- Richard Couch and Martin Pichinson are in the business of figuring out what to do with distressed companies, particularly venture-backed startups that are in crisis or nearing their endgame.
- Both are fielding a flood of calls these days from venture investors worried about their portfolio companies as the coronavirus-related economic downturn deepens.
- Some venture are using the crisis to cull underperforming companies from their lineups, others are still assessing which companies they will continue to support and which they'll cut lose, the consultants said.
- Both Couch and Pichinson are expecting the downturn to last for a while and to lead to widespread destruction in the startup world.
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Richard Couch and Martin Pichinson get called some unflattering names — Dr. Death, Darth Vader, the undertakers of Silicon Valley.
But when times get tough at startups, they're often the ones who get called to try to salvage something out of the situation. And right now, as the coronavirus pandemic has spurred a sharp and what's starting to look like a calamitous economic downturn, they're fielding lots of calls.
"We are on more conference calls now than we probably ever have been," said Pichinson, co-president of Sherwood Partners, a Silicon Valley-based consulting firm. "People are absolutely trying to figure out what to do," he continued.
Pichinson and Couch, CEO of Diablo Management Group, which is also based in the Bay Area, specialize in finding resolutions for distressed companies, particularly venture-backed startups — ones that are running out of cash or prospects or are at some crisis point in their life cycle. Sometimes that means restructuring them. Sometimes that means selling them off. Sometimes that means shutting them down and getting what they can for the pieces that are left.
Even in good times, many startups don't pan out and lots of other companies fail, so Couch and Pichinson's services are constantly in demand. But in the wake of the economic shutdown due to the coronavirus, both have become popular figures in Silicon Valley.
"There's a pick-up in conversations, that's to be sure," said Couch, who is perhaps best known for being the person who shut down Pets.com after its business failed.
Some VCs are using the crisis to cull underperforming companies
Venture capitalists are talking to Couch and Pichinson's consulting firms about what to do with their struggling startups. The investors are using this moment to re-evaluate their portfolios, the consultants said.
Pichinson's firm is already getting calls from venture capitalists who want to cull their weaker and underperforming startups. These are companies they'd been thinking about ridding themselves of even before the crisis, he said. But the downturn has made that job more urgent. They want to clear things out so they can focus on their successful companies and are ready to invest in new ones after the crisis ends, he said.
"They're saying, 'OK, let's get the low-hanging fruit," Pichinson said. "'This is not what we're going to go ahead and really invest in anymore.'"
The venture investors Couch is talking to aren't yet at that stage. Instead, they're combing through their portfolios and assessing the status of their companies, he said.
Startups can be assigned a status of red, yellow, or green, depending on their health and outlook, Couch said. Green companies are those that are doing fine and can be left alone. Yellows are those that investors are watching frequently and that they know they're going to need to make decisions about soon, because the companies are going to need financing in the near future.
"There are a lot more yellow deals out there than there have been," Couch said.
New funding for many of those companies — at least from the venture industry — may not materialize, he said. The venture capitalists he's talking to are wary of investing more money in startups that are looking to raise a B, C, or D round at a flat or lowered valuation.
"People are reluctant to throw good money after bad," he said.
Cash preservation is paramount
Part of what's making these kinds of decisions — whether to shut companies down, whether to invest more in them — more pressing is that with the economy in turmoil, cash is starting to be harder to come by, Couch and Pichinson said. Some limited partners at venture firms are refusing to pony up money when the general partners put out a call for cash, Couch said. Meanwhile, some corporate venture offices are shut down and unable to follow through on investment commitments, he said.
While the federal government is offering loans to help small businesses and larger corporations get through the crisis, there are concerns that venture-backed startups may miss out on some of the aid. In recent weeks, numerous starts have been slashing jobs and cutting back on expenses.
"What's going on right this second is cash preservation," Pichinson said.
Both expect there to be widespread devastation ahead in the startup sector. The pandemic isn't likely to end any time soon and even when it does, it will be months, perhaps years before things return to any semblance of normal, they said.
And what will be normal after the crisis may not resemble what was the norm before it, Pichinson said. Few people are likely to want to attend a football game or a concert or even a movie in a theater anytime soon, he said. Those changing societal norms are going to have an impact on companies and investors.
"Where they may have invested a company yesterday, they may not tomorrow, because some new rules are being written," Pichinson said.
For the companies that get handed over Pichinson and Couch's firms, some will end up being sold to private equity firms after a restructuring. Some will see their teams join other companies as part of acqui-hire deals. And some will see their assets — everything from their patents and other intellectual property to their office furniture — sold off, in many cases, likely for pennies on the dollar.
"The market will develop over a three-to-six month period to one where there's a fair amount of turmoil," Couch said. Right now, he continued is the "calm before the storm."
Got a tip about startups or the venture industry? Contact this reporter via email at twolverton@businessinsider.com, message him on Twitter @troywolv, or send him a secure message through Signal at 415.515.5594. You can also contact Business Insider securely via SecureDrop.
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