Raj Abhyanker, founder of LegalForce (Jason Doiy / The Recorder)
SAN FRANCISCO — At the CODEX Future Law Conference earlier this month, there was a lot of talk about the need for legal industry innovation—and the obstacles standing in the way. Speaking at one panel, Raj Abhyanker, CEO and cofounder of LegalForce Trademarkia.com, proposed a $10 million lawyer-run venture fund aimed at helping startups establish themselves and build their patent portfolios, “to help our own profession succeed,” he says. The Recorder caught up with Abhyanker to learn more.
Q: Why do you think launching a venture fund with your fellow lawyers is important?
A: One of the biggest problems in the legal space is that there are limited exit opportunities at the top of the pyramid. Because only lawyers can own law firms, venture capitalists can’t invest in them. For example, I have a law firm that’s highly profitable, but I have to keep running my own law firm. Institutional investors can invest to help me grow, but can’t own the firm. Many lawyers are stuck.
At the same time, I see so many lawyers without jobs, employment prospects, and I feel bad for them. Graduates from law school need some hope; they need to see a future in the profession.
Q: Walk me through your proposal.
A: This would be a venture capital fund whose limited partners are all lawyers. This way, we can invest in more things than VCs can. If 10 successful lawyers or law firms team up, and are willing to commit $1 million each year over the next 10 years, we’d have a $10 million investment pool in over 10 years. We can go out and make real investment in real companies, or real law firms, which are good cash flow investments. We could achieve a better return on investments in our own industry than I do through mutual funds and the public market, and we’d be investing in the future of our profession.
Q: What about the investment opportunities for this fund? We could invest in any small size—three- to five-attorney—law firm that has a brand and whose book of business does not rely on the personal skills and effort of individual partners but rather the value of the entity, technology or brand.
In larger firm contexts, Wilson Sonsini, for example, has a brand. However, I believe there are smaller firms that also have independent value beyond that of any one partner or attorney. This is particularly true for law firms that have leveraged the Internet, government data, technology, newsletter publishing or branding to create incremental goodwill beyond that of the personal skills and efforts of individual attorneys. My firm LegalForce RAPC and Trademarkia are examples. Wilson Sonsini owns a small piece of Trademarkia; they were one of our first investors as counsel to the company early on. The partners at Cravath aren’t even alive anymore, but the firm has become a brand. The organization needs to carry more goodwill than the partners, and with the age of the Internet that’s only accelerated.
Legal startups are the same way. We would invest in legal and nonlegal startups whose technology, intellectual property and/or goodwill outlasts individual people in that legal startup.
Q: Why would a startup seek investment from a group of lawyers?
A: When an early-stage startup raises venture funding, it looks for those who can help take them to the next level; they look for smart money, money that comes with connections and strategic counseling for the future. Venture funds do not understand law, and they don’t understand legal startups, so they only have limited impact. They can’t advise on how to ensure that you’re compliant on the rules of the state bar while still delivering a valuable service. In addition, traditional venture capitalists stress the need for IP protection, but lack the internal competence to meaningfully build valuable patent portfolios. For this reason, they have to rely on referrals to corporate attorneys/patent firms. By aligning interests with our venture fund formed entirely of lawyer LPs, we could align our interests to build meaningful IP portfolios at a fraction of a cost of traditional law firm consultancy models. This would create incremental shareholder value in potential exits, and insurance against downside business failure risk.
Q: What else can a lawyer venture fund offer startups that a traditional VC fund can’t?
A: A group of lawyers could help build up the patent portfolios for these early-stage startups. They could bankroll all the patent filings for that startup, and provide an internal machinery for filing a whole bunch of IPs. Most of the capital expenditures of startups are professional services providers. Our LPs would be professional services providers, and they’d go above and beyond to ensure the success of the companies we invest in.
The patent portfolios are insurance against downside risk. When VC-backed companies go sour, the VC pulls its money and liquidates everything. But often there’s not much to liquidate other than patents, trademarks. Firms like Sherwood Partners, known as the undertaker of Silicon Valley, buy up the residual rights to former venture-backed companies. We’d minimize the downside risks of our investments by building large IP portfolios around the young companies we’d invest in. Our venture fund, therefore, would have higher returns than most venture funds.
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