Silicon Valley restructuring veteran says his firm is winding down up to 3 startups a day

@cookie / 3:31 pm PDT • April 13, 2020

Marty Pichinson gets called a lot of things: Silicon Valley’s undertaker, its terminator, a grave digger. These aren’t meant as slights; Pichinson is the founder of Sherwood Partners, a restructuring firm that Bay Area venture firms frequently turn to when they need someone to help sell off the assets of startups they have funded. The idea is to return at least some money to the company’s creditors and, if anything is left, to the VCs, too.

We last checked in with Pichinson almost exactly three years ago when the startup world was humming along. Even then, because of the sheer number of companies that get funded — and thus the number of startups that invariably don’t make it — Sherwood Partners was helping to wind down two to four companies a week.

Now, as he told us in conversation last week, it’s winding down two to three companies every day.

So who is shutting down, how does it all work and what can VCs expect to get in terms of a return in the age of the coronavirus?

Right now, Pichinson says the shutdowns are across verticals and across stages. “We’re in companies that raised $10 million to $25 million, to companies that raised up to $1.5 billion. It doesn’t matter what size they are; when they come to us, they’re all broke. If we’re closing it down to clean up and monetize what we can, they are basically in the same position, whether they raised $20 million or they were once a billion-dollar business.”

He says it typically takes a couple of weeks for his firm to get a handle on what kinds of assets it has to work with, the most valuable of these being a company’s intellectual property. Unsurprisingly, pricing for the IP — which sells for cash only — is all over the map, too.

“We have enough software that we could run certain values,” says Pichinson, “but the buyers are going to tell us what it’s worth. We have buyers that come in at 50%, 20% less than someone else, and we’re going to take the highest offer because that’s our job.”

For VCs, it’s mostly a matter of outsourcing what they don’t have the time or expertise to do themselves. By the time a company connects with a firm like Sherwood Partners, investors have already exhausted every other possible exit for the company, and the money restructuring can wring from its assets probably won’t add up to much, particularly if there is bank debt.

Indeed, Pichinson said that in such cases — and there are many — it’s more important that Sherwood does what it can to make back a company’s secured lenders their money, and “70% to 75% of the time, we’re pretty good at getting them close to 100 cents, 80 cents on the dollar.”

If there are no secured lenders, VCs are at the “top of the waterfall” typically — especially later-stage investors who might have agreed to a lofty valuation in exchange for more favorable liquidation terms.

Because Pichinson — a former music manager — has been in the restructuring business for decades, we asked: Does he compare this downturn to previous downturns?

He says he really doesn’t.

“We’ve seen lots of ups and downs where one sector gets hot, then all of a sudden they stop and something else comes in [to take its place]. But right now, it’s across the board. It’s why I call it the ‘great unwinding,’ because we don’t know where it’s going to end.

“What we do know is that as far as us using our screens and working from home, [this pandemic] is going to accelerate that trend. The world will never be the same [when it comes to public spaces]. God forbid we go to a movie in nine months and someone is coughing who really choked on a piece of popcorn; we’re all going to freak out.”

We were tempted to laugh as he painted this picture, but Pichinson, who’d just installed a hummingbird feeder outside his home office, wasn’t joking.

“We know that the virus will probably continue in different virus form, because the carrier is not only the human species but the airplane. So we’re going to start doing things different. I personally would not want to be an investor in office real estate. [Companies will] finish their leases, but I don’t know anyone that’s going to take the same [amount of space].

“What we’re going through is very sad. It’s scary even for me. I’m not happy about it. It’s weird. It’s bizarre. But we’re not in control. So it’s different because we don’t know the end.”

Silicon Valley restructuring veteran says his firm is winding down up to 3 startups a day

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