As the innovation economy has begun to spread outside of Silicon Valley, several Pennsylvania law firms have taken a shot at appealing to companies that may be the next Google or Facebook.
Firms looking to cash in on representing young businesses are unlikely to find an easy path to success, observers said. But for those willing to adopt a startup mindset, court the areas’ entrepreneurs and build relationships with the resources they need, it can be a rewarding venture in terms of profit and law firm culture.
“It’s a long-term commitment. Not every client is going to be successful,” said Gregory L. Seltzer, a practice leader in Ballard Spahr’s emerging growth and private capital practice. “We believe that the emerging growth space can be profitable. But we have to be highly selective and we have to be incredibly engaged in ensuring the success for our clients.”
The startup community is selective as well, so the approach has to be deliberate. A firm has to add value, Dilworth Paxson executive chairman and CEO Ajay Raju said, not just offer discounted legal fees.
“You can’t just put a startup-business sign outside your office and expect people to come. It’s a very, very close-knit community and I think they like to take advice from one another,” said Jonathan D. Gworek of Morse, Barnes-Brown & Pendleton, based in Waltham, Massachusetts.
Gworek joined his firm nearly 20 years ago as an associate, and started working with startups right away. Since then, he said he has seen many companies grow into substantial clients.
“At the time, there were not very many firms that were positioned squarely to the startup community the way we were,” he said. But he has noticed the interest level gradually rise among other firms during the past two decades.
Marcie Borgal Shunk of LawVision Group said firms with entrepreneurial cultures have shown a particular interest in working with startups. She named a few firms that have shaped major practices around that market, such as national firms Cooley LLP and Perkins Coie. However, she said, she’s noticed some firms flounder in their efforts—mostly one-offs that didn’t go very far rather than firms that “went in whole-hog.”
Firms who “tip-toe in the water” are less likely to find success, Borgal Shunk said. Instead, it’s best to “infiltrate the community” and establish strong ties, particularly with private-equity clients.
“There are some markets where you can lead with price, or ‘I know your business better than anyone else,’” Borgal Shunk said. “In the private-equity space it’s really about creating a one-on-one relationship.”
Going in Whole-Hog
Several Pennsylvania-based firms have launched specialized programs shaped for the startup community. Their structures are different, but all of them make use of their existing relationships with the resources that entrepreneurs need.
Ballard Spahr has created two programs for aspiring entrepreneurs.
The Ballard Academy for Student Entrepreneurs is an application-only program that accepts 10 student-run companies per year, including five from Philadelphia and five from elsewhere in the country. They get free legal services and access to educational seminars and networking opportunities.
Seltzer said the idea was born after several companies had come to the firm looking to raise capital, but their development stage had been mismanaged.
“The answer was always, ‘We just couldn’t afford good legal representation,’” Seltzer said.
The students seemed to put a high value on the educational sessions and access to nonlegal resources, he said. So Ballard Spahr looked to replicate that for nonstudent entrepreneurs, leading to the firm’s newest program, SING. SING caters to a select group of emerging growth clients, Seltzer said, and it’s more aggressive with offering alternative fee arrangements.
At Dilworth Paxson, an effort to reach the startup community meant creating an exchange where startups and investors could meet.
“We wanted to create a watering hole where things are happening,” Raju said. “If you’re a startup, you don’t have to go on 13 doors and knock on them.”
Eight deals resulted from connections made in the exchange, he said. The entrepreneurs and investors who use the exchange do not have to use Dilworth Paxson for legal work, Raju said. But still, the firm has brought in more than $1 million as a result of the program, not necessarily from startups, but from larger post-product or post-revenue companies.
“Not a single startup has used us. They can’t afford us,” he said. “It’s an open-source mentality. Technologists do it all the time.”
Raju, who joined Dilworth Paxson about two years ago, has also invested in a venture fund along with other partners of the firm. The fund is a separate entity from the law firm.
Saul Ewing recently launched its Resources, Access and Mentoring Program, also known as RAMP, bringing in an investor-in-residence from SCP Vitalife, a local venture firm. As a pilot for the investor-in-residence offering, the investor will provide free services to three startup companies.
Also as a part of RAMP, the firm plans to offer monthly educational and networking events in several cities as well as discounts or deferred fee arrangements. It also holds office hours at Carnegie Mellon University’s Project Olympus and some Baltimore and Washington, D.C., incubators, and will begin doing so at its recently opened office in the Drexel Innovation Neighborhood.
Making it profitable
Borgal Shunk said law firms need to have connections to private equity so they don’t lose a client once it gets to the fundraising stage.
Seltzer said it takes a firm with major connections to provide emerging companies with the help they need. That often means a big firm, he said.
“Small firms … they don’t have the relationships that the big firms have,” he said. “It’s leveraging resources, and that’s what these startups need.”
But Gworek’s firm, Morse Barnes-Brown, got into the field before it was popular and without the big-firm infrastructure.
For about 15 years, the firm has had an office at the Cambridge Innovation Center, a venture capital firm. Gworek said he has participated in the business plan competition at Massachusetts Institute of Technology, and made an effort from the start to attend networking events for startups. This helped him make the necessary connections. And in the beginning, he said, there were not other law firms at those events.
Raju said smaller firms that think like startups might have the greatest ability to come up with new ways to help build the local innovation economy. Large firms may not need to innovate, he said, because they don’t have to in order to be successful. Since entrepreneurs started walking his firm’s hallway, he said, “it changes the culture.”
“It’s a misnomer and a fallacy that innovation has to be expensive,” Raju said, although firms may have to shift their focus away from getting legal fees right away.
But firms have to be deliberate in reaching out to potential clients, both on the entrepreneur’s side and the funding side, Gworek said, and must be flexible with fees. That also means selecting companies with the potential to become profitable.
“We are making an investment decision of sorts when we take a client on a deferral basis, so we can’t take in any client. We’re typically looking for indicators that suggest they’re going to be successful in raising money,” Gworek said.
Seltzer said most of Ballard Spahr’s emerging growth clients are not in BASE or SING. But most of them do have an alternative fee arrangement.
“It’s not the most profitable practice group,” Seltzer said. But “it’s an essential practice group. It leads to great work … it’s a great training program.”
Law firms should approach the decision like any venture capital firm would, Borgal Shunk said.
“You have to look at the opportunity and determine what you’re willing to invest in it,” she said, while keeping a portfolio of different clients.
Gworek said after doing this for a while, he started to see patterns and developed an eye for promising ventures.
“Some will come out at the end and be very interesting clients. … It does pay off or we wouldn’t be in business,” Gworek said. “As a firm you have to have a culture that sees the value and embraces the benefits … of being part of the startup culture because it does take time. And you have to be patient and understand that its a long-term strategy.”
Lizzy McLellan can be contacted at 215-557-2493 or email@example.com. Follow her on Twitter @LizzyMcLellTLI. •