This Is What Happens When a Startup Dies

SPEAKER_2 (0:02)

Bloomberg Audio Studios, podcasts, radio, news.

Joe Weisenthal (0:18)

Hello, and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal.

Tracy Alloway (0:22)

And I'm Tracy Alloway.

Joe Weisenthal (0:24)

Tracy, we always hear about big startup exits, people becoming billionaires, companies getting acquired going IPO, et cetera. But I don't think that's most of them is not that. That's just the ones we talk about. You never hear about the scores of other ones that always fail.

Tracy Alloway (0:38)

No, this is called survival bias, right? So you only ever hear about the winners because all the losers are basically gone and can no longer communicate. That's right.

Joe Weisenthal (0:49)

And then the other thing is that most startups fail and VCs talk about, oh, I need one winner for every whatever, 100, maybe 20 losers or whatever. They're probably a few in the middle. They get two or three X returns, but that's not what delivers the big money. But yeah, it's funny because the losers, that's the norm. That's the expectation going in with any series of investments. And yeah, we really should talk about losers more often.

Tracy Alloway (1:15)

Yeah, I'm into it. Let's talk about losers.

Joe Weisenthal (1:17)

I'll say one other thing too, which is that when we talk about a lot of startup investing, particularly in technology, you don't really think of them as having assets or a lot of assets that can be sold, right? So when a sort of cardboard box manufacturer goes bankrupt or whatever, well, there's probably some equipment that can be sold. There's land, maybe there's a building that could be repurposed, some intellectual property, maybe, I don't know, for some of these. With a lot of tech companies, it seems like there's nothing there if they don't succeed. And then there's like, all right, you just pull the plug and everybody moves on. But I don't really know if that's the case. Like I don't actually know what happens at that moment of death.

Tracy Alloway (1:56)

Well, from what I remember, bankruptcy tends to be pretty complicated in various ways. And I'm thinking back, this is the ultimate extreme example, but the Lehman Brothers bankruptcy, that took 14 years. And I remember covering it for years and years and years and years, and they had all these counter parties, this big waterfall of creditors and things like that. And I wonder how it works for smaller VC companies.

Joe Weisenthal (2:25)

Totally. And it seems like that whole court experience, it's probably something you might want to avoid if you can. So anyway, we really do have the perfect guess to talk about what happens when a company fails, what happens when the startup fails. We are talking with David Johnson. He is a managing principal at Resolution Financial Advisors. They're a financial advisory firm based out of Los Angeles that focuses exclusively on the insolvency world. So we're going to learn about all of this. David, thank you so much for coming on the podcast.

David Johnson (2:54)

Thank you, Joe and Tracy. I'm delighted to be here.

Joe Weisenthal (2:56)

This is going to be a lot of fun. What do you start off? What do you do or what does Resolution Financial Advisors do? What is your sort of typical client and what are they looking for?

David Johnson (3:05)

Resolution Financial Advisors is a financial advisory firm. It's true, but we don't do a lot of the work that other financial advisory firms do. I started my career at Alvarez & Marcell a long time ago. I think I was employee number 21 of what is now a 10,000-person firm. And I did restructuring work and interim management work and forensic accounting work there. So I've done a lot of that in my career. That's not what we do anymore. We focus like a laser beam on what I call the insolvency world. That is alternatives to bankruptcy and other ways to wind down companies, create value by recovering value. And sometimes we do use the bankruptcy code. I am a bankruptcy specialist. I'm a chartered financial analyst. And I am a certified insolvency and restructuring advisor. And so bankruptcy is the right tool in some cases. But for most of the people with whom I do work, it's not the right solution.

Tracy Alloway (3:55)

So why don't we talk about the various solutions that are potentially on the table? Because I think a lot of people will recognize something like chapter 11 bankruptcy. I know as the daughter of a commercial airline pilot, I am certainly familiar with chapter 11 bankruptcy. And that allows you to keep operating, keep the business going while you sort out your various creditors. And then there's chapter 7, which is an actual liquidation. And then there's, I assume, more creative workouts that you are advising on. What are the options?