Issue 5 / Failure

August 01, 2018
A photo of a pile of discarded computer equipment.

Image by dokumol from Pixabay.

The Undertakers of Silicon Valley

Adrian Daub

When startups die, an industry is born.

I am on the phone with the one-time owner of Back in 2001, was going to deliver your Starbucks coffee in less than an hour. Its former owner is… not what you’d expect.

Martin Pichinson is about seventy, a former music manager who came to Silicon Valley in the mid-1980s. His business partner is Michael Maidy, another septuagenarian who, judging from a Google search, favors dark suits that look about a half-size too big for him. Maidy was recently the CEO of another failed tech company: Pebble Tech, LLC, maker of smartwatches. Pichinson and Maidy look about as far from our image of the Silicon Valley CEO as you can imagine. But they are nevertheless an important, if rarely glimpsed, part of its ecosystem.

Their actual company is Sherwood Partners, and unlike, Pebble, and about a thousand other companies they have wound down over the years, it (a) still exists and (b) its business is always booming. The company is Silicon Valley’s premier specialist in “assignment for the benefit of creditors” (ABC)—a process by which insolvent companies assign their assets, titles, and property to a trustee.

ABC was how Pebble Tech, LLC came into existence: it was, for its brief life, simply a collection of Pebble’s remaining assets, to be distributed among various creditors, employees, and shareholders. This was also how Maidy briefly became the figurehead of a zombie version of the once-hip startup.

When you’re dealing with Sherwood, things are going badly. “People don’t like to talk to us, because they think, ‘If I’m talking to Sherwood, it’s a sign I’m in trouble,’” Pichinson says. Maidy’s and Pichinson’s names are all over public filings. While many of the lawyers and VCs I spoke to for this story try to stay out of the headlines, Sherwood doesn’t have that option. TechCrunch once called Pichinson “the Terminator of startups,” and many journalists on the Silicon Valley beat seem to check in with him periodically to see how business is going—if he’s upbeat, it’s time for another culling of a herd.

They’re not undertakers, Pichinson insists, though he too can refer to ABCs as “a private funeral.” Silicon Valley’s failure industry runs on discretion and convenient amnesia. Sherwood Partners is a place of memory and a place of failure. “I am the guy who closed down a lot of the high-flying dot-coms,” Pichinson notes, not without a note of pride. Receiverships, bankruptcy, ABC—Sherwood is like a one-stop-shop for whatever the opposite of the image Silicon Valley likes to project is. And it has been for almost thirty years.

Fail Better

Silicon Valley thinks it has failure figured out. Even beyond the clichéd embrace of “failing better,” a tolerance for things not going quite right is baked into the tech industry. People take jobs and lose them, and go on to a new job. People create products that no one likes, and go on to create another product. People back companies that get investigated by the SEC, and go on to back other companies. They can even lie on behalf of a company like Theranos without any taint whatsoever. In Silicon Valley, it seems, there is no such thing as negative experience.

The attorneys and consultants who have grown old with the industry’s failures, from to Pebble, are anything but harsh in assessing their “clients.” “They are not bad,” one old hand insists. Instead, “the question really becomes: how many new ideas can society handle?” Even Sherwood Partners doesn’t see themselves as a repository of Silicon Valley’s fuck-ups. To them it’s about luck, bad timing, the wrong blend of personalities. “They didn’t fail, they just didn’t come in first.”

That can be deeply charming: rather than make failure, messiness, and growth something to hide, the ethos of the tech industry puts fallibility and vulnerability at the center of life. The guys at Sherwood have some of that relaxed California vibe, plus a dose of paternalism—they wind down companies started by people less than half their age. They try to make it a teachable moment and move on.

At the same time, Silicon Valley’s tolerance for failure has long sustained an obsession with youth. If a founder fails, tech discourse interprets it as a sign of young vigor. In a country in which twenty-five-year-old white rapists are “still boys” and black twelve year-olds on the playground “look like adults,” the question of who gets to be a kid and who counts as a grown-up is clearly charged with privilege.

In 2017, a chastened Travis Kalanick admitted, “I must fundamentally change as a leader and grow up.” Even in a place as choc-a-bloc with balding skateboarders and middle-aged trick-or-treaters as San Francisco, a forty-year-old CEO of a $15-billion company casting himself as an overenthusiastic kid who just needs to get his shit together is a bit much.

Failing in Silicon Valley is often a prerogative of the young—or, in Kalanick’s case, the adolescent-acting. And people don’t talk about how much less sustainable it has become to be young in the Valley. One VC who back in the early aughts grew a tiny startup into an $80 million company with more than 250 employees reminisced to me about the early days when “we just lived with our parents in Toronto.” “Our labor force was ourselves and we paid for the servers by credit card,” he continued. Then he reflected a moment. “That’s no longer possible, which I guess is what makes us necessary.”

Another change he has noticed: a lot of big funds have moved towards investing earlier in the life of a company. Where once a founder may have come to them looking for a Series A round, now they are coming for angel funding. This means that any falling out of favor with investors will be extremely public—“If Sequoia offered you funding and suddenly isn’t around for the next round, I ask myself: what do they know that I don’t?” Silicon Valley’s tolerance for failure is partly predicated on a privacy that is starting to dissipate.

But the thing about failing is that it seems to carry opposite meanings depending on who does it. If a traditional brick-and-mortar business hemorrhages money as unregulated digital competition moves in, then that’s just a sign that brick-and-mortar deserves to die. By contrast, if a disruptive New Economy startup loses money by the billions, it’s a sign of how revolutionary and bold they are.

There is an entire cottage industry in Silicon Valley devoted to making this distinction. The fawning court press, the hype machine, the angel investors are always ready to explain why a venture that has all the hallmarks of a total failure is actually a genius idea. And those aren’t the only businesses built on the reality behind “fail better.” There’s also the handyman at an incubator who lets all the denizens pick over the carcass of any startup in the building that has gone belly-up: swivel chairs, ping-pong tables, swag and lots of Soylent. There are lawyers busy disentangling the Gordian knot tied by youthful idealism. And there are companies like Sherwood, which step in and take over your company when all hope of success has faded.

Daddy’s Home

The clean-up crew stays deliberately out of sight. “It’s in bad times that they hear about us,” Pichinson says, and he sounds regretful about it. The careers being made in Silicon Valley have something magical about them, and perhaps for that reason all of the professionals working behind the scenes get the sense that their clients think consulting them will constitute a capitulation. An admission that what they’re running is a business, that their career is in the end just a career, that gravity has some kind of purchase on their meteoric trajectories.

A lot of the younger VCs are themselves highly successful founders, and the contingency of their own success hasn’t yet sunk in. I’ve generally found it to be the case that people who strike it rich in Silicon Valley are in a way dumbstruck by their own success. It comes so early, so unpredictably, so noiselessly—a bolt of lightning out of a blue sky. But people have to make sense of what happens to them. Some withdraw almost shyly from their own good fortune. But those who don’t have to tell themselves stories about it. Why do they deserve their good fortune? What does it mean?

This matters because only those who have encountered the most stupefying, most inexplicable success will end up funding the next generation of startups. If you wind down, get acqui-hired, or make some other type of “graceful exit,” you usually don’t have the cash to do venture capital investing. Among those who do have that kind of cash, their sense of reality can be deeply warped—perhaps it almost has to be a little bit, shell-shocked as they all can be by their extraordinary luck.

That might be why a nimbus of unreality envelops the early stages of funding. At the center of this colossal churn of money is a kind of stunned muteness. The investors all tell me: I wish founders spoke to me sooner. “We’re not smarter, but we’ve seen more pain in the industry than anyone,” Pichinson says. It makes sense why kids who have glided almost without resistance into Stanford, alumni meet-ups, and VC offices may not want to be reminded of pain. Many of them, Pichinson points out, have never experienced a tech recession—they were in kindergarten, if that, when the dot-com bubble burst. As one lawyer I spoke to explains, “Often enough, the only authorities they run into outside of their age cohort are venture capitalists, who are either very young themselves” or are busy speed-dating a bunch of startups, without providing much mentorship in the process.

But reality may not be worth much. In the league in which these startups play, one founder tells me, reality may seem like a poor guide to business. The crucial moment in the life cycle of your business arrives at a moment when you’re “expecting to get millions of dollars for a PowerPoint deck.” You have to convince a room of investors that your company could make hundreds of millions of dollars—“otherwise why not just get a business loan?” The term “lifestyle business,” he points out—meaning a business that is designed to keep its owners fed and happy rather than making them brain-meltingly wealthy—is “kind of a pejorative in this world.” Because to be reminded of why people normally work is an unwelcome dose of real life, of gravity, of adulthood.

This is where the anonymous lawyer I spoke to sees his niche: hard truths, a little bit of adult sensibility. He runs his business as a tiny two-man firm with a boutiquey reputation. He doesn’t advertise his services, and people come to him only by referral. A Bay Area local—Berkeley-bred, Berkeley-educated, Bohemian Club—he has seen tech come in waves. He’s gotten older, while tech has gotten younger. Many of his clients are straight out of college, if that. They’ve imbibed an ethos of egalitarianism and a vocabulary of aspiration. This forces him to function as reality principle, as mentor, and, often enough, as a Cassandra.

He also functions as an avatar of a centuries-old corporate structure inimical to their visions—hierarchical, vertical, based on more than just personal relationships. He’s only at the end of his thirties himself, but surrounded by so much immaturity he’s started to sound middle- aged by comparison. “It’s weird for me to think of myself as the adult in the room,” he says.

By the time they come to him, many startups have some legal framework in place. Which can be a good thing or a bad thing. He sees terms between a young company and its VC investors, where both sides are represented by the same law firm—the investors’. That’s not technically a conflict of interest but, he says, it’s a massively bad idea.

He usually just tells his clients to simply do the right thing. He tries to counsel twenty-five-year-old disruptors to be caretakers of a legacy. Beyond your contractual obligations, how do you make sure not to fuck over employees or investors? How do you make sure your company’s final chapter lives up to the vision you had for it? Failure, he points out, puts Silicon Valley’s high-flying language to the test much faster than unbridled success.

Another thing he tells his clients: the IP is gone. You can’t sell it or take it with you—but you can make it open-source and help others out, or yourself down the line. If you don’t, it may end up once again at Sherwood Partners. Because Sherwood isn’t just a repository of a kind of wisdom that Silicon Valley doesn’t have time for. It’s also a literal repository of IP that arrived too late, too early, or too close on the heels of a similar idea.

Although most of Sherwood’s work is with investors, employees, and vendors, they also hold a massive database of patents amassed from their assignees. “We probably monetize more patents than anyone else in the world,” Pichinson says. And he’s not wrong: Agency IP, Sherwood’s sister company, is nominally a consultancy, but in fact spends most of its time actively exploring the applicability of patents left behind by the companies Sherwood has buried. Like what William Morris agency does for screenplays, says Pichinson, who now operates from LA’s “Silicon Beach.” He makes it sound glamorous.

You Can’t Get Rid of Wealth

The guardian angels of better failure in Silicon Valley are the investors. When men like Pichinson are pretty Zen about failure, it makes sense—after all, it’s their business. When lawyers who charge by the hour seem okay with failure, then sure, why not, they get paid one way or the other. But what about the investors who sink money in ventures and either get some of it back or none of it back? It’s easy to assume that the shrug with which they treat every flop is a facade. It’s unnerving to realize that it’s absolutely not—and for good reason.

The reason is what one VC calls “the repeat business effect.” Sure, a twenty-four-year-old can run his company into the ground—but he’s still a twenty-four-year-old, with time and energy for another startup, and then another. And any one of those could pan out and make everybody fantastically rich. It is, as one founder told me, “the luxury of having a lot of runway left.” Why would you upset a person like that and potentially miss out on a future payday?

There is a lot of money sloshing around Silicon Valley in search of that payday. It laps up Sand Hill Road, all the way to the famous Rosewood Hotel with its Tesla-filled parking lot and tech divorcees on the prowl. There’s the old Chris Rock joke about the distinction between being rich and being wealthy: “You can’t get rid of wealth,” Rock says. Watching the well-preserved faces at the Rosewood bar, you believe it. The money that pours in—from pension funds, hedge funds, private investors—has to go somewhere. It is agnostic about individual failure or success; its mantra is the law of averages. By the time one venture crashes and burns, everyone is already on to their next one.

But failure comes encased in bubble wrap—at least among those who have a reasonable expectation of running into each other again. What about those who don’t? Many of the employees who have foregone sleep, pay, healthcare, and a social life for the benefit of now-worthless shares will not be instrumental in making the next spin of the wheel the winning one.

There are many ways to close up shop in Silicon Valley: get acquired or acqui-hired, wind the company down, buy out your investors and start anew as a small business. Depending on how a company dies, however, most or all of the employees will not be part of these transactions. Google won’t acqui-hire the receptionist, or even the publicity person. They won’t take on those who were only contractors, or those who mysteriously got the boot right before a desperate final funding round.

And even among those with titles, salary, and equity, the acqui-hiring party gets to pick and choose: in an acqui-hire truly deserving of the name, the company’s product and assets matter little. It’s really a way of hiring a very small group of people—and it falls to that group to stand up for those members of the company that the hiring party is not interested in. “They know what they’re prepared to spend,” one person whose company got absorbed into Google told me. “How equitably that gets spread around is basically one big prisoner’s dilemma.”

Given the gender dynamics of Silicon Valley, that means that men usually fail better. Given that many of the founders meet in college, it means that having gone to university with the top team is a plus. Those excluded are people who are treated as contractors and received only equity, people who vested and then left, people who have been thrown out before they reach a vesting cliff after a mysterious performance review.

And for them, the law of repeat business reveals its ugly side. “None of this litigation happens in this industry, because nobody wants to be blackballed,” my anonymous lawyer says. Or, as an angel investor puts it, it’s important that even a failed venture “facilitates the founder’s story.” Something similar seems to be true for employees: “I learned a lot” is a story that whoever is hiring, seeding, funding, or advising you on your next undertaking is going to want to hear. “The bastards screwed me out of a bunch of money” isn’t.

That’s the funny part of the tech industry’s narrative about itself. For tech, failure is always assumed to be temporary; for everyone else, it’s terminal. Taxicab companies are going out of business because they’re losing money? Creative destruction, my friend—sink or swim. Uber hemorrhages cash? Well, that’s just a sign of how visionary the company is. This double standard justifies the exploitation of workers outside of the tech industry—and, in certain cases, the exploitation of workers within it.

Adrian Daub is an academic and writer living in San Francisco. He is the author of What Tech Calls Thinking: An Inquiry into the Intellectual Bedrock of Silicon Valley.

This piece appears in Logic's issue 5, "Failure". To order the issue, head on over to our store. To receive future issues, subscribe.