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.]
This morning, Xencor announced they have priced an IPO and “raised $70 million by offering 12.7 million shares at $5.50.” Given what the company did to me and quite a few of my friends, I was happy to see that they had to cut the offering price from about $15 to about $7 and then only end up getting $5.50 per share. But when people of low moral character are running a company, why would you buy when you have to worry about them finding a way to steal what shareholders should have been due?
In short – and this is just my opinion – this man, his son, and the management team he installed at Xencor betrayed their friends, their investors, and their fiduciary responsibility, deciding to steal the company despite the many of us who hung in there for about 15 years…a decade longer than we had expected…only to be stabbed in the back by people who, it seems now, should never be trusted by anyone, with anything.
I hope that anyone who even considers investing in the new Xencor stock (symbol going to be XNCR on Nasdaq) considers the character of the people who are running the show. For the record, based on a conversation with Xencor’s CEO, Dr. Bassil Dahiyat, I don’t think he was substantially involved in what I consider to be the theft (though it may be technically legal) of the equity of his long-suffering shareholders. I’m talking about the non-scientific people on the Board, and those insiders who used their purchase of the company’s one round of debt to screw the rest of us.
I don’t have the time or resources to individually pursue legal action against the company and its directors, but I hope that others who suffered the same fate at the hands of Xencor management will indeed do so, and I will help in any way I can should a lawsuit be filed.
In the meantime, I hate that these people, whom I used to consider friends or at least colleagues, have put me in a position where I have to hope they fail, since they have schemed to ensure that my interests and theirs are no longer aligned. I feel as if I’ve been mugged…by someone I know.
I haven’t used the names of those I consider to be guilty of violations of ethics – I’m not qualified to judge whether there are also violations of law – but they know who they are. I hope that the money they stole from those who trusted them somehow allows them to sleep at night. Actually, I don’t hope that. I hope they live with the deep guilt they should feel every day, and I hope that my modest attempt to expose their behavior will make it more difficult for them to cheat or mistreat others in the future.
The lesson for me: Be exceptionally careful whom you get into business with, whom you entrust your money to. A good investment isn’t just about technical potential, but about management talent and character. In hindsight, Xencor has only one of the three to any substantial degree, and is utterly devoid of ethical character, at least among those who really control the company.
I won’t, or at least hope I won’t, make the same mistake again. As with pretty much everything in life, it’s all about the people.
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