A Q&A with Silicon Valley’s “Undertaker”

In January of last year, for the San Jose Mercury News, I wrote about 27-year-old Sherwood Partners in Palo Alto, long known to industry insiders as “the undertaker” because its primary role is to efficiently shutter companies.

Sherwood made a killing in the aftermath of the Internet bubble, closing down roughly 180 startups. In the years that followed, however, as the tech economy rebounded and startups became more efficient, Sherwood’s business slowed considerably. It closed two satellite offices that it had opened and cut down its staff of 60 MBAs and CPAs to less than 30. In fact, as I was writing my piece, it was fair to compare Sherwood to some of the former high-fliers it has wound down — and I did.

What a difference an almost unprecedented economic meltdown makes. When I caught up with Sherwood’s gregarious cofounder Marty Pichinson on Friday afternoon, he was just wrapping up an hour-long conference call, juggling two new calls, and eager to escape the office after a very long week. Before he took off, Pichinson, who has an inimitable flair for drama, told me why startups should keep their PR people, how to negotiate with a landlord, and what most startup employees can expect in the way of a severance package.

I take it business is booming right now?

I’ve been coming in at 6 a.m. and going home at 8 o’clock. “Booming” is being polite. It’s a tsunami — a word I used before Alan Greenspan did. It’s just a total, unexpected paradigm shift for the world.

It’s really shocking.

“Shocking” is being polite. It’s earth-shattering. We’re back to one or two calls a day, which is translating into three of four new engagements a week. To put that into perspective, from 2002 through 2008, we were maybe getting five new deals a month. But now, all these calls are building up. We got a call yesterday to help a company and today, the request changed; it went from, “Can you help the company” to “we need you to close the company” because one of the investors is not going to ante up.

Have you seen other investors pulling out of deals?

We saw this years ago; it’s just starting now.

How are you fielding all these new requests?

We’re crazy. We interview all the time because we’re looking for good people. It usually takes us 90 days and sometimes more to interview a new employee. Well, we have this group of people we’ve been interviewing and now we’re just accelerating our process.

Meaning you’re bringing on contractors or full-time employees?

Oh, I never use contractors. When you use them you can’t guarantee the quality of work. I mean give me a break. Sometimes they stay too long because they don’t have another engagement. Sometimes, when they have another engagement, they leave too quickly.

So you’re busy unwinding companies. Walk me through who typically gets fired first and why.

You can’t determine who to lay off until you understand what your needs are. When you analyze who to cut, you have to say, “Do I need four people in sales or is the one consultant who has better connections better for me?” And do you need full-time salespeople? Some startups try to have too many full-time employees when they don’t have a full-time business. You have to look at what everyone is doing and how they integrate.

Once you know who is getting axed, what’s the best way to do it?

If you do cut, you only try to cut one time. You cut deep and sharp because you have to build morale up and everyone left has to be comfortable that they have a job.

Are there other, less painful, ways that can startups can reduce costs right now?

You can cut the food that you’re giving employees. You can ask people to take a small reduction in their salary — or a large cut if necessary. You can stop giving away free services. The beta customers that are costing you 12 percent of your employee base — it’s time to ship up or shape out and you cut ‘em.

Look at your electric bill. Are you running your utilities at night? Stop. You can negotiate with your phone service provider. We do it all the time, negotiate debt on unsecured creditors. It’s either: get nothing, or get something. People don’t want to litigate and sue. I go to companies and sometimes we get savings of 50, 60 cents on the dollar for a going concern.

You could sell ice to Eskimos, though.

You know what? You raise a very important point; you need to know how to walk the walk and talk the talk.  I do not suggest people in the company do this because they won’t do as good a job as a third party — whoever they may be. The CEO is going to hear, “Well Mr. Jones, you paid your bill last month. Now you want to negotiate?” It’s like trying to cure yourself of cancer; leave it to a professional.

What about real estate? Should people be looking for cheaper rents?

Look, there’s plenty of real estate right now. Even Palo Alto is starting to have vacancies. It’s not about where you look. If you’re honest with your landlord, they might go ahead and give you a discount for a year and tag [on the savings] to the end of your lease. Or they might say, “Okay, look, I’ll give you a longer lease for less money per month and we’ll blend the rate.”

Now, can you do this when a market is hot? Absolutely not. But right now, do you think everyone isn’t a deer in the headlights? No one anticipated this tsunami. Anyone who says they saw this coming is a liar.

Okay, how about service providers: which could many startups do without?

With service providers, again, you have to analyze what they do for you and how important it is. Maybe you ask someone who has worked four days a week for you to work one, or ask them to reduce their fees. It’s common sense stuff.
What about public relations?

Do you listen to Warren Buffett and strike when there’s trouble? Is PR cheaper than advertising? The answer is yes. Are you better to have a third party tell reporters how great your product is? The key is to negotiate. I’m not a believer in cutting public relations if the machine is well-oiled and people are reading about you. It takes three to six months to get public relations up and running. Why throw it away?

Now, do you need an inside marketing person? Probably not at $150,000 a year. Also, outside PR probably has a wider net.

What about sales and customer service and accounting?

Sales you can outsource. You can partner with companies outside the U.S. Customer service, you have to analyze whether it’s cheaper per call inside or outside, and whether outside provides the same quality and how long it will take on a call and if people will mind if they wait five minutes. Accounting? It depends on how sophisticated your needs are.

Basically, you’ve got to make believe that you’re on an island and you’re going to run out of food. If you’ve got a dwindling bowl of soup and you’ve got X number of children to feed, you give them less, or you give everyone their share but you kill off some of your children.

You are brutal. Okay, where else can we make cuts?
Reimbursement of people’s cars, or their mileage. And do you really need to take everyone out to lunch, or eat at fancy restaurants? Cutting club memberships also makes sense unless it’s a person who’s doing a lot of business at the club. And travel is going to be a big, big number going forward.

But it’s everything. You’ve got to take your P&L line item by line item by line item. And after you finish, put your work in a folder, look at it tomorrow, and then again the day after that, just to confirm that you’re doing the right thing and that you can’t do anything more.

Meaning you have to make all of your cuts at once? Can’t it be an iterative process?

I’ve been doing this for 30 years and if you do it strong and deep one time, everyone complains for a period of time, then gets over it. Also, I’ll be honest with you, I’ve terminated people and two weeks later, I’ve brought them back and apologized for cutting too deep. Usually, they come back. It’s acceptable to be human as long as you’re not a jerk.

I’m almost afraid to ask, but what kind of severance packages are startup employees getting?

Sadly, right now they’re minimal. Two weeks is a maybe.

Yikes. So what are you charging your clients, and are your clients VCs or is your fee coming directly from the startups?

The companies retain us, but a board [of VCs] typically hires us. And we don’t bill by the hour. I find it immoral.  We do value billing. If we’re closing a company, it’s anywhere from $50,000 on up. If we’re doing interim CFO or CEO work, it’s anywhere from $7,500 a week on up, depending on how many Sherwood people are needed and how full-time it is.

And at what point are you being called in? When there’s barely a pulse or sooner?

People are calling us in earlier than they did during the bubble. Now, we’re giving suggestions to the board before the 747 hits the wall and bursts into flames, so the call comes in a few weeks to a month before the company hits that point, instead of the day before.

We’re also getting calls from people who are trying to sell companies and want our help renegotiating the debt while the M&A firm is at work because the VCs don’t want to put in more money.

Do you feel at all conflicted that your business does so well when other businesses are in the toilet?

I feel very bad about this. We’ll do well but I don’t feel good. We’re not going to have a depression but this is life changing. This is everything changing. There will be new government laws. There will be new oversight. There will be new ways to do business. People talk about when the IPO market is going to open up again. You think people are going to run back to the stock market in another year or two? I don’t think so.

I’ll tell you a story. I went to Costco two days ago. I like to shop. I wear Lucky jeans on the weekends. They cost me $90 at Nordstrom’s, but I found two pairs for $39 apiece at Costco. I almost bought them, but before I reached the checkout, I said to myself, I don’t need them.

How bad do you think it’s going to get?

During the bubble, something like 1,600 companies were funded. I hear in recent years there’s between 1,200 and 1,300, including some older investments. I see VCs clearing out a minimum of one-third plus of those investments. The banks will tell you the same thing. It’s why you have to keep your powder dry. You really have to watch what’s going on.