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In the world of venture-funded companies, not much surprises industry observers. Yet a\u00a0new strategy employed by one privately held company\u00a0might have founders and venture investors wondering if it\u2019s a maneuver\u00a0worth replicating.<\/p>\n
What happened: The U.S. subsidiary of a\u00a0venture-backed Berlin-based search optimization company called Searchmetrics<\/a> just filed for Chapter 11 bankruptcy protection<\/a> in Delaware.<\/p>\n What it\u2019s interesting: Sources close to Searchmetrics say the company was forced to file to escape a longstanding battle with venture-backed\u00a0competitor BrightEdge<\/a>, based in Menlo Park, which \u2014\u00a0\u00a0Searchmetrics alleges \u2014 stole its\u00a0intellectual property, then filed for patents around it. (Searchmetrics says it had patents on its technology in Europe but failed to secure similar patents in the U.S.).<\/p>\n Searchmetrics\u2019s\u00a0chief restructuring officer, Wayne Weitz, explains in a letter to the court: \u201cOne of the [Searchmetrics\u2019s] primary competitors in the U.S. market is BrightEdge Technologies [which] sought to acquire or merge with Searchmetrics in or about October of 2013. During acquisition discussions, BrightEdge became privy to Searchmetrics\u2019 confidential, proprietary, competitive information and business practices, including its business model and growth plans. Ultimately, Searchmetrics and BrightEdge could not agree on terms and the acquisition discussions fell apart.<\/p>\n \u201cUnbeknownst to Searchmetrics, whilst in the midst of the acquisition discussions, BrightEdge developed a campaign to eliminate [Searchmetrics\u2019s]\u00a0presence in the U.S. market. BrightEdge started by engaging in a smear campaign designed to lure the Debtor\u2019s customers and prospective customers to BrightEdge by making false and disparaging statements about Searchmetrics\u2019s products, and then initiated vexatious, baseless, and prolonged litigation against [Searchmetrics] on two fronts. This Chapter 11 Case was initiated to bring [this litigation]\u00a0to an expeditious and cost-effective end to permit the Debtor to reorganize, failing which, [Searchmetrics]\u00a0will be liquidated.\u201d<\/p>\n Searchmetrics employees 250 people altogether; its U.S. subsidiary employs 40, mostly marketing and sales staff who\u00a0are based in New York.<\/p>\n One source tells us that with the exception of \u201cone or two people,\u201d the company\u2019s U.S.-based employees are paid on salary and commissions, so aren\u2019t at risk of seeing their equity impacted by the filing. (Typically, in such a proceeding, there\u2019s little to nothing left for shareholders once\u00a0more senior creditors are paid. In this case, BrightEdge would be considered a creditor, though Searchmetrics is hoping to pay it a whole lot less than BrightEdge might win in a patent suit.)<\/p>\n The\u00a0move is far from certain to work. Richard Kanowitz, a New York attorney who specializes in bankruptcies on behalf of Cooley, notes that, \u201cWith bankruptcy, there\u2019s an automatic stay, but whether that stay holds is another story.\u201d (We should add we merely asked Kanowitz whether he thought it was unusual for a venture-backed company to file for bankruptcy protection to spare itself from a patent lawsuit. He wasn\u2019t aware of the companies involved at the time.)<\/p>\n Stephen Lubben, an expert on bankruptcy who teaches corporate governance and business ethics at Seton Hall Law School, meanwhile observes that yes, bankruptcy filings by venture capital-backed companies are rare, particularly in California, where the\u00a0strong preference is to do an \u201cassignment for the benefit of creditors\u201d that allows\u00a0backers more say in how\u00a0to\u00a0save their investments.<\/p>\n But also speaking generally and not specifically about these two companies, Lubben says that\u00a0bankruptcy filings solely to address a single piece of litigation are \u201cdicey. The court might dismiss the filing as being in bad faith. The company will have to show some other reason for needing to reorganize, and that it\u2019s not just trying to stiff a single creditor.\u201d<\/p>\n Presumably, Searchmetrics\u2019s attorneys wouldn\u2019t have filed if they weren\u2019t optimistic about their odds of success. Asked for a comment about its Chapter 11 strategy, a Searchmetrics\u2019s spokesman wrote in an email to us:\u00a0\u201cThe U.S. subsidiary cannot invest properly in growing its business despite longstanding customer approval of our Searchmetrics products, a deep pipeline that brings new innovations in online content marketing, and a great relationship with our parent company,\u201d while trying to fend off BrightEdge.<\/p>\n BrightEdge, which just learned of the suit itself, is planning to respond shortly, and we\u2019ll update this post as soon as it does.<\/p>\n Ten-year-old Searchmetrics has raised roughly $32 million from investors, shows Crunchbase<\/a>. Its backers include Holtzbrinck Digital, Iris Capital and Kreos Capital, among others.<\/p>\n BrightEdge, also founded 10 years ago, has raised around $62 million<\/a>, according to Crunchbase. Its investors include Illuminate Ventures, Insight Venture Partners, Intel Capital, Altos Partners and Battery Ventures.<\/p>\n You can read through Searchmetrics\u2019s court filings here<\/a>.<\/p>\n","protected":false},"excerpt":{"rendered":"![\"\"](\"https:\/\/tctechcrunch2011.files.wordpress.com\/2011\/12\/fight-club-fightclub-fight-club.jpg?w=680\")
In the world of venture-funded companies, not much surprises industry observers. Yet a new strategy by one privately held company might have founders and venture investors wondering if it’s a maneuver worth replicating. What happened: The U.S. subsidiary of a venture-backed search optimization company called Searchmetrics just filed for Chapter 11 bankruptcy protection in Delaware. Read More<\/a><\/p>\n\n<\/img><\/a>
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