Got a Dead Dot-Com? Marty's Your Man
Over the past 18 months, Martin D. Pichinson has become a permanent fixture in technology circles. But the CEO of Sherwood Partners Inc. in Los Angeles is about as welcome as a loaf of bread during Passover.
Nothing personal against the gregarious Marty. It's just bad news when you need him. Marty the Liquidator, as he's known, is mop-up man to the tech industry, where many liken him to the Harvey Keitel character in Pulp Fiction -- the guy the hit men called to clean up their bloody messes. Pichinson is the man venture capitalists turn to when their companies are crumbling. His job: to sort through the companies' dirty laundry and shut them down.
The fast-talking former New Yorker and onetime music manager spends most of his time liquidating assets, from baseball caps to laptops, and ensuring that creditors get some cash back -- a task that has gotten tougher as tech failures balloon. He increasingly does restructurings, too, though that's a secondary business. Some 537 dot-coms shut down in 2001, more than double the number in 2000, according to Webmergers.com, a researcher of Internet trends. Pichinson estimates that the 76 cleanups his 22-person shop has handled in a little more than a year represent more than $2 billion in lost investments and unpaid bills.
Sounds big. But it might be peanuts compared with what's to come. Despite optimism about an economic recovery, Pichinson and his venture-capitalist clients expect a second wave of shutdowns that will go far beyond the dot-com wreck.
The losses -- in terms of jobs and dollars -- could be much larger, they say, because bigger bets were placed in telecom equipment, software, and optical networking. These companies will likely go under -- less because they wasted money on custom carpeting or Super Bowl ads -- than because VCs funded too many, and they all hit the market just as their potential clients slashed capital spending. "We look at 2000 and much of 2001 as the era of kindling, the easy fire-starter stuff," says the 55-year-old Pichinson, who helped close such high-profile blow-ups as online delivery service Kozmo.com and Alladvantage.com, a site that paid users to surf the Web. "Now we're getting into the trees themselves."
Case in point: Sigma Networks Inc. in San Jose, Calif. The optical networking upstart shut its doors in January after burning through $120 million of the $430 million investors had committed. Sigma did overinvest in gear. But its main problems were a saturated market and the turned-off VCs. "By all rights, we should have survived," says Michael Depatie, Sigma's former chief financial officer. "I think a lot more companies will go down in this capital environment, and Marty will be busy for a long time."
One reason VCs like Pichinson is his low profile. No bankruptcies for him. He relies on a process known as Assignment for the Benefit of Creditors (ABCs). ABCs are quicker, cheaper, and less painful because creditors privately negotiate a resolution. Lawyers' fees are minimal. He disposes of assets through online auctions or liquidators. All this lets VCs avoid public failures. "As a firm policy, we are not interested in companies filing for bankruptcy," says Christopher P. Marshall, partner at venture firm Trident Capital LP and a Pichinson client.
Discretion doesn't come cheap. Sherwood charges $75,000 or 7.5% of assets, whichever is higher. Clients such as venture powerhouse Kleiner Perkins Caufield & Byers are happy to pay. "Marty knows exactly how much each creditor is going to take, how much [online auctioneer] DoveBid will auction equipment off for, and he knows the value of a Sun server," says Sigma's Depatie. "Everyone tends to be happy when we're done, even though it's a pretty ugly process."
Companies that have a chance of surviving, Pichinson restructures. That part of his business --which has grown from 10% last year to 30% now -- involves layoffs, renegotiating with creditors, and selling assets. The CEO of a systems-integrator company in Silicon Valley says Sherwood got creditors to take pennies on the dollar -- saving his firm at least $2 million. "You grow up thinking if you owe someone $100, it's $100," the CEO says. "But you learn you can maybe pay them $10."
It's no mystery to Pichinson why so many tech upstarts came unhinged. At the top of his list, hubris: overstaffing, too much office space and equipment, and bloated marketing budgets. Consider iChristian, a religious Web site that Sherwood shut down. Pichinson says its equipment could handle 1 million hits a week -- it was lucky to get 4,000. "I call this the other-people's-money problem," says Pichinson. "Without tight reins, there's no concern for where the money goes. You create huge losses for the whole business community."
Pichinson has been rehearsing his Keitel role all his working life. He spent seven years managing rock bands. His clients, including The Miracles and Lou Rawls, marveled at how he worked the tightfisted recording industry. Warren "Pete" Moore, a founding member of The Miracles, says Pichinson hammered out a $2.5 million contract with Columbia Records in 1972 -- after star singer Smokey Robinson had left. "For him to do that without Smokey was pretty phenomenal," recalls Moore. "But Marty never gives up on an idea until people do what he wants them to do."
Despite his nasty business, VCs say they like Pichinson, a quintessential networker. Recently, he sent clients a dot-com Monopoly game as a gift. True to form, he got a deal on it: The game retails for $39.99, but he paid just $7.99. The VCs hope Marty the Liquidator will do as well for them.
By Linda Himelstein