The Spectacle Blog

Cheated by People I Trusted

By on 12.3.13 | 11:41AM

I’ve had fairly good fortune – or maybe fairly good judgment – on almost always having gotten into business with stand-up people whose word was their bond, and who didn’t look to make a buck by mistreating their partners/investors.

A recent event, however, offers a word of caution, not just for me for anyone who gets involved in small company (“private equity”) investing.

About 15 years ago, I was shown an investment opportunity in a promising biotechnology company called Xencor. Some friends and I invested through a little partnership we created for the purpose of investing together.

The person who showed us the deal was a man whom I had worked for in Europe for about two years. Because he never performed on his promise to bring competitive technology to the electronic markets we were trading, our team was unable to compete, though of the first traders to go over there, I was the only one who showed a trading profit at the time that I gave up, realizing that the trading company owner had no intention of making the investment he promised in order to allow us to do well.

This man’s failure to live up to a most basic promise when it came to starting up this particular business should have been a note of caution for doing anything else with him in the future. But I hadn’t yet sensed a pattern, and as with many people who fail to live up to their word, there were always “explanations.”

Xencor disappointed in terms of technical progress and burned through quite a bit of money, but still showed potential, and we invested a bit more in a later round. We expected that the deal would last a few years, and that the company would then go public or be sold, but none of that happened, in part due to difficult financial markets and in part due to the company’s underperforming – again, while still showing technical potential.

They needed more money over time and did other investment rounds, which my group did not participate in. Notably, the only financing round which we were told that would be very dilutive to us if we didn’t participate in was the second round, the one which we did participate in as mentioned above.

But one of the rounds the company did was a debt round rather than an equity round. For those who don’t do this sort of stuff a lot, the bottom line is that when a company gets in trouble, the debt holders really get a lot of control, and equity (stock) holders have very little. In hindsight, I suspect that’s the very reason the round was structured the way it was – they prepared for several years for their later misdeed.

The debt round was bought substantially by the man who brought me into the deal, along with his family and a small handful of others.

Recently, through a series of events I don’t entirely understand, but leading into a long-hoped-for initial public offering, the debt holders basically stole the company from the rest of us, taking something like 90% or more of the company ownership, and leaving our original investment worth less than 1 percent of its original amount. [I believe that the original amount had already become worth less than, perhaps even half of, what we had put in, but this man (and his son, who I believe is substantially in charge of the Xencor situation) who had not honored his promise when I went to work in Europe for him, basically stole several million dollars of value from investors most of whom were his “friends” and former colleagues.]

I realize that this story is slightly outside of what AmSpec readers may be looking to read about here, so if you're interested in reading further, please visit:
http://rossputin.com/blog/index.php/xencor-management-cheated-investors

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