Startup falling apart? Silicon Valley’s fairy godfathers are at your service

If your startup is crashing and burning, Steve Hogan‘s your man.

Silicon Valley’s top “turnaround” guy has devoted his career to helping companies in crisis. And now, Hogan has a band of eight technology veterans behind him. With its new firm Tech-RX, Hogan’s team is working with its first group of distressed tech startups in a last-ditch effort to turn their fortunes around.

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This process of a patching together or mercifully killing a struggling company (and selling off the parts) isn’t anything new. Sharp-suited executives at global consulting firms like Bain & Company are often called in to uncover the root of the problem. Oftentimes it’s a bad egg in the executive team.

Likewise, Tech-RX’s partners have some tough decisions to make. But theirs is a gentler, more entrepreneur-friendly approach than your average consulting firm, which might be lacking deep tech expertise. Rather than execute an onerous “cram down,” as Hogan refers to the process of firing the bulk of the staff, the partners will take pains to work with and retain the full founding team.

Meet Silicon Valley’s ‘turnaround guys’

Hogan has worked with distressed companies for most of his career, coming on board as an interim CEO for half a dozen small companies. At Synamics, where he worked from 2004 to 2007, investors selected him to save a company experiencing a crisis situation stemming from fraudulent activities and mismanagement by a senior executive. His aggressive strategy revitalized cash flow and refocused the company as a player in the Webinar services market. At Axiom Navigation, he helped salvage a company on the brink of bankruptcy. Hogan raised $2 million by selling portions of the manufacturing business and repositioned Axiom as a licenser of GPS technology for cellphones and vehicle telematics.

For the past several years, Hogan has been more involved in the startup scene. He attends networking events in the tech circuit and mentors young entrepreneurs enrolled in Peter Thiel’s 20 under 20 program. The tech world is notorious for its emphasis on youth — but often it takes gray hair, experience, and a Rolodex of connections built up over years to set a company on the right track.

“We are a bit like matchmakers,” said Bob McDonald, the firm’s operating partner, who also worked as a turnaround guy for over a decade. McDonald told me that the company has also brought on half a dozen advisers, many of whom would prefer to keep a low profile. The full-time partners are independently working to bring in new deals. “We’re a tight group,” said McDonald. “And we all own shares in the firm.”

Tech-RX is still in the nascent stages, and the partners are involved with the first batch of startups while under nondisclosure agreements. Most are working 40 hours a week out of pocket but believe in Hogan’s vision. He even brought on his son, James, a former executive vice president of PayPal. Chris Sorenson, the managing director of tech incubator Plug & Play Chicago, is also a partner, as is Bill Hunt, who has founded or been a senior executive at six software companies, including ClearAll (acquired by Oracle) and OptTown.

“We all know about an amazing company that’s fallen apart for whatever reason [and] its tech was buried, innovation was stifled, and capital dwindled away,” said Hogan, calling such cases a “complete waste.”

The magic formula to save a distressed company

If a company is flatlining (usually the point where the entrepreneur is desperate enough to seek outside counsel), Hogan or one of the partners will determine whether it’s a fit. The partner with the most experience in that sector will remain with the company for about a year, sometimes longer.

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During that time, they bring fresh talent into the C-Suite and an infusion of private equity or venture capital investment. In most cases, someone in the current management will retain an equity stake.

Early and mid-stage tech companies that have procured a first round of venture funding make up the team’s bread and butter. The partners have domain expertise in almost every area of hi-tech, areas as varied as networking and “big data.” Most of the team is fairly new to the consulting game, although over decades they have served in senior positions in HP, Accenture, Oracle, and Xerox.

A key advantage Tech-RX will bring to these companies is new funding. According to Hogan, investing in one of the firm’s distressed companies is a less risky bet for investors than seed-funding a startup. These companies have already hired product and engineering talent, but they often lack leadership, focus, and a clear business model.

Sometimes all it takes is a “pivot”, a Silicon Valley term for change in direction when a company’s target market doesn’t take to the product or the technology is outdated.

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Founders: be prepared to lose control

The firm’s No. 1 rule is that the current team must give control to Tech-RX and its partners — whatever Hogan says, do it.

For the duration of the “turnaround,” the firm retains executive management and financial control. What this means is that the team will present a plan to the current board to restructure and recapitalize the company. Tech RX doles out chunks of equity so everyone (new investors, existing investors, the founders and high-ranking managers) have a stake.

The partners work on a success fee basis, so they won’t take a dime unless they’re able to turn a company’s fortunes around.

“We make doggone sure that the company is moving forward,” Hogan told me with a twinkle in his eye. “We are not about to continue down a path that clearly isn’t working.”

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The moral of the story? So if you’re feeling desperate, lonely and ignored by the leading venture capitalists on Sand Hill Road, don’t pull the plug on your startup. All it takes is a magic combination of funding, grey hair, and a well-executed pivot.

Don Corleone with fairy wings // Nick Punt