It’s never easy making relationships work, and interactions between venture capitalists and their legal counsel are no different.
Venture folk are a tough crowd to please – they want expert advice and they want it now. And when they’re not satisfied, they won’t hesitate to take their business elsewhere.
That’s according to a survey of more than 400 venture capitalists, investment bankers and industry consultants by Thomson Venture Economics (publisher of Venture Capital Journal).
The survey, conducted online in January, found that venture capitalists use different law firms for a variety of situations. One firm might represent the investors in negotiations with limited partners while raising an investment fund, while another will advise them before investing in a new portfolio company.
In fact, nearly three-quarters of all respondents relied on multiple law firms (Figure 1), while only slightly more than 20% of respondents said they used a single law firm to represent them because there was enough expertise there to meet all their demands.
Expertise and experience, however, are hard to come by.
Some respondents said their lawyers are “incompetent” and others said their lawyers need a refresher course through business school as well as an engineering degree. One wrote that most lawyers are “overdue for an MBA. … Less than 1% of JDs understand business.”
Whether or not a law firm has the domain or market expertise to be effective counsel is the single-most important factor for venture capitalists in choosing legal counsel, the survey found. More than half (53.5%) said it was the single most important factor when choosing new legal representation (Figure 2).
A personal connection is also key. Nearly 19% of respondents selecting a law firm will base their decisions on whether they click with the partner, followed by 18% who said they have to be referred to a law firm before selecting a new legal team.
Tell Me What You
Venture capitalists want a lawyer who knows the law, but who also knows the technology industry and the competitive market for deals. As one respondent lamented, lawyers “show a lack of expertise and rarely put forth any effort.”
Venture capitalists also want a lawyer who can work out the kinks in any situation, but never loses sight of the big picture. One griped, “Lawyers get stuck in minutia and put the deal at risk.”
According to 37.6% of those surveyed, what irks them the most about lawyers is the feeling that they never think outside the box (Figure 3).
But a discussion about a lawyer’s lack of business sense pales in comparison to what venture capitalists have to say about how much they pay their lawyers. Not surprisingly, fees are the biggest bone of contention between private equity investors and law firms, the survey found. And, if venture capitalists could change one thing about the law firms that represent them, they would change a firm’s fee structure to make it more transparent (Figure 4).
When one investor surveyed was billed for work he didn’t request, he switched law firms.
Half of those surveyed said they would find new representation if a law firm wouldn’t amicably resolve a fee dispute (Figure 5).
Fees generated more complaints than anything else, especially when a client knows they’re paying for a senior partner to do associate-level work. “They keep their staff busy on our dollars,” one grumbles about having to pay big bucks, but getting to work mostly with the law firm’s underlings.
Nevertheless, for all their grousing about fees, only 1.5% of respondents said a fair and easy-to-understand fee calculation was the most important consideration when selecting a new law firm (Figure 2).
No matter what the complaint is, when the two sides can’t resolve their differences, venture capitalists will walk away from the negotiating table and find another law firm to do business with. Only 5.6% of those surveyed said they would never switch law firms. But 79% said they would jump ship if a firm screwed up a transaction or caused major delays in getting one done (Figure 5). Meanwhile, another 58% said they would follow a senior partner out the door and switch their legal representation to a new firm.
But again, talk is apparently cheap. Despite all their complaints, only 15 out ofthe 400 respondents said they had just switched firms, while only eight said they were having problems with their current lawyers and were actively searching for new counsel (Figure 6).
It’s not all bad news for lawyers, though. Consider for a moment that 70% of venture capitalists expected to rely more heavily on their lawyers in 2004 as investment activity picks up. That means more billable hours for lawyers serving the private equity market. Only 19 respondents are expecting a decrease in business this year, which translates into a reduction in legal services.
But predictions on business activity are no crystal ball. If a lawyer can’t maintain a good working relations and keep clients happy, then there’s no work to be done at all.