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Perhaps no other technology law firm has been hit as hard by the economic downturn as Menlo Park, Calif.’s Venture Law Group. Created to tap the startup market, VLG has seen its pipeline of new technology startups slow to a trickle, and the firm lost as many as 80 clients last year. While many in the Silicon Valley predict the firm’s imminent demise, the firm’s partners say they aren’t ready to call it quits just yet. They’re digging in, slashing costs and beating the bushes for any new piece of business they can get their hands on. They also are sticking to their business model of taking an equity stake in their clients. “The tough times are when you really get to know what people are made of,” said Craig Johnson, VLG’s co-founder and chief architect. “The bottom line is people like the firm, like what they’re doing and believe that technology will recover some day.” That’s not to say the firm hasn’t taken a hard look at its business model or its cost structures. Johnson said the partners have had some pointed discussions about the firm’s emphasis on startups and taking equity in them in order to link the firm’s financial success with that of their clients. But no one has yet proposed the firm start doing bankruptcy work or litigation, Johnson said. Instead, the firm has moved up the startup food chain and begun to represent companies that have already scored venture capital funding, as well as VCs and investment banks. Such clients don’t generate as many equity investment opportunities for the firm as unfunded companies, but at least they’re good for some modest billables. Venture Law Group was founded in 1993 on the idea that lawyers catering to emerging growth companies could share in the upside of the market by taking equity stakes in their clients. One of the first firms to adopt a formal investment program, VLG has been an aggressive investor. In 1999, the firm’s equity investments generated more than $30 million — and in the following year investments generated more than $100 million, according to the firm. But the emphasis on startups, especially Internet startups, left the firm exposed when venture capital activity took a nosedive two years ago. To ease the bottom line, VLG laid off associates last year and trimmed its ranks with performance-related firings. And Johnson is foregoing a salary draw for the second year, so his pay, the highest in the firm, doesn’t sap cash away from operations. In December, the firm cut base pay for associates while at the same time increasing their share in the firm’s equity investments in clients. The move more firmly cemented associate compensation to the success of the firm’s client base. Johnson said equity plays an increasingly prominent part of the firm’s pay scheme, even while the stock market languishes. How that equity is doled out among associates became an issue for the firm while partners examined cost structures and pay. The firm had to rethink the emphasis it placed on seniority when it came to awarding bonuses and shares of equity. More experienced lawyers hired during the boom weren’t drawing the same shares as younger lawyers who were hired in the years before, Johnson said. As equity became even more of a currency for the firm, it forced the partners to rework some long-standing policies. “We just hadn’t thought it through,” Johnson said. Key to the firm’s current strategy is “that everyone understands how and when they benefit from equity.” Still, managing costs will remain a struggle until the technology market resumes, Johnson said. “We’re assuming that it’s going to be long and ugly. The whole food chain is stalled.” Johnson has become more visible in the past year as a firm manager than he was during the boom when work was pouring into the firm. He’s been devoting more energy to marketing the firm among potential clients and pitching in on management issues, thus freeing up other partners to devote more time to marketing, as well. The marketing efforts were sorely needed. What the firm lived on during 2001 were 323 pieces of new business, said partner Donald Keller Jr. While some 60 to 80 of the firm’s clients died off for lack of capital or a viable business, the firm’s remaining clients retrenched and didn’t generate much work. Partners are tight-lipped about the drop in revenues for the firm in 2001. But when associates were laid off, Keller said, the firm was wrestling with a decline in revenues of about 15 percent from the $64 million the firm grossed in 2000. Not only has the pace of deal-making slowed, but company executives are trying harder to control costs, and that includes cutting down the time they spend talking to lawyers. “Clients don’t generate as much per-client work as they used to,” said Jon Gavenman, a VLG partner. The new business bagged in 2001 included 85 startup clients that had scored VC funding and 67 startups that had not yet scored funding. The firm’s diet in 2001 also included 93 venture capital funding transactions and 74 miscellaneous transactions that ranged from representing a company in a single merger and acquisition deal to counseling individual entrepreneurs on personal compensation matters. With the firm’s marketing machinery in high gear, partners have called upon every large venture capital player in the Valley and have probed all of their contacts among entrepreneurs, Keller said. “We’re making sure that everyone knows we’re open for business,” Keller said. The partners are even calling on investment bankers, whose work VLG was one of the first firms to turn away when company-side work exploded. “We now have the time to do it,” Keller said. The firm’s lawyers may have had a lot of downtime in the past 18 months, but they haven’t been idle. VLG’s lawyers logged a total of 10,000 hours in 2000 on a database of the firm’s deals. Called VLG Advantage, the database comprises data gleaned from thousands of M&A deals, private and commercial transactions, leases and bridge loans, and compensation schedules the firm worked on during the past two years. It was the brainchild of partner Joshua Green. In June 2000, the firm’s partners met for an off-site meeting in San Francisco to find tangible ways to measure their value to clients, and the database was the result. “Every client is judging the value of our service and the relevance of it to the success of their overall business,” Green said. There’s no question about the firm’s viability, Green said, adding “there is not a crack in the resolve that this is successful.”

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