Thursday, November 9, 2006
Posted by Jeff Lipshaw
There is some interesting data about the bursting of the dot.com bubble in yesterday's Wall Street Journal, and it plays to what I think is a fascinating curricular possibility. Consider this part of the dialogue Gordon Smith started over at Conglomerate on the subject of law and entrepreneurship. Gordon's post is a take on the scholarship of entrepreneurship; I want to focus on the programmatic and curricular setting into which that scholarship might be placed.
In his "Portals" column (Nov. 8, 2006), Lee Gomes highlights a paper coming out in the Journal of Financial Economics, authored by David Kirsch (Univ. of Maryland Business School, right) and others, suggesting that the actual failure rate of dot.com start-ups was far lower than popularly perceived, and in line with failure rates of firms in other industrial booms (like the development of the automobile industry). According to the article, Kirsch says the popular conception, no doubt fueled by mega-failures like Webvan, eToys, and Pets.com, is that only a few dot.coms survived the bursting of the bubble. But, in fact, there is something like an 80% survival rate.
Most of these survivors, though, aren't the titans like Amazon or eBay, but much smaller efforts such as wrestlinggear.com, which sells equipment to high-school and college wrestlers, what Prof. Kirsch called precisely the sort of demanding niche market for which Web shopping was invented.
These far more modest achievements stand in contrast to the "we are the next Microsoft" philosophy prevalent among those in the start-up and venture capital communities in the late nineties. The study zeroed in on something I saw: the Get Big Fast strategy. Now I was not in one of the real hotbeds: Silicon Valley, Austin, the Dulles Corridor, Boston. I was trying to develop a practice in the Ann Arbor area, leveraging tech transfer out of the University of Michigan. I'm not sure how many deals ever got done as a percentage of the ideas that got floated in our community, but there was a lot of venture capital money looking for investment, including Arbor Partners, a group that had come out of Comshare, Inc.; Avalon Partners, founded by the ex-president of Gateway; Woodland Ventures, looking for investments in the health care area; and the Enterprise Development Fund, founded by my friend, Tom Porter, and his business partner, Mary Campbell, the two of them really the godparents of early stage funding in the area.
How this translates into an opportunity for law school curricula below the fold.
But "get big fast" was the mantra (even though getting big fast was far more difficult when the technology required FDA approvals for safety and efficacy, an aspect of health care products, versus getting through the beta testing on software). I can't count any more the number of times I heard an entrepreneur pitching a business plan, in which the line went something like "the global market for this particular thing is $12 billion; we only need to get 2% of that market over the next five years to be a $60 million company." Right. And I'm going to be 007 in the next Bond flick.
But when companies were going from start-up to IPO in eighteen months in Silicon Valley, you could form a law firm like the Venture Law Group, the brainchild of Craig Johnson (left) and others formerly at Wilson, Sonsini, in which the lawyers bet on the success of the company, and recouped the cash-free layout of services on the back-end of the initial public offering. Despite having a law school classmate who was a founder partner in VLG, I have no inside information on the ultimate success of that business plan. I only know, like everyone else, that VLG now only exists as a group within the Heller Ehrman law firm.
But VLG epitomized the "three-run homer" strategy of entrepreneurship law, and we watched in envy from the Midwest, as venture capitalists told us "you don't get it" and took their business to VLG or to Testa Hurwitz in Boston.
What we saw in Ann Arbor was, I think, far more common: the dead zone of start-up funding. I served for a time as a member of the board of directors of the New Enterprise Forum, the venture capital club in Ann Arbor. Once a month, the organization would host an evening in a ballroom of the local Holiday Inn, in which there would be a presentations, usually by the very popular money folks (like Tom Porter), a featured entrepreneur (doing the equivalent of a law professor's job talk on the business plan), and the "pass the mike" session, in which everyone in the room identified themselves and had a chance to talk for a minute about his or her vision for making a lot of money. What always struck me, however, was that for every entrepreneur looking for funding (and not successfully, given their reappearance every month), there were at least a half dozen each of various kinds of fee-for-service providers: lawyers, insurance agents, business plan writers, strategy consultants, accountants, personal coaches, and the like. And that is why it was the dead zone: the entrepreneurs faced the Catch-22 of needing those services to attract funding, but not having the funding to pay for the services. At Prestigious and Large But Midwestern and Regional Law Firm, we tried to emulate VLG with a fixed-fee startup package, but even our ridiculously low price for "all-you-can-eat" basic legal service put us out of reach of most entrepreneurs.
Here's the curricular opportunity. Law school grads who want to be business lawyers usually think about the large ball of big law firms and corporations. Even in the venture capital area, business people and lawyers are playing large ball in the high tech corridors. But the reality is that most entrepreneurship lawyering is the small ball of routine business law and business planning, mixed in with common sense, and a touch of business acumen, and is not the domain, much less the exclusive domain, of the most elite grads of the most elite schools.
As Prof. Kirsch noted in the Wall Street Journal article, "It turns out there were lots of nooks and crannies for entrepreneurial action.... But those nooks and crannies might have been $5 million or $10 million businesses well worth doing, though not necessarily for VCs." Indeed, I taught a two-credit class at the Indiana University School of Law - Indianapolis called "Technology Startups and Venture Capital" and the challenge is finding any legal doctrine that is unique to the area. The one interesting doctrinal area is the law of down-round financing (see Gordon Smith's work), but otherwise we find ourselves, in an interdisciplinary way, looking, for example, at the sociology of lawyering to entrepreneurs (see Mark Suchman & Mia Cahill's canonical article in Law & Social Inquiry on Silicon Valley lawyers), or the economic development issues of entrepreneurship. But the legal issues (as opposed to, for example, the economic or sociological or valuation issues, which I also taught) are otherwise the nuts-and-bolts corporate and tax and contract work of small business lawyers. (And I think Gordon's synopsis of Law and Entrepreneurship Redux reflects the fact that the interesting scholarship is not in doctrinal law of entrepreneurship.)
So what are the curricular opportunities? This is an area ripe for interdisciplinary programmatic innovation, with the basics of business organization, financial services, and commercial law currently offered, as well as advanced seminars in say, economics and ethics for business lawyers, or creative problem-solving for business lawyers. And the capstone ought to be hands-on experience in the small business clinics (whether based in university technology transfer or low-tech entrepreneurship, or urban or minority entrepreneurship) that are springing up at law schools across the country (as to which Tom Morsch (right) at Northwestern has been one of the guiding lights). And that seems to me to be the perfect way to address, from a social policy and economic development standpoint, some of the dead zone issues, at least for some of the really good but VC-unfundable business plans.
There is untold untapped opportunity in teaching small ball business law. There were plenty of bright, motivated, entrepreneurial law students at IU-Indianapolis - I know because some of them were my students - who saw this kind of small ball as an alternative to the big firms. The downside for young lawyers starting off in small ball law is the loss of training those firms provide, but providing that training (within or without the traditional three year law school term) is the curricular opportunity for all of us. And maybe even some good scholarship about the dead zone.