For the last 25 years, Marty Pichinson and the firm he co-founded, Sherwood Partners, have specialized in selling off the assets of startups when they fail, as well as helping them extend their runway so that if they have to close down, they can do it the right way — in slow motion, versus at high speed. He’s been given every kind of death-related moniker as a result, from the Terminator to the Undertaker.
Pichinson — a native Illinoisan who is as renowned for his brash style as his salesmanship — doesn’t mind any of them, as long as they help keep Sherwood at the top of its game.
We chatted with Pichinson on Friday to ask what he’s seeing in the current market.
TC: The stock market has been on an upswing. Startups keep getting funded. What’s happening in the world of wind-downs?
MP: We’re seeing two to four companies wind-down a week, which we’ve never seen before. I think more [investors] are taking the Sequoia Capital approach, meaning if something isn’t working, they’re moving on.
TC: Haven’t they always?
MP: It’s happening faster right now. Microsoft and Intel and Facebook and Google and Apple — they own all the territory and they aren’t going away, so it’s more difficult to be the same type of company as another, but with a slightly different twist. For these companies, it’s great if someone else wants to develop a new feature or tool; they’re just going to fix that in the next version [of their own offerings].
TC: Almost every time we’ve talked over the years, you’ve said that work is busy. Certainly, it slows down sometimes.
MP: Sherwood has mostly been on an upward run since we started [in 1992], but we did slow down in 2014, and we couldn’t figure it out. Well, VCs were running their companies further to the edge to [improve their internal rates of returns before they hit the fundraising trail]. Turns out we had our best quarter ever in 2015 [as soon as they stopped funding those companies].
TC: What happens if the IPO market opens up, which seems to be happening?
MP: Doesn’t matter. More IPOs mean more companies in their respective spaces grab their crowns, and the other companies are left in the dust. It isn’t any different than when Facebook won.
In the meantime, the money keeps flooding in. Venture has become a true asset class. Everyone wants to get into this new world, including PE players, who were consolidating restaurants and dentists’ offices and malls. Well, there are no more malls. What’s new is tech, but not all these companies they’re funding are going to make it.
TC: More specifically, are you shutting down more Series B companies? How much earlier on in the process are investors pulling the plug?
MP: It’s across the spectrum really, B-, C-, D-, E-stage companies. We’ve shut down three or four unicorns. A lot of startups have taken on more debt than they should have. VC is hopes and prayers. Then you get inventory and receivables and all of a sudden that debt starts to pile on. Then not only do you have to please investors but also lenders, and lenders have very concrete expectations.
TC: Are there certain sectors where you’re seeing more startups than others?
MP: It’s everything, from streaming startups to hardware and software to clothing startups. One problem we see are similar concepts and maybe customer satisfaction levels but approaches that are so different that it’s difficult to consolidate these companies and squash them together to create a powerhouse. The price of consolidating the companies is too high.
TC: Years ago, you told me that Sherwood had begun selling a lot of intellectual property. At the time you’d even created a new company called Agency IP in Mountain View around the auction of IP. Is that still what you’re primarily focusing on when you unwind startups?
MP: We sell a lot of patents, maybe more than anyone else. Usually, the only way to pay back [lenders’] loans is to sell the patents. So people aren’t paying what the company would have been worth but usually enough to pack back that secured debt.
TC: What do you tell the VCs who hire you? Aside from funding fewer companies, is there anything they could be doing differently — better?
MP: I’ve been saying for years that VCs should be calling us in earlier. Some call us in a year before a startup is facing the end of its runway. But if [played the right way], a B player can easily beat an A player. You have to get to the customer first, before the customer knows about the A player.
Also, sometimes companies are so locked into a particular idea, and we’re like, “This isn’t the idea. This 10 percent of your business over here that’s starting to generate money? Stop the other stuff and focus on this.”
TC: You moved to L.A. recently. Why?
MP: I moved down to L.A. 18 months ago. Silicon Beach is a real thing. We have land for buildings. I won’t say it’s less expensive, but we have space. There is going to be a shotgun marriage between content and technology. Amazon and Netflix are winning Academy Awards. Everyone is getting into everyone’s space, but no one company can produce everything.
TC: What about close-outs and restructurings? Isn’t Silicon Valley still the place to be for those?
MP: We still have a big office in Silicon Valley. In New York, we have four people. And in L.A., we’ve gone from two to 10 people.
We think we’re well positioned as L.A. becomes more and more popular. It’s easy for a VC to enjoy breakfast, then fly to L.A., have lunch with a portfolio company, stay at a nice hotel, and have another company lunch the next day and be home [in the Bay Area] the next night for dinner. My gut is that it’s very difficult in other parts of the country because the algorithm is just different. There’s a lot happening in robotics and medical in Boston, and there’s a little happening in New York, but VCs are coming to L.A. because it’s a very easy trip.