A Quick Conversation with Silicon Valley’s “Undertaker”

Between the IPO drought and a slowdown in M&A, Marty Pichinson can’t answer the phone fast enough these days.

Pichinson is cofounder of 27-year-old Sherwood Partners, long known to industry insiders as “the undertaker” of the venture industry. Its primary role is to efficiently shutter companies, and, when possible, to return a little something to their creditors. And as you might guess, demand for its services is growing in a straight line toward the sky right now. (Among some of the high-profile startups Sherwood is in the process of winding down are bankrupt mobile content provider Amp’d and the bankrupt residential home phone provider SunRocket.) Indeed, in January of 2007, the firm was being asked to take on three new clients a month. Fast forward to today and it’s taking on three to four newly imploding companies every week. Most of them are Web 2.0 startups backed by Valley VCs, but Sherwood also counts Google and Microsoft as clients.

I reached Pichinson — an extroverted 62-year-old who once managed musical acts and tends to pepper his speech with words like “caca” — yesterday, after he returned from a three-week trip to Poland. Here’s part of that conversation:

How long does it take you to wind down a company?

If we restructure the company — try to save it, it’s anywhere from 3 months to 12 months. If we close it, it takes up to a year because of all the legal ramifications.

Where are these startups, and their backers, going wrong?

Well, you’ve got to start bringing in companies like Sherwood early to work with managers and help shave off costs. It’s all about extending the runway long enough that customers can absorb a product. Everyone comes up with this cockapoo about startups. It’s not about being smart. It’s about being around long enough.

Cutting costs, negotiating better — these sound like business fundamentals that a startup’s VCs should be helping with.

This is what people don’t understand: decades ago, when a VC put money into a Cisco or HP and sat there and worked with them, they were managing a $2 million fund. Now, with funds the sizes they are, do VCs really have the time to work with all these companies when they don’t know which will be the winner? No.

Couldn’t the answer be to raise smaller funds and back fewer companies?

VCs have to put money into so many companies. Who else is going to bet on ideas? That’s what venture capital is. Did you ever think you could take a cell phone with you to Italy and talk with people as if you were home? Paradigm shifts like the kinds we’re enjoying and will continue to enjoy cost money. I think the venture model is perfect the way it is.

You must be recovering from jet lag. Just kidding. You’re working with a lot of Web startups, correct? What are you seeing?

A growing practice is companies that want to acquire others; they’re calling us in to do an ABC [an assignment for the benefit of creditors], so they can purchase the assets while we’re winding the company down. It lets the employees keep going. In other cases, we’ll get a forebearance [the stay of enforcement of something like a debt or obligation that’s due], so we’ll get 90 days to get our arms around everything and come up with a plan, like give stock to creditors, which they like.

So VCs are squishing together failing Web 2.0s so they won’t have to write off their investments entirely.

Sometimes, yes.

Is that a sign of trouble, or business as usual?

You know what I think? I think the economy, excuse my French, sucks right now. You have no secondary market for mortgages. You got an energy crisis that’s killing us all. You’ve got storms and floods in the Midwest. Things are a mess, and we haven’t seen anything yet. Q3 and Q4 are expected to be worse. Credit card debt is going to collapse. Hedge funds are dying. Limiteds are going to start suing everyone. It’s a perfect storm, almost like mankind has never seen. Shit happens, but the venture model works.