Adam Smith may have written the Wealth of Nations and been a seminal economist underpinning our capitalist thinking, but evidently his name-saked website about law firms doesn’t understand crap about law firm economics. 

Yesterday, The Wall Street Journal printed an Op-Ed about The End of Big Law.  In short, the author argues that we’ve seen the end of the big law firm as we know it.  It’s a must read for anyone interested in the subject.  Any reader of this blog knows that I’ve been predicting this for quite some time as part of my Law Firm 2.0 series. 

Today, however, I read one of the worst rebuttals I’ve ever read.  Adam Smith, Esq. is a website that purports to be experts on the economics of Law Firms.  According to their site, they provide consulting services to Big Law firms, so clearly there is no bias there, right? (sarcasm intended).  You can probably guess that they argue the the End of Big Law is a myth. 

The "rebuttal" (in quotes, because it really doesn’t deserve the description) is that Big Law is just like any other industry hit by the recession.  What they are missing are the massive changes that have taken place in the past decade in the Big Law ecosystem.  I won’t go into detail (if you want detail, read my Law Firm 2.0 series), but how can supposed experts on law firm economics not see that these changes are only being hastened by the recession, not caused by it?  The changes started a long, long time ago.  The recession is just putting the nails in the coffin. 

Secondly, any credibility the author may have is completely destroyed in my mind by two ridiculous assertions:

1. "I have yet to meet a managing partner not exquisitely attuned to the sentiments of their partners and the perceptions of their clients.” You clearly don’t get out much then.  This is absurd.  If this statement was true, one would not see the massive amount of partner transfers between firms and pissed off clients.  I am confident when I say that the majority of clients think exactly the opposite and disagree that law firms are "managing their firms as smartly as they are" (quoted from a previous Adam Smith blog); and

2. "Last time I checked, we were not capital-intensive nor do we have but the most trivial base of fixed assets." This is also laughable.  First, I find it enlightening that the author uses the word "we" when referring to Big Law.  Clearly this is another tip of the cap to bias.  Secondly, law firms are notorious for getting in over their heads with fixed assets.  See: Brobeck and / or my prior posting on this.  And this doesn’t include the multiple of dozens of conversations I’ve had with AmLaw 50 partners agreeing with me that fixed costs are out of control. 

This blog is simply reinforcing what’s broken and wrong in the legal environment.   Me, I’m happy to see articles like this, as it emboldens me as a venture capitalist to exploit and profit from the inefficiencies of the market. 

Lastly, the Adam Smith post accuses the WSJ article of being  "a truly impressive exercise in the abject failure of critical thinking" and likens it to a "tabloid."  I’d call this a case of the pot calling the kettle black, but in this case there is no kettle. 

Back in January, we invested in a company called FirstDocs.  Essentially, it was an investment in the Law Firm 2.0 thesis that I’ve been blogging about. 

I’m pleased to announce that they have renamed, re-branded and re-other things and are now Brightleaf.

Check out their new website and not only will you (hopefully) marvel at the new pretty graphics, but more importantly get a very clear idea of what they are developing just ahead of their public launch, which will be in the next month or so.

I’m really happy with the progress that Dan, Luke, Tom, Muthu and Anil have made and can’t wait until they are live and in public to share with those of you interested. 

Nice job, gents. 

My favorite IT guy, Ross Carlson clued me on a recent lawsuit whereby a landlord is suing their tenant over a tweet whereby she besmirched their name.

The tenant tweeted that her apartment was moldy and that her landlord thought it was okay.  Despite her having only 20 followers, the landlord claimed "damaged business reputation" and has sued her for $50,000. 

Ugh.  Note to landlord and lawyers:  get a life.

I suppose that I should be on the lookout from AT&T and/or United for lawsuits against me for all the horrible things I say about them on Twitter, but then again, all of my claims are true.  So maybe I’m still safe. 

As an added bonus, I’ll leave y’all with this lawyer joke (Thanks to Gabor Garai for this one):

One afternoon, a wealthy lawyer was riding in the back of his limousine when he saw two pathetic-looking men by the side of the road, eating grass. He ordered his driver to stop and got out to investigate. He asked the men, "Why are you eating grass?"

"We don’t have no money for food," the first man replied.

"Then you must come with me to my house," insisted the lawyer.

"But, sir, I got a wife and three kids here," said the man.

"Bring them along!" replied the lawyer.

The second man exclaimed, "I got a wife and six kids!"

"Bring them as well!", the lawyer proclaimed as he headed back to his limo.

They all climbed into the car, and once underway, one of the men expresses, "Sir, you are too kind. Thank you for taking all of us with you."

The lawyer replied, "I’m most happy to do it. You’ll love my place. The grass is almost a foot tall."

The latest TechStars TV is out.  Not to be missed is David Cohen setting up the Everlater guys.  He completely convinced them that some cute girls thought that Nate and Natty were "rock stars."  Nice work, David, but I hear paybacks are a bitch.

As a P.S., check out Everlater’s launched site.

Every once in a while, I read something and go "huh?"  The most recent was the report that 52.9% of venture capitalist think that VC is broken.

Per my post, I don’t think the model is broken and am disappointed in my colleagues who think it is. 

Today, I read another article about VC being broken in BusinessWeek.  The author believes that the VC model would work better if early-stage investors bought early and sold out to secondary funds before the companies ultimate exit.  He then argues these secondary investors make better board members of later-stage companies.  Huh?

This is absolutely the wrong thing to do.  It make no sense.  This why:

1. Secondary Buyers Never Pay Full Value for Shares.  I’ve seen a lot of secondary deals and even in the "named" transactions (Facebook,etc.) the secondary guys enter in a 50% discount to current value of the shares.  In other words, whatever value I’m carrying the investment at, I should expect to get 50 cents on the buck.  I understand the strategy from the secondaries and would do the same if I were them, but that certainly doesn’t help my return.  From an investor (my investors) standpoint, I’d always be selling for half of value;

2.  There Are Very Few Companies that Fit the Profile.  All of the author’s examples talk about the extreme outliers in VC investing, so at best this is an edge case scenario.  In most cases, the companies aren’t in a position to attract a secondary buyer as they are still too risky;

3. VCs Should Hold Their Winners.  The corollary for number 2, above is that VCs make a massively disproportionate amount of their returns from these Black Swans and to sell them early would depress overall VC returns.  As the model has been shown to work, one needs to hold their winners, not sell them too early; and

4. VCs Make Effective Board Members.  I don’t know all the secondary funds, but the ones that I do are financial engineers, not company runners.  I would agree that our specialty is early-stage counsel, but that doesn’t mean that we have nothing to add later in the equation and I’ve seen no evidence that secondary buyers have more to add than VCs. 

I applaud anyone thinking out of the box to improve the VC industry, as clearly I’m interested in VC success, but this is not the way to approach the problems.  Yes, some VCs are broken, but I still think the model works. 

According to a recent report, cats control humans.  As I’ve hypothesized for many years (being a caretaker of a stray cat), their purr is not so much a “I’m happy daddy” signal, rather a way to manipulate me to feed and / or pet them.

According to today’s news report, I was right all along, but now I’m backed up by science.

I’ve always thought that cats were a total evolutionary anomaly in that they really are good for nothing (unlike dogs, horses and other domesticated animals), yet somehow have won our hearts and in ancient times been our gods.  This seems to be more evidence that there is something inherent in our care taking human ways that cats play to.

That being said, I still love my fat feline, Sammie. And since I’m a totally manipulated cat owner, here are some of my favorite pics.

Take me with you.

You sure you have to work?

Uh, help.

I’m here to assist you.

I like offensive puppets.  I think Team America World Police is one of the funniest movies that I’ve ever seen.  As an aside, the fact that the original cut of the movie got a NC-17 rating is simply awesome. 

Today, however, I ran across two more offensive puppets (but not anywhere nearly as offensive as Team America.  You can watch at work). 

1. Walt Mosspuppet rips on Michael Arrington’s love of the new Google OS.  Great stuff.

2. Sarah Palin puppet discussion why she’s resigned as governor.  Love it. 

On the news that Bing is overtaking Yahoo! for position in search rankings, I’ve decided to spend the next month going "bing."  Call me a bandwagon fool. 

I’m only going to use Bing for search and see what happens.  I’ll let y’all know… 

I’m sure that my partner Ryan McIntyre won’t do the same as he’s pissed that the number one "Ryan McIntyre" on Bing is an insurance salesman, not him.  (FYI, he’s number 2 on Google as well, but to a different Ryan McIntyre). 

In the meantime, enjoy some Monty Python:

Off my recent post about where VCs find their portfolio companies, one reader (Valto Loikkanen) sent me the following:

"Knowing you like to compare startup/vc relationship/meeting to ‘dating’ etc. I just had to try and put these divisions to those terms, but did not want to put this public in your post

Dating Deal Flow:

1. Personal Networks; -> Friend and family;

2. Repeat Entrepreneurs; -> ex girlfriends;

3. Other VCs; – > roommates;

4. Email / Blog / Cold Calls; -> Email / Blog / Social Networks / Pick up lines;

5. Professional Service Providers; and – > Bartenders; and

6. Venture Shows / Trade Shows. – > Bars, clubs etc.

So how would you put the % "

First off, I do compare the VC / Entrepreneur dance to dating.  If you aren’t excited up front and really looking forward to the next interaction, that should be a sign to skip the opportunity right there.

As for how my dating "deal flow" stacks up versus my VC deal flow, let’s just say that "Repeat Entrepreneurs" are irrelevant and that Trade Shows are no longer 0%.  I plead the 5th on the rest of the question. 

I’ve received a few emails recently asking me where VCs find their investment companies.  I can’t speak for all firms, but if I look over the past 10 years of my career and add in results from other VCs that I’m close to, I will conclude the following:

VCs get their deal flow from the following sources (in no particular order):

1. Personal Networks;

2. Repeat Entrepreneurs;

3. Other VCs;

4. Email / Blog / Cold Calls;

5. Professional Service Providers; and

6. Venture Shows / Trade Shows.

It’s hard to put a particular percentage on each category.  In general, I think that good VCs with healthy deal flow invest in 1% or less in the aggregate of their deal flow.  I know that sounds like a small number, but the great majority of companies presented to us to invest in are easy rejects.

As for division between sources, I think a healthy VC might see the following division:

1. Personal Networks; 30-50%

2. Repeat Entrepreneurs; 30-50%

3. Other VCs; 10-20%

4. Email / Blog / Cold Calls; 5-10%

5. Professional Service Providers; 5-10% and

6. Venture Shows / Trade Shows. 0%

So what does this mean?  The low hanging fruit is VC / Trade shows.  If you are presenting at a show, you’ve already struck out the normal routes of VC investment and you are pitching to "everyone."  I think that most VCs who have healthy and proprietary deal flow don’t go / care about these types of events.

Clearly personal networks / repeat entrepreneurs (what I call "proprietary deal flow") are the major sources of companies.  This is why investors should chose one VC over another. 

As for the cold call / email / blog category – yes it does happen.  In our newest fund, we have one deal already in this category and we are working on another that fits this bill. A VC with a strong web presence can attract good deals.

The professional service providers can also be a source of deals.  While I’ve spent plenty of time making fun of lawyers and accountants, occasionally they have good clients to fund. 

So bottom line – you have a much greater chance of getting a deal done if you are already in a VC’s network or if you get a warm intro from someone in our network.  Your other avenues are much less likely, but not impossible.