Venture Capital & Emerging Companies lawyers have to work hard to be successful. They work in an exciting environment, with energetic companies who lead our economy to wherever it’s going. But, unfortunately, the size of their deals, the failure rate of new ventures, and the likelihood that successful ventures will “leave the nest” for lawyers with later-stage practices, means that these lawyers constantly must hunt for new business.
A startup lawyer may be outside counsel for a company. But that company tends not to have much legal work. It will only do the legal work that it absolutely needs to. It might not survive to create more legal work. And its financial constraints mean it needs to pay as little money as possible for the scant legal services it does commission.
On the other side, the lawyer might be doing work for the venture capital or angel investor. The work is more regular, but the investor will almost always cap the costs its lawyer may assess. Plus, most investors have a roster of firms they can send work to if one objects to that cap.
Brightleaf does a lot of deep financial modeling at our client firms. Much of that analysis shows that from a profitability perspective, lawyers doing VC deals actually lose money on those deals. This comes as no surprise to those lawyers, who routinely write off dozens of hours because they’ve blown past their cap.
So if it’s hard to profit from individual EC/VC matters and if EC clients evaporate quickly, and if you need to juggle a lot of these clients to keep revenues rolling in, why are so many quality lawyers in this space?
The reason is that they all want to win the “Lottery”. Several startup lawyers we work with refer to startup clients as lottery tickets. They each hope that the startup becomes the next Zynga, or Facebook. They hope that one of their lottery tickets will need to go public someday, generating millions of dollars of billable work for their firm…if not for themselves.
So, if startups really are lottery tickets, it seems a good strategy for VC & EC lawyer would be to get as many “lottery tickets” as they can, thereby increasing their odds that one or more of their companies will make the big dance.
Easier said than done…for several reasons. There’s fierce competition for these clients. They don’t always seek out legal help when they should. Their founders tend to be very smart, but very unsophisticated about selecting outside counsel. But the biggest problem for EC/VC lawyers is simply that it takes tremendous time and effort not only to hunt for startup business clients but also to provide (likely unprofitable) services to those clients.
It might sound overly simplified, but as competition increases, EC/VC lawyers who plan on thriving, or even surviving, in this practice area for years to come are going to have to do two things. First, they have to find ways to more easily gather these lottery tickets. Second, they have to find ways to lower the time and cost of servicing these clients while providing even higher service levels to them. The pressure to do so is likely to mount. As margins continue to be squeezed at law firms, their CFOs will increasingly measure individual matter types from a profitability perspective…the way every other industry on the planet measures profitability by product line. As CFOs visualize profitability by matter type, they start to squeeze or remove unprofitable practices. This puts the EC/VC practices right in the fiscal crosshairs.
How will EC/VC practices solve this dilemma? How do they grow in this market over the long haul? How do they lower servicing times and costs while increasing service levels so they can win more business? How do they out-compete new model firms and Rocket Lawyer style providers that crowd the sidelines of their fields? How do they justify themselves in a climate that focuses more and more on profit?
Here’s what we see…They focus on using technology to make their practice much more efficient, significantly improving their margins and making unprofitable work profitable. They are employing technology to better market their services to new startups, connecting with those startups on their own turf. They leverage mobile devices to shorten the acquisition cycle of these new clients.
As the world of law firms continue to specialize, those practices that best leverage technology to differentiate themselves and connect with new clients and efficiently receive and complete work from all clients will ultimately have the biggest pile of lottery tickets. And having the biggest pile of tickets will always place them in the front of the line to collect their winnings.