Venture Capital’s Dr. Death

When it’s time for a start-up to wind down, who you gonna call? Marty Pichinson

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Steven Cherry: Hi, this is Steven Cherry for IEEE Spectrum’s "Techwise Conversations." This is show number 73.

In the world of business, often one company’s failure is another’s opportunity. Perhaps no one in modern finance has done as well at making a fortune from misfortune as my guest today.

Marty Pichinson is the head of Sherwood Partners, a Silicon Valley business consultancy that works for banks, venture capitalists, or companies themselves to save them or shutter them. His work garners so much notoriety that the business press and a lot of unhappy creditors have given him not one but two nicknames: Dr. Death and The Terminator. But in a 2003 interview with CNN, Pichinson said, "I am one of the best fixers of broken things."

2011 has been a banner year for him. So far, he has "retired" close to 60 companies, to employ a euphemism of his press representative from a recent e-mail. Many of them are in the life sciences, clean tech, wireless technologies, software, and medical devices. He joins me by phone from Mountain View, Calif. Marty, welcome to the podcast.

Marty Pichinson: Thank you for having me. It’s a pleasure.

Steven Cherry: Marty, one of your favorite tools is the ABC, which stands for "assignment for the benefit of creditors." Tell us how an ABC works.

Marty Pichinson: Well, I don’t want to say it’s the favorite tool, but it’s a polite tool to wind down a company. Under 34 states in the country it’s an old code—some of it goes back to the 1800s—but it’s when a company is insolvent and they just really want to wind down, instead of doing a bankruptcy, which has many moving parts; it’s just an assignment for the benefit of creditors. You assign your assets to the assignee, and the company, of course, is the assignor, and you sign a contract where the assignee owns all the assets and the liabilities. The venture capital world likes this because it’s enabled them to just quickly find someone they know, they trust that’s going to properly wind the assets down.

Steven Cherry: Now that’s just one of the methods that you use. And you’re not always winding down a company; sometimes you actually are trying to save it. Tell us how it works in general. You’re approached by, say, a venture capital group or a bank or the company itself, right?

Marty Pichinson: So we take these companies, and we believe management should be looking towards tomorrow. And it’s a very unique approach, so the venture capitalists slash the investors board; by bringing a Sherwood in, we’re permitting management to look towards tomorrow because of all the money that’s been invested. Now they can keep focusing on completing and maturing their product and focusing on sales and what we call the world "adopting" or the adoption of the product. Well, Sherwood can take care of yesterday’s problems, be it restructuring a debt, be it restructuring a lease, be it handling some aspects of a lawsuit so that the management company doesn’t have to spend all their time and they get very emotional. I’ve done this for close to, my God, oh, wow, 40 years. It’s a long time, and it’s not that we’re not nice people—we’re very nice people, but we handle the stress, and we understand where the world goes. We know most of the bankruptcy firms and they know us; you know, one of the major VC firms came up with a great tag line that we’re going to be rolling out the first of the year: "Who better than Sherwood knows what can go wrong?" So in the restructuring the key is, bring us in earlier or a workout firm, whoever it may be; the earlier you bring us in, we have a different set of eyes. Our eyes are "What can go wrong?" where entrepreneurs’ eyes (and it should be) is "What can go right?"

Steven Cherry: You know, it’s funny that you mentioned that, because I was going to ask you, you know, when it comes to public companies, sometimes a company’s assets are worth more than its book value, and that’s nothing new. I mean, that’s the plot of the movie Wall Street, which was made in 1987. I noticed last week a headline that read, "RIM’s market cap is now less than the total value of its assets." RIM is, of course, Research in Motion, the parent company of the BlackBerry phone. Is it ever too early to think about winding down a company?

Marty Pichinson: It’s not that it’s never too early. There was an article—and I’ve been looking for it for two years now; I can’t find it. Mackenzie—about five years ago, the essence of the article was going into the 21st century—any firm that doesn’t bring in some consultants that fully understand and appreciate the bankruptcy world of what can go wrong will probably be doomed to fail. Because, you know, I hate to use the term "The world is flat," but it’s flat. The consolidation and globalization has changed everything we’ve done. You know, I’ve read a couple of your articles; I read that people are upset with patents, or they’re upset with this, or why is this happening? And you know, technology has always promised since the 80s: "Ladies and gentlemen, we’re going to make things easier, profitable for you, but we’re going to reduce people," and that’s what’s happened. And with the consolidation and the globalization, all of us, if we go into a mall and someone said to me, "Excuse me, I’m going to blindfold you and take you to another mall," and we put a gun to their head and you said, "What state are you in?" we’d have no idea—everything is basically homogenized. So the key is, you really need to understand what happens and can happen in bankruptcy, because the key here is we all have—and here’s the word that financial institutions hate and investors hate: "concentration"—but we all have concentration, and concentration means too much of the percentage of your business is going to one or two or three customers. But there are no more regional situations or local situations; everything is national or international. So you really need to understand what can go wrong and what the value is going to be of making a mistake—RIM, sadly, and I loved the BlackBerry product, but I’m off it. Okay? The phone’s just not kept up to what I wanted—I’m not saying what I needed. Do I need all the apps? Probably not. My wife thinks I’m absolutely crazy, but I enjoy them and some of them have use for when I travel, for notifying me—they’re like an assistant on my belt.

So going bankrupt is a very dangerous thing, and most companies go there because of their ego, because they don’t believe they can have a mishap, and when the mishap happens, everyone wants to be so positive that "Don’t worry, the next order is going to fix this problem, the next product, be it phone or whatever, is going to fix the product." That’s a beautiful dream, but that’s like saying I’m going to give you a million dollars, and I know your product’s going to be successful. The odds of success are under 10 percent, if that, so it’s a new world right now. We’ve left the industrial age; we’re in the information age, all rules out the door.

Steven Cherry: So we shouldn’t be surprised if we noticed tomorrow that a Sherwood was called in for RIM.

Marty Pichinson: No, we shouldn’t, and it’s sad, but I want you to know that it doesn’t mean that it can’t be changed. Sometimes, a new set of eyes can help you avoid trouble or see new changes that just from within you can’t see. Is it any different, sadly, when someone breaks up with their girlfriend in high school and they think their world is ending? Come on, you and I and everyone else knows plenty of people. Things happen; the difference is today it’s happening quicker, it’s happening without expectation, and it’s happening for reasons we may not understand. But does it really matter? And that’s the thing with the workout person; we don’t really care why something happens, we only care how can we readjust it and how can you refocus the direction of the company so that you avoid any further pitfalls.

Steven Cherry: In the case of RIM, one of its biggest assets is its patent portfolio, and you mentioned patents a minute ago. Nortel, you know, in June sold its patent portfolio for [US] $4.5 billion, which was a figure that just kind of staggered a lot of people. The once great company Kodak has been selling its patents sequentially for what might end up being about $ 2 billion. I’m wondering if patent portfolios are going to get reappraised in light of these sales and if we’ll see more companies whose market cap would be less than the value of their assets because of their patent portfolios. Maybe we’ll see some more Gordon Gecko activity this year and the next.

Marty Pichinson: The answer is—this year I don’t know if you’ll see much, but next year you’ll see a lot. Patents are the oil in the ground, from the Gettys, from the Standard Oils; it’s the new currency, it’s the new dream of changing and making things easier and more enjoyable for the users. So you talk about the iPad. Okay, 18 months ago there was really no iPad, and now all of a sudden more gaming is on the iPad than ever before. Doctors are using the iPad. This is all from technology; these are all from patents. Yeah, the patents become more valuable. Why? Because of the adoption, and that’s where people don’t understand the value of the patents. Like some of the articles I’ve read, people are upset that the patent laws should change, or this should change. Well, if they change, who’s going to invest in them? Who’s going to give you that call at the computer on your belt which is your cellphone today? Another five years, you’re not going to have a laptop anymore; it’ll all be wireless, it’ll all be on your belt. So patents are becoming valuable because they’re the way things happen. What is a car? A car is a transportation vehicle for human beings or products that works on a wheel that works on an engine that Mercedes really developed and then eventually developed more the gas engine in the United States. This is all from patents from people’s ideas, so of course they’re going to be valuable. What are we going to do? Find more valuable land? Find more valuable corn? A more valuable jacket? It’s all about today—technology—and technology all relates to patents.

Steven Cherry: So Yahoo is another example of what we were talking about. We at Spectrum, we’re just finalizing our annual patent power scorecard for 2011. And I can’t talk about the actual numbers yet, but Yahoo’s patent power turns out to be considerable in our communications and Internet services category. Microsoft and Google are direct competitors, and they were both heavily involved in that Nortel auction, so I’m wondering: Could even a big, fairly successful company like Yahoo end up getting bought and stripped for its patents?

Marty Pichinson: Well, I don’t know if it will get stripped for its patents, because it has a pretty decent-sized user base, but it may be purchased or absorbed, which is why Microsoft, who originally wanted to take it on, was also the user base; you cannot really put a line in the sand between patents and users. Patents are not valuable if there’s not a user of the product and the patents that are within. That goes for clean tech, bio, life science, pharma, hardware, software, so there’s a correlation. I mean, a patent can be wonderful—you and I can be jumping up and down and saying, "Oh, my God, this is the best thing ever." If there’s not a user to absorb the products that hold and are used by the patent, there’s no value, so of course they’re valuable!

Steven Cherry: So just to wrap up, I’m curious: You know, forest fires take out weak and dying trees, and they give new and healthy trees some growing room; leeches and maggots have come back into modern medicine because they do the same sort of thing. Do you think it’s always going to be the case that guys like you perform an essential role in the business world, but people are going to continue to give you nicknames like Dr. Death and the Terminator?

Marty Pichinson: You know, we’re not Dr. Death; this is you and I—come on. We didn’t stop funding the company, okay? We are helping clean out the weeds. That’s like saying your gardener is killing your grass because it’s fall.

Steven Cherry: Very good. Well, thanks a lot for spending time with us.

Marty Pichinson: It was a pleasure, and thank you for spending the time with me.

Steven Cherry: We’ve been speaking with Silicon Valley’s Dr. Death, a.k.a. Marty Pichinson, of Sherwood Partners, about how the Valley clears out its dead and dying companies to free up capital and market share for new ventures. For IEEE Spectrum’s "Techwise Conversations," I’m Steven Cherry.

Announcer: “Techwise Conversations” is sponsored by National Instruments.

This interview was recorded 9 November 2011.
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Audio engineer: Francesco Ferorelli

NOTE: Transcripts are created for the convenience of our readers and listeners and may not perfectly match their associated interviews and narratives. The authoritative record of IEEE Spectrum’s audio programming is the audio version.


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