VC legal dispute threatens biotech startups
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Apple Tree Partners has invested billions of dollars to launch and grow biotech companies, but now a legal dispute threatens to shut many of them down.
The big picture: Apple Tree has an unusual structure for a venture capital firm, according to court documents filed in Delaware and the Cayman Islands.
- Since 2012 it's been almost entirely funded by one man, a Russian oligarch named Dmitry Rybolovlev. If that name sounds familiar, it's probably because you remember his unsuccessful art fraud allegations against auction house Sotheby's.
- Rybolovlev made more than $2.4 billion of commitments to Apple Tree, but not via a blind pool. Instead, Apple Tree would propose "budgets" for new portfolio companies for approval by Rybolovlev or a representative of his family office.
Zoom in: This concentrated capital arrangement was risky for Apple Tree portfolio companies, particularly given that Apple Tree sought to be their only investor via tranched financings.
- The protection was a "global default" provision. Were Rybolovlev to refuse a valid capital call, the fund could confiscate up to 50% of his interests.
Behind the scenes: According to a lawsuit filed by Apple Tree, this arrangement worked fine until shortly after Russia's invasion of Ukraine.
- After that, Apple Tree claims that Rybolovlev got stingy. By September 2022, his family office allegedly said it only would approve "austerity" budgets going forward.
- There were some legal wranglings in the Caymans, which got resolved.
Fast forward: Last month, Apple Tree issued over $100 million in capital calls — $87 million of which is earmarked for up to 10 portfolio companies.
- This is according to a Cayman's complaint by Rybolovlev because much of Apple Tree's filing in Delaware is redacted.
- He claims that he is not legally obligated to pay because, in part, the companies haven't met certain milestones. Moreover, he accuses Apple Tree of "serious mismanagement and a lack of probity."
- Apple Tree calls the situation "an emergency," saying that several of its portfolio companies "face imminent collapse." In fact, a source tells Axios that one of them has already signaled its plans to shutter.
Look ahead: The firm is asking the court for specific performance (i.e., require that Rybolovlev meet his capital call), and argues that Rybolovlev actually wants them to struggle and sell to him on the cheap.
- Rybolovlev wants a ruling that his obligations have been met.
- Meanwhile, up to 10 startups and hundreds of employees are stuck in limbo.
