat.

These funds are called zombies, the walking dead of venture capital, funds that “have concluded that a successor fund is not happening and they will start downsizing staff as management fees start dropping. Remaining callable funds will be saved for only the most promising ventures,” said Dror Futter on LinkedIn. “Some go through the motion of vetting deals even though they have limited/no ability to invest. In other cases, founders may be unaware that investors on their cap table have entered Zombie status – and will not be able to participate in future fundraising.”

Business Insider does include a list of known zombie funds.

But no one is asking what happened? So, here we go:

As Andy Harrison noted in the LinkedIn comments, “It’s a sign of a few things – maturation of investors (specifically those who invest in vc funds), maturation of investors part 2 (vcs are getting smarter about writing checks), a reality check for entrepreneurs (there is a lot of junk out there AND it shows that a lot of people shouldn’t be entrepreneurs – they don’t know how to build companies), and this is a natural correction – we are now through a period of excessive speculation and stupidity.”

Truth be told, anyone with a certain amount of money can hang a VC shingle. No vetting or previous experience required. Great fortunes were made in tech – including by vested employees who happened to be at the right company at the right time. Does that give them the proper credentials or backgrounds to become successful investors? And there’s yet another question founders should have been asking their potential investors: ‘What’s your background?’

FOMO has long been a driving factor in investing. Case in point: how much funding is going to companies with ‘AI’ front and center in their pitch decks? True, OpenAI has enjoyed a huge influx of funding, for better or for worse and most probably c) all of the above, but note to self: how many years went into development before ChatGPT hit the zeitgeist?

How many months or weeks have the current AI-centric startups been in business, who are now suddenly raising excessive amounts of capital?

Never underestimate FOMO or lack of experience on the part of funds – or the fact that there’s a world of difference between smart money and dumb money and do note that some of the funds listed by BI that have been ‘dormant’ for a while had been deploying funds for years. Some may be in a holding pattern until whatever is going to shake out, shakes out. In other cases, messages sent to the fund’s founder bounced. Gone and maybe even best forgotten.

We certainly hear about startups that fail or are jettisoning employees, but when it comes to funds in the dead pool, not so much.

There is a correction going on, which we’ve witnessed before when the dot com bubble burst, and as with the startups at the time, so went many a venture fund. And what did we learn? Just as the industry bounced back with a vengeance, so it went with funds

So, a final heads up and pay attention, founders. As critical as it is to know when it was the last time that a fund deployed cash, it’s also good to know about the exits they had.

If any.

There’s your barometer to determine how good the fund is. Investors, after all, are in the exits business. If the funds you’re talking to haven’t had any exits, might be best to just head for the door. Onward and forward.