finaWhen I jokingly explained that Lake Whillans was not the Iron Bank of Braavos in my last column, I was pretty sure that that was the last article I would ever write about HBO programming. Then episode 2 of season 2 of Silicon Valley aired on Sunday; the episode, titled Runaway Devaluation, depicts a quintessential paradigm for the use of litigation finance (or distressed venture funding, another financial product we provide).
For those who do not know the premise of Silicon Valley, the show focuses on the development of a seemingly revolutionary data compression company named Pied Piper that is seeking to build its business in the land of high-powered venture capitalists, and sharp-elbowed competitors. The episode Runaway Devaluation catches the company as it has just finished meetings with the top venture capital firms in Silicon Valley and received numerous term sheets, the most lucrative valuing the company at $100 million.
However, a lawsuit brought by a company called Hooli, which had previously tried to buy Pied Piper and now hopes to start its own competing software, transforms all of Pied Piper’s terms sheets into worthless stacks of paper as the venture investors are not willing to invest in a startup embroiled in a lawsuit, no matter how frivolous the claims may be. Pied Piper’s transactional lawyer (the only lawyer with which Pied Piper has a relationship) describes Pied Piper’s prospects of defeating Hooli’s claim as a “slam-dunk”, and advises the company to hire another law firm (one that “litigates”), suggesting that it should ‘only’ cost $2.5 million.
The rest of the episode depicts Pied Piper attempting to navigate the problems that Hooli’s conduct has caused:
- All of the VCs have backed away from the company so Pied Piper does not have $2.5 million to spend on a litigation and, in fact, is running on the fumes from their TechCrunch prize money just to meet payroll;
- The company has no access to capital to continue to build the company, and if it does not find a way to raise funds, it will have to close down despite the fact that their technology and company were valued at $100 million only days before; and
- Hooli is developing competing technology (with the benefit of its seemingly unlimited resources) such that any delay in Pied Piper’s development of its technology as a result of the litigation could derail the business.
In short, Pied Piper is no longer a viable business, which is exactly the result Hooli hoped to bring about by filing the lawsuit. As one VC executive explained to Pied Piper, “Hooli has the unlimited resources to hamstring you until Nucleus [its competing product] comes out, at which point they will be the market standard and you will be irrelevant. We’re here to invest in innovation, not lawyers.”
This episode concludes with the founder of Pied Piper and the CEO of Hooli meeting face to face in a Mexican restaurant; Pied Piper is faced with the choice of selling their business to Hooli at a substantially reduced valuation or attempting to navigate their dire legal situation with no capital or guidance. As the audience awaits Pied Piper’s decision, a mariachi band arrives to drown out the conversation and leave us all waiting until next week to see what Pied Piper’s decision is.
At Lake Whillans, this scenario is all too similar to situations we encounter on a regular basis (minus the mariachi band). We offer companies in this position the capital and guidance necessary to grow their business and navigate their legal troubles. So as I watched the episode come to an end, I couldn’t help but imagine the Lake Whillans logo rolling up with the credits to present Pied Piper with another option. While we don’t yet know how Pied Piper’s story will end, I know one thing: if litigation finance or distressed venture funding were available in the make-believe Silicon Valley, Pied Piper would be in a better place.