From Dan Primack this morning, these factoids:

"More than half of venture capitalists (52.9%) believe that their industry is “broken,” according to a survey conducted by executive search firm Polachi Inc. Moreover, nearly 60% said that they are less confident in the VC industry today than they were six months ago."

You can read the full report here.

Having spent plenty of time bashing lawyers and the accounting profession, it’s only fair that I call out my own industry today.  Y’all are really confused.

The Industry Isn’t Broken

VC isn’t broken.  In fact, I would argue that there’s never been a more exciting time to be involved in venture capital.  I’m highly optimistic.  (Mind you that I’m a software / IT guy, so I’ll leave the cleantech and biotech opinions to others). 

What’s not to like these days? 

1. It’s never been cheaper to start a business with the advent of cloud computing resources, open source development environments and specifically today, low rents and the ease of hiring quality people;

2. Because of past successes, this country (as well as the rest of the world) is producing a lot of entrepreneurs.  Today, more than ever, our college graduates are creating their own opportunities, not just working for the incumbents.  These folks are scratching their own itches and creating companies of value (see everything from Facebook to Techstars);

3. We have more experienced entrepreneurs ever to fund.  Given the maturity of the industry, it’s much easier to find folks who’ve "been there, done that."  And with point 2, above, there has never been better deal flow and cool stuff to invest in;

4. VC is not a slave to credit markets or other systemic risks like other areas of finance.  While the popular press has dramatized that investors are defaulting on the VC commitments, I’ve spoken to many folks who think this reporting greatly overstates the issue;

5.  While the report says that nearly 70% of VCs are worried about their investor syndicate, this is something that should be in control of the individual VCs.  I understand that some VCs syndicate for extra brainpower around the board table (a good thing), but many VCs syndicate simply to validate their investment thinking.  This lemming approach isn’t good in its own right, therefore I don’t have a lot of sympathy for folks worried about it now;

6. We learned (or should have learned) a tremendous amount during the Internet bust period (2001-2004).  The VC industry essentially got a "free pass" and instead of just being thankful, we should have learned a lot of valuable lessons about building Internet and software businesses.  In short, we know how the next generation of companies should create value; and

7. Broadband, mobile connectivity and attention from advertisers exists today in ways that we envisioned 10 years ago, but finally is reality.

 The Industry Shouldn’t Analyze Itself in the Short Run

The report says that the past 6 months has deteriorated VC confidence.  What?  With all due respect to John Maynard Keynes (who said "in the long run we are all dead"), who gives a shit about 6months?  We are talking about an asset class in which each fund has a 10-12 year life span.  We are also talking about an industry that has proved its best returns are usually made on companies invested into during a down economic cycle.  Why shouldn’t we be excited about today?  If history does repeat itself, we could look back one day as this time period being one of the best for investment.

In short, if you are making decisions in VC based on trends and noise in a 6 month time period, you are in the wrong industry.  We need to be patient.  You can’t rush success and you can’t bet on "what might be" 6 months from now. 

Exit Markets

Alright, all you haters out there are probably saying "none of this matters Mendelson unless we have an exit market."  And yes, clearly, we need to have a vibrant exit market for us to achieve our financial return goals.

That being said, I speak to bankers on regular basis who think we are on the cusp of a wave of M&A.  They are on the front lines and one of them (who is normally the most pessimistic dude that I know) is practically giddy.

On the IPO front, it’s bleak, but we’ve seen a few companies get out and folks like the NVCA are putting their weight behind plans to restore liquidity in the industry. 

Unless you believe the entire U.S. economy is game over permanently, these markets will come back and they will allow us to meet our financial objectives.

So, there you have it – why more than half of VCs (surveyed) are confused/deluded/misinformed, if indeed, this presentation accurately represents their views that the industry is broken.  It’s not.  Invest in good companies with great entrepreneurs, stay patient, make our your investment decisions and the rest will take care of itself.  And if they still don’t like it, I’m happy to have less of them around – it certainly won’t hurt my business. 

*** I’ve had several comments about the VC industry being broken given that it got too big and raised too much money. I don’t think this is a fact of a broken industry, rather this is a situation that will be corrected. The industry will settle into a steady state. This is a bad fact, but doesn’t mean the industry is broken. ***

Last night word spread that FlyClear ceased operations.  I’m seriously bummed.  Clear was one of those small bright spots in my hectic travel schedule.

I don’t have any inside information from the company, but something doesn’t add up.  They claim that they had signed up over 260,000 travelers.  Since joining cost between $100 and $200 bucks that would put lifetime revenues in the $26m to $52m range.

So how does the company burn through all of that cash plus it’s venture funding when from a consumer standpoint their service amounted to a few folks at every airport helping you through security?

My only guess is that airports must have been extracting large sums of cash, or the TSA was bleeding them dry.  Or perhaps Clear was developing next generation screening technology and that created a massive cash burn.

Whatever the case may be, I’m really going to miss the service, as several flights would have been missed without them. 

Brad has a GREAT post today on preparing for a first meeting with him.  All I can say is "what he said."  If you are meeting with me / trying to get my attention, these are better tips than I could have come up with on my own.  After all, plagiarism is the most sincere way of flattery.  

The title isn’t as provocative as Michael Arrington’s "Jew Haters Welcome at Facebook, As Long As They Aren’t Lactating" but it doesn’t mean that it doesn’t piss me off.  (Read the article, it’s well done).

I’ve always hated double standards, but more than that hate purposely ignorant people, apparently some who are working at Facebook and allowing hate speech.

Shame on you, Facebook.  There is no logical excuse why you need to cater to the hatemonger clientele. 

You are a lawyer.  You represent a hot start up that is venture backed.  One day the CEO comes to you – out of the blue – and says “you’re fired.”  (Cue Donald Trump frown).

You’ve stuck it out through the lean times with the company even when they weren’t funded and now you are on the outside looking in.  What gives?  It must be the evil venture capitalist (me).  He must want one of “his guys” at the legal helm.

Not so fast.  Even ex-lawyers like me who believe we can evaluate the best of legal talent don’t take this action lightly.  And I never like to have a heavy hand with my CEOs.  It’s their company to run and I work for them.

I, however, have seen some unbelievably stupid things that company counsel lawyers have pulled that has ruined their credibility with the VC (me) and thus found their way out the door, either by my strong urging, or by agreement of the entire company.

So, today is the list of “quick ways to get fired.”  Before you laugh or go “duh” EACH of these are real events that I’ve dealt with personally.  And all of these have happened in the last 3 or 4 years, so these are not “back in the day” events.  Furthermore, there is no monopoly on stupidity. The mess ups below happened at small, medium and large firms all over the country.

I’ve divided them into three categories:  1. Screw ups that get you immediately fired.  2. Actions that get you fired sooner than later.  3.  Things that probably get you fired over time. Without further delay (and in order of egregiousness)…

Screw ups that get you fired immediately

1.  Screw around with redlines.  You and my counsel are negotiating the Series A financing.  As normal, there are several revisions of the documents.  My counsel notices that paragraphs are reverting back to previously rejected ones, but are NOT showing up as redlines.  They assume it is a mistake, but when the junior associate is asked “what’s up” he says that you told him to make the changes.  You’re fired (and you probably get reported to the state bar and the head of your law firm).

2.  Endorse the chief competitor.  We find a quote made by you on the primary competitor’s website extolling the wonders of the competitor.  First, it would have been nice to know that you represented our competitor.  Secondly, you providing the quote shows amazingly poor judgment.  You should never pick sides.  (And in hindsight, we kicked the other company’s butt, so you chose wrong).  You’re fired.

3. You provide little leadership and wait for someone else to come up with the answer.  The company is in a sticky situation.  It’s unique and it’s dire. There are many phone calls with lots of other partners and associates on the phone billing away.  You and your team provide absolutely no thought leadership on how to “fix” the problem.  Instead, the CEO, another executive or I come up with the solution, but you (probably in order to save face) tell us that we are idiots and that it will never work.  We have to hire another law firm to vet our idea and they say “great idea – it works.”  Company survives.  You don’t.  You’re fired.

4. You provide advice to the CEO adverse to the company’s interest.  Things aren’t going well at the company.  The board is mulling around thinking about replacing the CEO.  In contentious discussions to remove the CEO, it becomes apparent that you and the CEO have been having side discussions.  Specifically you have advised him regarding his leverage that he has against the company in order to either keep his job or extort a larger settlement agreement.  Guess what?  You’re Fired. (But not by the CEO, the board makes it a “two-fer” and you and the CEO are out).

Actions that get you fired sooner than later

1. Be lax in your advice and get it wrong.  Yeah, we all make mistakes, but being lazy and riffing off the cuff about legal issues and then being proved wrong is something that can doom your relationship.  If you come to the board meetings, sit back and offer opinions that later turn out wrong, you will have a short stay as company counsel.  Specifically what annoys me the most is when lawyers riff about subject areas that they aren’t experts (e.g. corporate guy guessing about litigation issues) and don’t bother to check their own advice with their own firm after the board meeting.  Let’s call this: “You’re fired over time”

2. Being inefficient, getting lost in the woods, billing for small stuff that doesn’t matter.  You are the epitome of Why Startup Lawyers Frustrate Me.  Despite how stupid it is to negotiate crap like registration rights, you waste your time, my time, my counsel’s time and your client’s bank account doing so.  Again, you’re fired (over time).

3. Bait and switch.  You bring in the client, but you never show for board meetings, phone calls, etc. and send junior folks in your stead.  Or worse yet, the company hires you to run an important litigation matter and you don’t show for court, rather your less skilled colleague does.  You’re fired (over time).

4. Not knowing who your client is.  You have trouble figuring out that you represent the company, not the CEO.  Nothing as heinous as the above example, but you seem to have a “what’s good for the CEO filter” on all of our advice.  You’re fired (over time).

5. Letting summer associates run wild on the account.  You let a dozen different summer associates bill out (at first year rates, no less) to the client during a 3 month stint.  You’re fired (over time).

Things that probably get you fired over time

1. Being annoying.  There are a ton of them, but some that come to immediate mind are talking too much at board meetings and trying to prove how smart you are, spending the entire board meeting on your blackberry or constantly complaining about my counsel choice during a financing.  (Don’t you understand that you are just insulting me and that I probably use these guys all the time?).  Additionally, you make grand promises of VC intros or other introductions into your “vast network” and you never come through.  You probably don’t get fired for any of these, but if the CEO decides that they want to make a switch, I’m certainly not going to stick up for you.

All of these actions seem to suggest that you don’t realize that as soon as the financing is done that you are representing me as a board member, or that you don’t understand that I have many different investments and have a long memory.

Then again, if these aren’t obvious to you, then you are probably one of the folks who committed one (or more) of these acts.  To the rest of you, hopefully you got a sick chuckle out of these real-life events.

I really don’t like to travel.  This is unfortunate due to the requirements of my profession, but as I like to say "if the job was perfect, they wouldn’t have to pay me." 

Being a frequent flyer in the friendly skies of United usually means an elevated blood pressure, missed meeting and the "unique" offering of customer service that only United has perfected.

However, all of my travel ills were reversed during my travels to San Francisco this week. For one single trip, the travel gods smiled on me.

1. Flight  235 DEN to SFO on the 23rd was 30 minutes early.  Gate was available.  Gate was the closest to the airport exit.

2. Ran into my partner Seth whom I hadn’t seen all week which was nice.

3. Went to Hertz and instead of the usual high-mileage piece of junk, I got this:

Now, how cool is that?  Crusin’ around the Bay with my mullet and my Mustang.

4. Then I get to the Hotel Vitale, my favorite hotel in San Francisco and I’m informed that I’m the last person checking in and they are 100% booked.  No problem, they say, they’ve upgraded me to the Penthouse Suite.  I had a balcony that sat "no more than 35 by order of he fire marshall" complete with heatlamps and great views.

5. Flight  482 SFO to DEN on the 24th was 35 minutes early.  Gate was available. 

Thank you travel gods.  For once it all worked out perfectly.  I expect my punishment will be quick and painful.

I saw a billboard last week for Who Can I Sue? and nearly puked.  Their stated mission is to:

"provide (i) an efficient portal for its users to browse and find relevant information about a variety of legal claims, (ii) an ability for users to determine if they are qualified for a particular claim, and then (iii) a mechanism for the user to review pertinent information about attorneys and law firms in the user’s geographic area and connect in real-time with the attorney of choice when the user is ready."

To me, this sounds like a bunch of plaintiffs lawyers encouraging the "only" growth industry current in the U.S. I know that there are many people out there with legitimate claims, but from where I sit, I see even more bogus ones.

Viva la lawsuits.  Sigh.

I wish that I could take credit for changing their minds, but no one called me.  That being said, I was happy to hear that the FASB is moving into a more flexible mind set regarding FAS 157.

Only time will what ultimately comes of this, but hopefully it won’t be as stupid as it has been to date.

Well, I’m back. I took some time off blogging about Law Firm 2.0, as I wanted to “take in” all the layoffs and such – a blog on that is coming soon. But without further delay, here are my thoughts on outsourcing as a critical change coming soon to a law firm near you.

As a venture capitalist, I’ve seen the advantages of outsourcing. One of our largest success stories, Stratify, controlled costs and provided 24/7 support through a well-managed outsourcing strategy. Most professions are outsourcing at least part of their work, why not lawyers?

I can see two potential ways outsourcing can work in the legal setting .

The first way is simply outsourcing outside of metropolitan areas that are expensive to live in. Why make all of your lawyers commute to New York City or the Silicon Valley to work in an office where they never see their clients? In fact, many of these lawyers would prefer to live outside the city centers to avoid the higher costs of living. I would posit that after some type of apprenticeship program at the law firm, well-trained associates could move anywhere in the country and work effectively. I know for a fact that most law firms have some lawyers working from home in locations where offices aren’t located and no one knows the difference. Maybe now it’s time to do that wide scale. Law offices could start to look like consulting offices in that most of their now smaller and cheaper office space is for visiting professionals. Salaries could be adjusted on cost of living analysis. The law firm could increase margins and pass some of the savings onto their clients. As an example of one firm thinking outside the box, Orrick has outsourced its entire back office to West Virginia. Why not some of the lawyers? Wouldn’t many Silicon Valley lawyer prefer to practice from home in San Francisco or Marin? Who says all the good lawyer want to live in expensive places to live? Who says that good lawyers don’t exists in secondary or tertiary markets today?

The second way would be to actually outsource work to other countries. This clearly works better for some practice areas than others, but if it works for processes as complicated as software development, it will work for the legal process. I think patent drafting, licensing / contract drafting, diligence and some other non-client facing tasks can easily be outsourced. I’m sure most lawyers reading this will brush it off saying it’s too hard, but nearly every other industry has figured out outsourcing. One reader of this blog suggested the following:

Although the model did not work well in the airline industry, I think that smart law firms should develop “budget line” practices for routine work.  These could be staffed with Indian attorneys, part-time stay at home attorneys and maybe attorneys in smaller markets with lower costs of living – in all cases, non partnership track attorneys.   They would be supervised by the higher paid, partnership track attorneys with a roughly 10%/90% split of time between the supervising attorney and these lower cost attorneys.  These groups would not handle things like general client counseling,  high stakes litigations or large scale M&A.  The managing attorney would manage the allocation of work between the value line and the main line of the firm.  Given the lower cost of labor and the increased possibility of leverage, assuming a reasonable mark-up, this proposal still might maintain per-partner profits

I actually think he’s got a good point.

Something to consider. As always, fire away…

Especially those whose paychecks come from our tax dollars?  The ones who are spending our tax dollars?

Ugh.

It wasn’t enough that our Treasury Secretary and our potential Health and Human Services head didn’t pay their taxes, but today, Obama’s candidate for the newly created “Chief Performance Office” clearly didn’t perform and pay her taxes.

Yeah, I know some of these are issues are small dollar and some are foot faults, but as a guy who takes his tax paying seriously, it certainly irks me that those imposing these taxes on us can’t / won’t get is right.

I wonder what percentage of politicians are in tax compliance?  I fear many less that I would have hoped.

*** Just broke after I posted this that Daschle is out as well.  Another one undone by non-payment of taxes.  Embarassing.  ***