Picking up the dot-com pieces

Richard Couch specializes in taking over companies that have run out of money and hope, giving them a new lease on life through mergers, credit negotiations or the sale of assets.

11 min read
Blame it on the job, but Richard Couch has high blood pressure, arthritis, and an assortment of other physical ailments to remind him that he can't do 100 push-ups forever.

And he loves what he does.

What he does, frankly, is parachute into a company when everything is going to hell in a handbasket. As the managing partner of Diablo Management, Couch works with distressed companies, a profession much in demand within Silicon Valley these days.

To be sure, times have been good for Couch and his Danville, Calif.-based company as a result of the dot-com implosion. Last year, five of the 10 companies Diablo worked with were dot-coms. This year, Couch expects his company to work with some 15 companies, including another five Internet companies.

Couch, probably best known as the man who put Pets.com to sleep, compares himself more to an emergency room physician than to some kind of dot-com mortician. He specializes in taking over companies that have run out of money and hope, literally giving them a new lease on life through mergers, credit negotiations or the sale of assets.

In addition to Pets.com, Diablo has worked with event coordination site TimeDance.com, online music company Riffage.com and, most recently, Internet education company Masters Institute.

CNET News.com's Troy Wolverton recently talked to Couch to learn more about the workings of this little-known line of business.

How did you get in this business?
I had a chance to take over a big job at Victor Technologies, a medium-sized company. So I left Xerox and did that. And it turned out I wound up taking over that company. (Victor Technologies) was a company that was in an enormous amount of difficulty, which I did not understand when I went with the firm. They had seven different businesses. We took six of them through bankruptcy and sold them off and one survived.

I quit just before I was fired because I had major disagreements with the board on how things were going to be handled. At the end of the year we had done pretty much what we said we were going to do, but they were really unhappy with me and I was really unhappy with them. Think of it: Here I am a Xerox guy and a year later I'm in the middle of this mess that I had never seen before. Anyway, we agreed that I was going to leave the company. And I was feeling like a failure. And within hours I had probably five or six assignments being offered to me by investors in similar businesses who followed what we were doing on a literally page-by-page basis.

We've done over 165 deals in 21 years. By any calculation you want to make, it probably represents well over 100,000 employees of various businesses, represents 165 CEOs. All of a sudden, I'm in the workout business. And I knew nothing about it. I fell into it. I have never had a marketing program, I've never made sales calls, I've always had projects to do, usually in some way connected with the first 15 or 20 folks that I saw in this two or three years when I began.

What do you like about what you do?
I like the problem solving. If you're the guy that started the company, you started after a certain goal or you wanted to be at a certain place at a certain time, and if you're not there, you're unhappy. At a minimum, you haven't realized your dreams and expectations. It may also be that you spent a lot of money. It may also be that you have undergone a fair amount of personal embarrassment because a lot of people relied upon you. So the situation is not only very negative, but the momentum is negative. And I like being able to come into those situations and offer up a set of choices. It's intellectually stimulating. You're learning all the time.

We've done over 165 deals in 21 years. By any calculation you want to make, it probably represents well over 100,000 employees of various businesses, represents 165 CEOs. Not too many places in life where you can touch that many people one way or another.

Anything you don't like about what you do?

Couch on what he tells clients
I think that this business has very much changed the lives of some people who are in this business in unfortunate ways. I mean, the divorce rate is high, higher probably than some other jobs. The incidence of the ailments and illnesses that have to do with being overweight, out of shape, not getting enough sleep, being too high-stressed--all those kinds of things get people in this business...It seems to me you get in the most trouble when you lose control of a situation. You have the best chance of surviving the experiences if you have control. Sometimes you don't know enough to get control; you don't know how the hell you'd do it, but you've got to think of something. Otherwise, you go with the flow--and that is not why you're there.

Do you have any standard line for the management or for the employees when you come into a situation? I'm sure there's lots of anxiety when you come in and they realize things have really hit the fan.
I don't know if you'd call it a standard line, but I guess the first thing you tell people is that nobody dies. This is just a business problem and we'll have choices on what we do about it. We may not solve all of it, but we'll have choices on what we can do and we'll pick the best choice and do the best we can and we'll feel better because we tried it, because we were systematic, intelligent in doing it. And if it works we'll congratulate ourselves, and if it doesn't work we'll try something else. But we are not going to sit here and talk about how bad life is. And we aren't going to sit here and try to retrace every single step you took to get here. Just doesn't help.

Number two: We'll probably have more choices than you think. And that success lies in doing the best you can to take advantage of whatever choices you make in a general way. We don't generally manage with democratic process. I let them know that. If it's Thursday and we have to make a decision, we'll make a decision, whether we've got all the information or not. If we've got to make one, we'll make one.

So what kind of criteria do you use when you come into a situation, when you're evaluating?
How quickly can we be cash breakeven, number one, because cash is like altitude when you're parachute jumping. You don't have any cash, you don't have any choices. If you've got a little cash, you've got a few choices. But you always worry about cash first.

Couch on the importance of cash
The second thing I worry about is who can I trust and believe that's giving me information. Are they dealing with us on the up-and-up? Are they people we can rely upon? There are times you go into a deal and you have to go a level below the executive staff to find people that you can deal with that aren't too upset or too preoccupied or too frustrated or whatever. I'd rather give a battlefield promotion to a guy who is anxious to accomplish something than continue to work with a guy who just couldn't get over being furious over the current circumstances. So I worry about who we're playing with.

The third thing you're worried about is how quickly can I come up with a set of choices as to what might happen. Pretty quickly after you come into a situation, you've got to have something to say to creditors, equity holders, customers. You're basically trying to give them reasons: "Here's why you ought to wait around and see how this game comes out. Don't kill me now. There's something here worth waiting for."

Sometimes what's worth waiting for is that if you wait and work with us you won't lose as much money as you will if you don't. It's a given you're going to lose money, but you'll lose less money if you work with us. That is a benefit. Not what you'd like, but that is a benefit. We had a customer not long ago. We told them, "If you follow this plan, you're going to lose $110 million. If you don't follow this plan, you're going to lose more."

You were talking about control. How do you convince the entrepreneurs, the CEOs, the upper management to hand over control to you--to hand over the reins?
You may be surprised. I seldom run into the problem where the guy is really mad at you because you're there. The problem we run into is the guy is just tired. He's tired, he doesn't want to do this anymore. And the problem we run into is they're more likely to say, "The hell with this! I'm going to leave." That happens three or four times as many times as the situation where he's worried about protecting what he's grown. I'm often surprised by that.

When you're trying to sell or restructure a dot-com business, you have very few choices. One of the first things you do when you come into a deal is you start recruiting people to stay. There is this perception that workout and turnaround guys come in and chase everybody away. The hell we do! We come in and try to convince people, especially in a hot job market.

I've got a situation right now where I've got a good controller. I've been there for a week and she's already told me she's gone next week. Well, wait a minute! I'm trying to tell her you can learn something, you can do something worthwhile. And she says, "The equity is worth zero and it's going to stay worth zero! I'm 38 years old and I'm working 85 hours a week. I've got a family. I'm tired of this stuff! Who works for salary? I'm leaving. So you've got a week to find somebody."

How do you convince people like that to stay?
A lot of times you don't, especially in a real hot job market. We do about 60 percent of our business on the West Coast and the Silicon Valley. The kind of people you're dealing with are generally optimistic people and they're generally "can do" people. If they decide not to do one thing, they believe they'll have lots of other choices, and they do, usually.

When those execs and employees leave, how does that affect the prospects of the company?
It's usually negative. Sometimes it's dramatically negative. You have this process you have to manage where the key variables in success or failure are not the product and its $18 million worth of development money, it's the six guys that know the code. And the guy buying it knows that it's a great idea if he's got those six guys, but if he doesn't, you might as well go burn it.

How are the dot-coms different from other companies you've worked with?
When you're trying to sell or restructure a dot-com business, you have very few choices. You don't have a big asset base. You don't have a big customer base. You don't have any momentum. Somebody went out and spent a lot of money to get started in a hurry and oftentimes they just fall off a cliff, as opposed to a company that's got a distribution channel, that's got a product, that's got a product that fits into another company's products, that's got assets, that's got a balance sheet, that's got receivables.

Couch on Pets.com
I had one customer, the CEO of a company, that was 25 years old. His first real job he ever had. I think he had $20 million, a really impressive young guy. He had a lot of knowledge and he had a lot of skill, but he had no intuition because he just hadn't done things. He believed that his idea was just going to work, that's all there is to it. There's no second choice. Well, it didn't, and there was no second choice. The product was finished, but it wasn't documented. You can't sell a product that's not documented unless all the people who built it stay with it. And they didn't.

You're now sitting on what's left of Pets.com. From your standpoint, what went wrong with the company?
If you talk to entrepreneurs, you'd be surprised at the number of them that would say if they have one wish, it would be to be lucky. They know they're smart, they know they work hard, but there's something to being lucky, just as there's something to being unlucky. This company was planned to go places on successive financing steps and they found themselves at a financing step when the market went south. And it was a little more crowded marketplace.

The costs of doing business in this business were substantial. You're not talking about raising trivial sums of money. And the markets just said, "Whoa!" Well, they had the choice of scaling down, which was not the way their business was built, so that would have been very difficult and potentially very costly, or they had another approach. They just had the right attitude. It was not about dying, it was not about ending. It was about making a better choice. And so they didn't walk around feeling depressed or frustrated. They very rationally worked their way through the process and then moved on to do something else. It's nice to see that. It was maturity. I think it's all maturity.

But selling pet supplies, pet food on the Web, was that something that was going to work?
Don't know. I mean, I've been curious about that. I have two dogs. I have yet to buy anything at all from anybody on the Web. I have no idea if I'm the typical consumer or whether I'm just one of those guys that likes to go to the pet shop to see what's in there, play with the animals.

If you had been running Pets.com from the get-go, how would you have done things differently?
I have no idea. If I had known a lot about them I probably would have bought stock. I like what I saw. While I wouldn't be a great individual customer or prospect necessarily. Have you ever looked at the amount of money that people spend on pets? It's an unbelievable amount. It's a huge amount of money...Those guys, they are smart people, they knew what they were doing in those circumstances at the time.

Some of the things they did were brilliant. I think the sock puppet campaign was brilliant. The logistical system they set up was very good, because we helped take it apart. I don't know. Again, you don't go back and look. All I can tell you is when I dealt with those people--if I were in the situation to run that business, those are the kinds of people that I would have hired.