It may be difficult to think of lawyers as unsung heroes, but in the venture capital world, the legal eagles often spot promising situations on behalf of clients.
So it was recently with Leib Orlanski, veteran financial lawyer and now partner in the Century City-based offices of Kirkpatrick & Lockhardt. Last year, he met a consultant by the name of Hossein Pourmand, who runs the Venture Advisory Service in West Los Angeles, at a CalTech-MIT Forum in Pasadena. (Orlanski sits on the board of the forum.) Pourmand told Orlanski of an optical switch being developed by two physicists, Rubin Sandler and Robert Leiberman, of Torrance-based Intelligent Optical Systems Inc. Optical switches help download the light beams from fiber-optic cable to end users.
“The optical switch the hardcore real advances in technology not the Internet ideas, is what venture capitalists are willing to fund now,” said Orlanski. “And I knew they needed some management. They (Rubin and Leiberman) were scientists.”
So Orlanski the matchmaker went into his Rolodex and fished out the name Frank Dabbey, who is more than a little expert in the area of fiber optics. In fact, Dabbey, also with a doctorate in physics, had founded and sold Van Nuys-based Valley Lightwave Technologies Inc. in the 1990s. Orlanski had done the legal work on the deal for the maker of fiber-optic cable.
After Valley Lightwave, Dabbey founded ASC Silica Inc., a company that makes the machines that make fiber-optic cable. But the impressively credentialed Dabbey wasn’t going to join an unknown startup willy-nilly. “You can’t get a name like Dabbey unless you have some quality funding involved,” explained Orlanski. “But we badly wanted him in a senior management position.”
So Orlanski again went back into his lair and phone lists, and this time emerged with funding from the well-known venture outfits Smart Technology Ventures in Beverly Hills (David Nazarian’s shop) and Torrance-based DynaFund Ventures. The two shops together chipped in $10 million with first round ‘series A’ financing, and Dabbey signed on.
The next step was limited production of the switches. “The goal is to develop samples and get them into customers’ hands,” Orlanski said.
The goal is also to move the company to an initial public offering or sale to a larger publicly held company, such as Nortel Networks Corp., within a few years, he said. “Either way is a good exit strategy (for venture investors) in a company like this, or even to go public and then sell out to a larger company.”
The icing on the cake is that Orlanski’s firm took an equity stake in Intelligent Optical Systems, and might see a handsome payday if the company ever goes public or is bought out. “Well, it is a small stake,” said Orlanski. ‘Let’s see how it does.”
For Better or Worse
The tech wreck, the sudden queasiness of banks, the troubles in shipping it all makes most investment bankers, venture capitalists and investors a bit jumpy.
But for Skip Victor, senior managing director at West Los Angeles Chanin Capital Partners, the current market just means more work. Victor, long ago of brokerage Drexel Burnham Lambert, and his crew of 40 are experts in financial restructuring, and recently represented creditors in the Chapter 11 reorganizations of apparel-maker Fruit of the Loom; cartoon-outfit Marvel Entertainment Group Inc., waste-management giant Safety-Kleen Corp., and Purina Mills, the animal food maker, among other assignments.
Victor says that the sustained economic boom of the 1990s resulted in overconfidence and somewhat looser underwriting standards, and by the late 1990s, many companies had become heavily leveraged. But in sector after sector, there has been overbuilding or too much supply, such as in telecommunications or Internet content. Now, of course, the economy appears to be slowing, adding to the woes.
“The distressed debt market is just much larger than it used to be,” said Victor. “There are just more and more companies every week with unsustainable balance sheets. That means much more work for us.” In general, Victor does not become involved in dot-com meltdowns. Usually, the e-companies are smaller or there is no sizable amount of debt or capital to work with.
Chanin Capital Partners can be hired either by creditors, who want to protect their stake and restructure the target company to go forward, or by management. In general, debtors will exchange their debt for equity, while new capital is sought for infusion, or a merger partner sought. If costs can be cut, then they are, said Victor.
Lonely Wine Company
Look in the dictionary for the definition of an ‘orphan stock” and you may just get the description of Marina del Rey-based Scheid Vineyards Inc. The small-cap company lacks “institutional sponsorship” of brokerages, money managers and mutual funds. When powerful stock-owning and trading entities like a stock, they can help it weather some bad quarters or they can shoot the stock north in good times.
No such supportive family for Scheid Vineyards. The vintner’s stock was trading last week for just more than $3 a share, despite having reported earnings of $2.6 million (47 cents a share) in its latest reported quarter ended Sept. 30. That compares with a net loss of $298,000 (5 cents) in the year-earlier period when it was trading for $4 a share. In other words, Wall Street’s reaction to the improving earnings at Scheid has been a big yawn. “We just seem to have fallen off the radar screens,” said Heidi Scheid, the company’s CFO.
To be sure, Scheid Vineyards has been through a couple dry years, something a small-cap company can’t do anymore on Wall Street without punishing shareholders. Bad weather caused poor harvests in 1998 and 1999, and profits were erratic.
Year 2000 is coming in OK, said Scheid, and additional acreage is being planted or is maturing, which if weather permits should boost production and profits in the future. Will Wall Street notice? “You tell me,” said Scheid.
Contributing columnist Benjamin Mark Cole writes about the local investment community for the Los Angeles Business Journal. He can be reached at [email protected].
