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TECH ‘We’re on the precipice’: The tech industry is bracing for a historic slump amid VC pullback, looming layoffs, and plummeting share prices By Rob Price, Samantha Stokes, and Diamond Naga Siu It’s about to get ugly for the tech industry.Startups and public companies are readying for a wave of cost-cutting and layoffs amid rough market conditions.Inflation is soaring, public market valuations are dropping, and venture funding is drying up. 
A lot can change in a few months. 

In January, buzzy B2B financial-services startup MainStreet flew its entire staff to Maui for a weeklong working vacation at a glitzy Hawaiian resort. It had raised $60 million in a Series A funding round in 2021, and was gearing up for a similarly hefty Series B in the coming months, company executives told employees. 

But a month later, Russia rolled its tanks into Ukraine, exacerbating economic upheaval across the globe and feeding a growing pessimism about the economic stability of the tech sector. When MainStreet’s Series B materialized it was significantly smaller than envisioned, and earlier this week the company laid off around 50 employees — roughly a third of its total staff, as Insider previously reported. 

The American technology industry enjoyed an extraordinary boom during the pandemic, extending a multi-decade bull run. Giants like Amazon and Apple soared to record-breaking market caps, while private companies received vast cash injections from venture investment firms flush with capital and hedge funds hoping to get in early on the next Airbnb. 

But now, amid rising interest rates, supply chain snares and rampant inflation, there’s a growing sense among tech industry figures that the good times are rapidly coming to a close, and a once-in-a-generation down-cycle is here. 

Ugly layoffs may be brewing across the board, some investors and industry watchers warn — from public tech giants to scrappy startups. 

“This will be in the top three corrections of the last 20 years — joining the 2008/2009 Great Recession and the 2000 dot-com crash,” said David Sacks, cofounder and partner at Craft Ventures. 

The public market is hurting 

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Some of the major players are already dialing back costs and hiring. 

On Tuesday, Facebook informed employees of an extensive hiring freeze of engineers at the company, as Insider previously reported, with its CFO Dave Wehner warning that reduced hiring targets “will affect almost every team in the company.” And at the end of April, Amazon’s CFO Brian Olsavsky told reporters that “we quickly transitioned from being understaffed to being overstaffed” — an unusual shift from a company that for years has focused on hiring relentlessly to meet demand. 

Amazon’s founder Jeff Bezos has also issued warnings about the shifting market. “Most people dramatically underestimate the remarkableness of this bull run.,” he tweeted on April 30. “Such things are unstoppable … until they aren’t. Markets teach. The lessons can be painful.” 

It’s an abrupt about-face for the industry. High-flying tech companies like Zoom , Okta, Block and Twilio more than doubled their workforces from 2019 to 2021, and their stock prices similarly increased twofold from the beginning of 2020 to November 2021. But since then, their stock prices have each lost about half their value. 

Netflix also doubled its stock price from 2019 to 2021 but experienced a 70% drop since November, and the streaming provider has started cutting whole teams, including its newly created publication Tudum. Online trading app and fintech darling Robinhood, which went public in July 2021, has been even more aggressive, laying off 9% of its workforce — around 300 employees — in late April. 

Some market-watchers view the ongoing sell-off as a return to more rational valuations after a pandemic-induced frenzy. “It’s a course correction because that hype and the peak usage was unsustainable,” said Nitish Mittal, a partner in the technology practice at research firm Everest Group. “A lot of this is dependent on the central premise that people are at home and using these services a lot of the time — that is just unsustainable as we recover from the pandemic.” 

Even before the pandemic, high valuations and cash-rich companies created an environment of high-demand for engineers and technical talent — prompting significant wage inflation in the sector. Keith Hwang, managing director of tech investment fund Selcouth Capital Management, questioned whether these some of high-paid engineers may now be at risk of job cuts. 

“We are now reaching a point where I think we’ve become overstaffed on the programming side,” he said. “In the ’80s, it was more about everyone wanting to go into banking because banking, you can make $100K out of undergrad. And you saw what happened to that — banking essentially collapsed. And now you’re seeing the same situation in software. Everyone and their mother wants to be a programmer now.” 

It’s a bad time to be a high-burn startup in need of VC funding 

In private markets, MainStreet isn’t the only high-flying startup to feel the heat. 

This week, celebrity video app Cameo laid off 87 employees — roughly a quarter of its staff. Thrasio, a startup that aggregates hot brands on Amazon and has raised more than $3 billion, let go off roughly a fifth of its workforce recently. And startup-support firm On Deck has laid off 25% of its staff, around 72 people. 

The reason for much of this, industry insiders say, is a retrenchment of capital available for private funding rounds. Investment hasn’t tried up entirely — multiple venture capitalists, who wished to remain anonymous, said they were actively working on closing deals — but there’s a level of caution that wasn’t there at the start of the year. 

Venture money into startups totaled $47 billion in April 2022—the lowest amount invested in private companies in the past 12 months, according to a recent report from Crunchbase. 

Startups can no longer rely on blockbuster funding rounds to keep the lights on, and need to reconsider their spend and find ways to make their existing cash piles last longer. For some, that will mean sweeping layoffs. For others, that means shutting down. 

In April, one-click checkout startup Fast, which raised $120 million in venture capital, revealed to investors that it planned to lay off more than half of its staff, and look for an buyer. A few days later, the $11 billion startup shut down entirely. Although CEO Dom Holland admitted to hiring too fast, insiders said the startup overspent on marketing and lavish executive retreats. 

Gossip about further planned layoffs among private startups are already percolating. “The next 6-8 weeks is going to be a bloodbath,” tweeted JD Ross, cofounder of music investment platform Royal. “I’m hearing rumors about a ton of companies preparing to lay off 20-40% of their team.” Delian Asparouhov, a principal at Founders Fund, wrote: “sign of the times i now hear about layoffs more often than new rounds.” 

“The closer investors are to the public market, the more dispirited they are because the public market correction in growth stocks has been severe,” said Sacks, PayPal’s founding chief operating officer who also co-founded startup Yammer and sold it to Microsoft in 2012. 

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“The people who are most depressed are the crossover investors, like hedge funds and so forth, because they’re actually in the public markets and they’re getting marked down every day,” Sacks added. “If you talk to venture investors, the growth investors are most nervous and the earlier stage investors are more insulated. Seed investing is probably the most insulated. The public market correction has been trickling down into the private markets since the beginning of the year.” 

His predictions are already being realized in the funding environment for startups. Seed startups raised $3 billion in April 2022, according to Crunchbase, a 14% increase year over year. However, the amount of money invested in late stage startups was down by 19% year over year. 

A number of veteran investors and entrepreneurs like Sacks have taken to Twitter in recent days to dispense wisdom. “An entire generation of entrepreneurs & tech investors built their entire perspectives on valuation during the second half of a 13-year amazing bull market run,” wrote Benchmark investor Bill Gurley. “The ‘unlearning’ process could be painful, surprising, & unsettling to many. I anticipate denial.” 

‘We’re on the precipice’ 

Some investors are already drawing parallels to previous crashes in 2000 and 2007, issuing warnings reminiscent of Sequoia Capital’s infamous 2008 doomsday warning, “RIP Good Times.” In the midst of the financial crisis of 2008, investment titan Sequoia Capital cautioned founders to cut costs, and “spend every dollar as if it was your last.” The firm delivered a similar message to startups as the dot.com bubble burst in 2000. 

“This is exactly what happened at the dot-com bust, where all these startups basically just couldn’t get funding because there was no funding. Everything dried up,” Hwang said. 

“We saw a big implosion. It started with layoffs, and then it cascaded down into the economy … and that’s what it feels like right now, that we’re on the precipice of that.” 

Others are cautioning against excessive alarmism. 

“Big Tech taking a bit of a breather after a massive ramp up in terms of personnel over the past couple of years is a healthy step,” said Dan Morgan, senior portfolio manager at Synovus Trust Company. “I would be concerned if the large Silicon Valley tech companies started announcing massive layoffs like in 2001-2002. But, we are not anywhere close to that.” 

Some expect this downturn to spark new innovations down the road. Mark Peter Davis, managing partner at VC firm Interplay, said that as employees at mature companies see their stock options go underwater as valuations drop — or they’re outright fired — he expects a “major uptick” in people setting out on their own. 

“You’re likely to have a lot of great companies started in the next 12 months,” he said, adding that while layoffs are really difficult for individuals, “shaking lots of great talent out of the tree” will create opportunities for skilled workers to become entrepreneurs themselves. 

“This will be one of those potential silver linings within all of this contraction,” he added. “There’s a real medium- to long-term optimism that comes out of this situation.” 

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Gerbsman Partners is pleased to announce the successful completion of maximizing the value of the Assets and Intellectual Properties at Ohana Biosciences, Inc.

Due to market conditions and trends, the Board of Directors and senior lender made the strategic decision to maximize the value of its Assets and Intellectual properties.

Gerbsman Partners – led by Steven R. Gerbsman, Principal and Kenneth Hardesty (CEO in Residence)– provided the Board of Directors and the senior lender of Ohana Biosciences, Inc. with financial advisory leadership through its proprietary ‘Date-Certain M&A Process’, facilitated the sale of the company’s Assets and Intellectual Property and the closing of the sale with Rock Creek Advisors, who facilitated an “ABC” (Assignment for the Benefit of Creditors).

Specifically, Gerbsman Partners provided leadership with:

1.  Business consulting and investment banking domain expertise in developing strategic action plans.

2.  Implementing its proprietary ‘Date-Certain M&A Process’ in order to maximize value of Ohana Biosciences Assets and Intellectual properties.

3.  “Managing and guiding the process” among potential acquirers, lawyers, advisors, as well as all stakeholders of interest.

About Gerbsman Partners

Gerbsman Partners focuses on maximizing enterprise value for stakeholders and shareholders in underperforming, undercapitalized and undervalued companies and their intellectual properties. Since 2001, Gerbsman Partners has successfully maximized the values of 116 companies in a wide and diverse spectrum of industries, ranging from technology, medical device/life science, digital marketing to cyber security, to name only a few.*

In the process, GP has successfully restructured/terminated over $810 million of real estate executory contracts and equipment lease/sub-debt obligations, and has assisted in over $2.3 billion of financings, restructurings and M&A transactions.*

Gerbsman Partners has offices and strategic alliances in San Francisco, Orange County, Boston, New York, Washington DC, McLean, VA, Europe and Israel.

*For further information on Gerbsman Partners expertise and industry experience, please request our company profile here

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Good afternoon 

I am pleased to announce that Eric Bell, Managing Director and Head of Cybersecurity Investment Banking at Progress Partners has joined Gerbsman Partners “Board of Intellectual Capital”.

Eric brings significant domain expertise in the Cybersecurity space at a time where this  knowledge is critical.

Eric recently published his Q1 2022 Cybersecurity Market Report that discusses the heightened focus on cybersecurity which has led to record-breaking investment, M&A activity and public market stock performance.  The report also addresses how the ecosystem has evolved, highlight key trends and questions whether the momentum will continue for the balance of the year.   

By background, Eric joined Progress in 2022 after spending 15 years as an investment banker, strategic buyer, investor, and entrepreneur.

Before joining Progress, Eric led Corporate Development at Merlin International, a cybersecurity software distributor to the Federal government, and co-led the firm’s strategic investment arm, Merlin Ventures. Previously, Eric led technology M&A and investments at Gannett, parent company of USA Today.

Prior to his experience in Corporate Development, Eric held roles as an investment banker at AGC Partners and Clearsight Advisors, a growth equity investor at Blue Delta Capital Partners, and was the Founder & CEO of a financial technology company, YoBucko.com. He started his banking career at Citigroup in New York.

Eric holds an MBA from Georgetown University and a BA from Hendrix College, and he resides in Northern Virginia.

Eric is a person of high ethics and integrity and the Gerbsman Partners team looks forward to a mutually beneficial business relationship.

About Gerbsman Partners

Gerbsman Partners focuses on maximizing enterprise value for stakeholders and shareholders in underperforming, undercapitalized and undervalued companies and their intellectual properties. Since 2001, Gerbsman Partners has successfully maximized the values of 115 companies in a wide and diverse spectrum of industries, ranging from technology, medical device/life science, digital marketing to cyber security, to name only a few.*

In the process, GP has successfully restructured/terminated over $810 million of real estate executory contracts and equipment lease/sub-debt obligations, and has assisted in over $2.3 billion of financings, restructurings and M&A transactions.*

Gerbsman Partners has offices and strategic alliances in San Francisco, Orange County, Boston, New York, Washington DC, McLean, VA, Europe and Israel.

*For further information on Gerbsman Partners expertise and industry experience, please request our company profile here

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An Obituary printed in the London Times…….Brilliant!!
 Today we mourn the passing of a beloved old friend, Common Sense, who has been with us for many years.No one knows for sure how old he was, since his birth records were long ago lost in bureaucratic red tape. He will be remembered as having cultivated such valuable lessons as:
 – Knowing when to come in out of the rain; 
– Why the early bird gets the worm; 
– Life isn’t always fair; 
– And maybe it was my fault.
 Common Sense lived by simple, sound financial policies (don’t spend more than you can earn) and reliable strategies (adults, not children, are in charge).
 His health began to deteriorate rapidly when well-intentioned but overbearing regulations were set in place. Reports of a 6-year-old boy charged with sexual harassment for kissing a classmate; teens suspended from school for using mouthwash after lunch; and a teacher fired for reprimanding an unruly student, only worsened his condition. Common Sense lost ground when parents attacked teachers for doing the job that they themselves had failed to do in disciplining their unruly children.
 It declined even further when schools were required to get parental consent to administer sun lotion or an aspirin to a student; but could not inform parents when a student became pregnant and wanted to have an abortion.
 Common Sense lost the will to live as the churches became businesses; and criminals received better treatment than their victims.
 Common Sense took a beating when you couldn’t defend yourself from a burglar in your own home and the burglar could sue you for assault.
 Common Sense finally gave up the will to live, after a woman failed to realise that a steaming cup of coffee was hot. She spilled a little in her lap, and was promptly awarded a huge settlement.
 Common Sense was preceded in death, 
-by his parents, Truth and Trust,
-by his wife, Discretion,
-by his daughter, Responsibility,
-and by his son, Reason.
 He is survived by his 5 stepchildren; 
– I Know My Rights 
– I Want It Now 
– Someone Else Is To Blame 
– I’m A Victim
– Pay me for Doing Nothing Not many attended his funeral because so few realised he was gone.  If you still remember him, pass this on. If not, join the majority and do nothing.

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Apart from a formal bankruptcy (Chapter 7 or 11), there are two basic approaches to maximizing enterprise value for underperforming and/or under-capitalized technology, life science, medical device, digital marketing, information & cyber security and solar companies and their Intellectual property:  “Date-Certain M&A Process” and an Assignment for the Benefit of Creditors (ABC).

Both of these processes have significant advantages over a formal bankruptcy in terms of speed, cost and flexibility. Gerbsman Partners’ experience in utilizing a “Date Certain M&A Process” has resulted in numerous transactions that have maximized value anywhere from two to nine times what a normal M&A process or “ABC” would have generated for distressed assets. With a “Date-Certain M&A Process”, the company’s Board of Directors hires a crisis management/private investment banking firm (“advisor”) to wind down business operations in an orderly fashion and maximize value of the IP and tangible assets.

The advisor works with the board and corporate management to:

  1. Focus on the control, preservation and forecasting of CASH.
  1. Develop a strategy/action plan and presentation to maximize value of the assets, including drafting sales materials, preparing information due diligence war-room, assembling a list of all possible interested buyers for the IP and assets of the company, and identifying and retaining key employees on a go-forward basis.
  1. Stabilize and provide leadership, motivation and morale to all employees.
  1. Communicate with the Board of Directors, senior management, senior lender, creditors, vendors and all stakeholders in interest. The company’s attorney prepares very simple “as is, where is” asset-sale documents (“as is, where is – no reps or warranties” agreements is very important as the board of directors, officers and investors typically do not want any additional exposure on the deal). The advisor then contacts and follows-up systematically with all potentially interested parties (customers, competitors, strategic partners, vendors and a proprietary distribution list of equity investors, investment bankers and lawyers in Europe, Israel, China, Australia, India and the US). It also includes the coordination of their interactions with company personnel and the arrangement of on-site visits. Typical terms for a “Date Certain M&A” asset sale include no representations and warranties, a sales date typically three to four weeks from the point that sale materials are ready for distribution (based on available CASH), a significant cash deposit in the $200,000 range to bid, and a strong preference for cash consideration and the ability to close the deal in 7 business days. Date Certain M&A terms can be varied to suit needs unique to a given situation or corporation. For example, the Board of Directors may choose not to accept any bid or to allow parties to re-bid if there are multiple competitive bids and/or to accept an early bid.
  1. The typical workflow timeline, from hiring an advisor to transaction close and receipt of consideration is five to six weeks. Such timing may be extended if circumstances warrant. Once the consideration is received, the restructuring/insolvency attorney then distributes the consideration to creditors and shareholders (if there is sufficient consideration to satisfy creditors) and takes all necessary steps to wind down the remaining corporate shell, typically with the CFO, including issuing W-2 and 1099 forms, filing final tax returns, shutting down a 401K program, D&O insurance and dissolving the corporation etc.

The advantages of this approach include the following:

Speed – The entire process for a “Date Certain M&A Process” can be concluded in five to six weeks. Creditors and investors receive their money quickly. The negative public relations impact on investors and board members of a drawn-out process is eliminated. If circumstances require, this timeline can be reduced to as little as two weeks, although a highly abbreviated response time will often impact the final value received during the asset auction.

Reduced Cash Requirements – Given the Date Certain M&A Process’ compressed turnaround time, there is a significantly reduced requirement for investors to provide cash to support the company during such a process.

Value Maximized – A company in wind-down mode is a rapidly depreciating asset, with management, technical team, customer and creditor relations increasingly strained by fear, uncertainty and doubt. A quick process minimizes this strain and preserves enterprise value. In addition, the fact that an auction will occur on a specified date usually brings all truly interested and qualified parties to the table and quickly flushes out the ‘tire-kickers.’ In our experience, this process tends to maximize the final value received.

Cost – Advisor fees consist of a retainer plus an agreed percentage of the sale proceeds. Legal fees are also minimized by the extremely simple deal terms. Fees, therefore, do not consume the entire value received for corporate assets.

Control – At all times, the board of directors retains complete control over the process. For example, it can modify the auction terms or even discontinue the auction at any point, thus preserving all options for as long as possible.

Public Relations – As the sale process is private, there is no public disclosure. Once closed, the transaction can be portrayed as a sale of the company with all sales terms kept confidential. Thus, for investors, the company can be listed in their portfolio as sold, not as having gone out of business.

Clean Exit – Upon closing of the auction, considerations received are distributed and the advisor, under the leadership of the insolvency counsel, then takes all remaining steps to effect an orderly shut-down of the remaining corporate entity. To this end, the insolvency counsel then takes the lead on all orderly shutdown items.

In an Assignment for the Benefit of Creditors (ABC), the company (assignor) enters into a contract by which it transfers all rights, titles, interests, custody and control of all assets to an independent third-party trustee (Assignee). The Assignee acts as a fiduciary for the creditors by liquidating all assets and then distributing the proceeds to the creditors. We feel that an ABC is most appropriate in a situation with one or more highly contentious creditors, as it tends to insulate a board of directors from the process. Nevertheless, we have found that most creditors are rational and will support a quick process designed to maximize the value that they receive. A good advisor will manage relationships with creditors and can often successfully convince them that a non-ABC process is more to their advantage. Apart from its one advantage of insulating the board of directors from the process, an ABC has a number of significant disadvantages, including:

Longer Time-to-Cash – Creditors and investors will not receive proceeds for at least 7 months (more quickly than in a bankruptcy but far slower than with a “date-certain” auction).

Higher Cost – Ultimately, ABCs tend to be more expensive than a “Date-Certain M&A Process”. It is not uncommon for the entire value received from the sale of company assets to be consumed by fees and/or a transaction for maximizing value may not be consummated in a timely fashion.

Loss of Control – Once the assets are assigned to the independent third-party trustee, the board of directors has no further control over the process. It cannot modify the process in any way or discontinue the process. Thus, it is not possible to explore multiple options in parallel.

Higher Public Relations Profile – The longer time frame for the ABC process and the more formal (and public) legal nature of an ABC make it more difficult to put a positive spin on the final outcome.

Messy Exit – Most independent third-party trustees do not perform the services of cleanly shutting down the remaining corporate shell. Thus, investors must either pay another party to do this job or leave it undone, resulting in increased liability.

About Gerbsman Partners

Gerbsman Partners focuses on maximizing enterprise value for stakeholders and shareholders in under-performing, under-capitalized and under-valued companies and their Intellectual Property. Since 2001, Gerbsman Partners has been involved in maximizing value for 115 technology, medical device, life science, digital marketing, information & cyber security and solar companies and their Intellectual Property and has restructured/terminated over $810 million of real estate executory contracts and equipment lease/sub-debt obligations. Since inception, Gerbsman Partners has been involved in over $2.3 billion of financings, restructurings and M&A transactions.

Gerbsman Partners has offices and strategic alliances in San Francisco, New York, Virginia/Washington DC, Boston, Europe and Israel.

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