Making Connections, Managing Risk in Startup Deals: A Visit to Boston Law Firm Mintz Levin
If you’ve seen from the inside how technology startups get created and funded, you know that law firms are involved at every step in the process. But to outside observers, it might be surprising just how central a role the attorneys can play—not just by helping entrepreneurs with incorporation papers and the other legal rigmarole of starting a business, but by connecting them with the right venture capital firms and making sure investments are structured fairly for both the founders and the venture funds. And while nobody likes to pay legal fees, a good outside attorney can literally save a company when things start to go south: an experienced firm can help straighten out founder-investor conflicts or line up emergency financing, for example.
Given that Boston was the birthplace of venture financing, it’s probably not surprising that it’s also home to a large group of law firms specializing in company creation and financing. Indeed, you can’t go far in the startup world without bumping into names like Cooley Godward Kronish, Edwards Angels Palmer & Dodge, Foley Hoag, Foley and Lardner, Goodwin Procter, Mintz Levin, Proskauer Rose, Ropes & Gray, Nutter, and Wilmer Hale (see tables on this page and page 4). Several of these firms are home to former partners from Testa Hurwitz, the Boston firm that more or less invented the modern corporate technology practice; Testa launched and represented scores of Boston-area startups, venture capital funds, and technology giants between its founding in 1973 and its dissolution in 2005.
|Selected Boston-Area Law Firms
Serving Technology Startups
Bowditch and Dewey
Burns & Levinson
Choate Hall & Stewart
Cooley Godward Kronish
Edwards Angell Palmer & Dodge
Fish and Richardson
Foley and Lardner
Goulston & Storrs
Hamilton, Brook, Smith & Reynolds
McCarter & English
Ropes & Gray
Last week I sat down with Tom Burton and Lewis Geffen, two attorneys from the corporate practice at Mintz Levin‘s Boston office, to hear more about how law firms fit into the local innovation ecosystem. Founded here in 1933 by Herman Mintz, Benjamin Levin, and Haskell Cohn—three Harvard Law School graduates turned away by Boston’s white-shoe firms because they were Jewish—Mintz Levin now has nearly 500 attorneys, making it Massachusetts’ fourth-largest law firm. It has long represented Biogen Idec—one of the first big biotechnology success stories—and was intimately involved in AOL’s acquisition of Time Warner in 2000. The firm also has major operations in San Diego. And under Burton’s direction, it has developed a booming practice representing clients in the energy and clean technology sectors on both coasts. Many of the firm’ clients turn up regularly in these pages, including EnerNOC, Greatpoint Energy, FloDesign Wind Turbine, General Catalyst, and Rockport Capital.
At Mintz Levin’s office near San Diego’s Carmel Valley, partner Carl Kukkonen tells Bruce, “We represent a lot of small, pre-funded venture-backed companies as well as multi-nationals.” Kukkonen, who was among the lawyers to open the San Diego office in 2006, adds, “I like to tell people I was working with solar, fuel cell, and battery companies before I ever heard of the term ‘cleantech.'”
From Mintz Levin’s 43rd-floor conference room at One Financial Center in Boston, one can peer down on the Federal Reserve building, the Custom House Tower, and every downtown landmark. It’s a far cry from the brick warehouse district of Kendall Square where we scribes at Xconomy spend most of our time—but the visit was an interesting reminder, for me, of all the high-level networking, negotiation, advice, and other homework that goes into getting a technology startup off the ground.
In my interview with Burton and Geffen, portions of which are transcribed below, we covered everything from the state of the cleantech industry and the challenges of working for both startups and venture funds to non-compete agreements and that old chestnut, the difference between East Coast and West Coast investing cultures.
Xconomy: Explain to me how Mintz Levin wound up developing an energy and cleantech practice.
Tom Burton: One thing that’s interesting about Mintz is the entrepreneurial nature of the firm itself, and the way it moves into markets that other firms haven’t placed a bet on. I was pitched that back when I joined the firm in 1996, and I chose Mintz over a lot of safer bets like the Skadden Arpses of the world.
Lewis Geffen: At Sherman and Sterling in New York, where I spent my first five years, no one ever thinks “I have to produce business somehow.” At Ropes & Gray or Wilmer Hale, new associates are simply given work. Whereas we teach “business development 101″ to our associates. It’s part of our fabric here.
TB: For me, all I knew was that I wanted to build something that hadn’t been built before. I wasn’t sure what it was going to be, but I trusted in the firm’s pitch, and took advantage of some luck. When I was a second-year associate, I brought in my first client, who ran up a nice bill and promptly went under. But one of our partners said, “Don’t worry about it—keep trying,” which was really unusual. So we started doing work for the Massachusetts Technology Collaborative, whose main statutory mandate was to build a cleantech cluster. That gave me an in to that world. I worked with Lewis on the first couple of deals with Rockport Capital, a small venture fund that had less than $100 million under management, meaning it was not that exciting to other firms but we were willing to do it.
Then around 2004, I was asked to join the program committee of the MIT Enterprise Forum. As the new guy, I was told “You’ve got November—what do you want to do?” I looked at my four clients and said “How about energy technology?” No one called it cleantech yet. I had randomly met Dan Reicher, the head of the energy efficiency and renewable energy portfolio at the Department of Energy in the Clinton Administration, so I got him to be the keynote. I’d just met Tim Healy at EnerNOC and had started doing his work, which we had pulled out of Testa Hurwitz. Over 200 people showed up, and that’s when I said, “You know, there’s something here. This is a real movement, and it’s going to be big.”
So I plowed 100 percent of my time into growing a practice. I made partner about a year after that, and [Mintz member] Peter Demuth said “Go do it, create a practice group, start a newsletter.” That was four and a half years ago, and today the newsletter has 3,000 people subscribed. A lot of people are taking advantage of the ground we’ve built, but in Boston there is not much competition. Foley Hoag and Wilmer Hale [have cleantech practices] but no one does nearly the transactional activity we do, or has the same size of clients. We have 12 to 15 venture fund clients and 30 to 40 companies, as well as some utility work and project finance. The word on the street is that there are 70 finalists for the new ARPA-E [Advanced Research Projects Agency, Energy] R&D solicitations, and we are counsel for seven of those companies. That’s a 10 percent hit rate, which is pretty unusual.
LG: On a macro level, getting into a new space like cleantech broadly is a combination of making a bet and being in the right place at the right time. We will certainly ask the question of whether this something more than a flash in the pan, and whether it is something that is going to provide the type of legal work that we excel in giving.
TB: It’s got to be high-end to support our rates [laughs]. So early on, we ask if this is something where venture is going to play. In cleantech, the firm was supportive because of our success in other industries like biotech, which informed the firm as to how you could make it happen. The firm didn’t hand me a bucket of money—I had to lead the charge. But if we hadn’t had success in the biotech space, or if we hadn’t had an AOL, somebody from management would probably have put the brakes on.
X: Are there potential downsides for a bet like this? Is it fair to say you’ll earn fees whether the industry succeeds or not?
TB: If the whole cleantech thing turns out to be a bust, the firm will have made some money and been profitable, but not nearly as much as if there is a long-term great result. There have been successful companies already. EnerNOC, for example—their guidance is to expect nearly a couple of hundred million in revenue this year, and cash-flow positive. They are going to become a profitable business, and they just raised another $100 million. That is a client that has been a success for us and has become one of the standard-bearers in the industry space. There is a staggering pipeline of other companies that are waiting to be sold or taken public, so the next three years are going to be really big years.
X: How has the economic downturn affected Mintz?
LG: Most of us have lived through the booms and busts of venture capital and emerging growth. We were the third-fastest-growing law firm in 1997-99, riding that dot com boom, and we contracted and crashed along with the industry. It’s not as dramatic this time around—we were not as leveraged in late 2008 as we were in 2001—but we all recognize the cycle that we’re going through now. Nobody is saying “Let’s give up on venture capital.” The question is, how do we hunker down, just like the VCs themselves, and how do we weather this. We are thinking about how we need to evolve, from an economic point of view. The changes in what’s driving emerging growth companies and the venture model are also going to affect how we make money and how we have to staff things. So we have a lot of internal evaluation going on.
X: Let’s talk for a bit about what kinds of actual work you do for startups and venture funds. But first off—you represent both companies seeking funding and funds seeking to invest, so how do you manage potential conflicts of interest?
TB: We will represent the funds X, Y, or Z, in a deal, and we will also represent companies A, B, or C, but we will never overlap a fund and a company together. Aside from that, folks just have to get comfortable with the fact that those relationships are there.
LG: It’s pretty well understood that there are only so many lawyers who understand venture financing—and you definitely want to work with somebody who is a venture lawyer when you are doing a venture financing, not with some litigator who is just trying his hand. And most of the industry understands that just because we work with, say, MVM Life Sciences or Oxford BioScience on some of their portfolio investments doesn’t mean that Mintz Levin couldn’t represent a company that has one of those funds as an investor. You would not be able to hire [an attorney in Boston] if you ruled out all the firms that have those relationships.
TB: The reality is that knowing how you think, and how this other person thinks, we can help you bridge potential conflicts that may arise over time. The investors trust us and will listen to us, which increases the likelihood that our client companies will become successful.
X: I think that among a lot of new entrepreneurs, there’s a certain skepticism toward lawyers, just as there is toward venture capital firms. The perception is that the law firms are going to earn fees whether or not the companies they work with are successful.
TB: Oftentimes, entrepreneurs’ bias against the venture community, or against the service providers as a necessary evil to take their technology to market, is a bias by those outside looking in. If you look at what happens in the venture industry, if a company is successful and has an exit, the same investors will often invest the next time in that same management team, because it eliminates the risk of working with someone new. What we can do in our role is mitigate that same risk, because of our familiarity with the industry and how it works.
X: On the other side, what kinds of work do you do for venture funds? Maybe you can take Rockport Capital, the cleantech investing fund, as an example.
TB: Most of the major funds around here have at least one partner dedicated to cleantech, but Rockport and Braemar Energy Ventures are the only two East Coast funds dedicated to cleantech. What these funds need is operating background and an understanding of the industries that the technology companies they build are going to be selling into. Rockport happens to have a very strong understanding of the utility industry and the coal industry—big, slow-moving industries where members of their partnership have or had board seats in major companies. We get involved as transaction counsel.
X: So you’re not involved in fund formation or fundraising from limited partners?
|Selected San Diego Law Firms
Serving Technology Startups
|Cooley Godward Kronish
Fish and Richardson
Foley and Lardner
Knobbe Martens Olson & Bear
Latham and Watkins
Luce Forward Hamilton & Scripps
Morrison & Foerster
Stradling Yocca Carlson & Rauth
Townsend & Townsend
Wilson Sonsini Goodrich & Rosati
TB: We do less of the fund formation work, although we have been asked to do introductions to LPs, and we represent significant LPs such as the endowments of MIT, Tufts, Johns Hopkins, and Dartmouth.
LG: There isn’t much fund formation these days anyway. The late 1990s, when everybody was jumping into dot-com, may have been the only era when somebody could form a venture fund and raise money without having a demonstrated track record of success. How could somebody start a new fund today? We have existing funds that can’t even raise their third, fourth, or fifth funds.
TB: I met yesterday with a group that wanted to invest in energy projects. They think they can go out and raise money, but the reality is that right now they need to attract people with experience making money in projects, and add to their team, before they raise the capital. So one of the roles I’ll play is I will introduce them to a couple of guys I know who had project funds previously, who aren’t doing that right now, and we’ll connect them and see what comes of it.
X: What kinds of things are you called on to do as transaction counsel, when you’re helping a fund set up an investment in a particular company?
TB: On the one hand, we negotiate the actual terms of the deals and the general roadmap. But we also do more creative things. In one deal that I’m thinking of, [the client] said “We’re putting money in, but we want an out, because this is particularly risky. Can you structure a deal that gives me a parachute if things turn south?” I sometimes say that we’re just glorified insurance salesmen. We just manage risk.
We are often called upon to come up with solutions to difficult problems. In the event that a business is going sideways or south, there are a myriad of issues around having a variety of shareholders who invested at different times on different terms with different interests. That makes for incredibly complicated dynamics, and Lewis will often be called upon to manage those dynamics—and without that, those companies will fail. I’m not overstating that.
LG: There have been times when companies were within weeks of running out of cash unless they could push through some type of financing. Not everybody is happy when it’s ultimately pushed through, but if there are only one or two people willing to step up and finance the company, you have to find a way of getting that done.
X: I have to ask you a question about non-compete clauses in employment agreements. I assume your work for companies includes structuring employment agreements. Based on your experience, where do you come down on the argument that non-competes stifle innovation in Massachusetts? Opponents say they discourage employees from starting new companies here in the state, or worse, that they send innovators off to California, where non-competes aren’t enforced.
LG: It’s important to note that not just any non-compete will withstand the law. It’s got to be reasonable. Restricting a CFO or even a CEO is not necessarily the same as restricting a CTO or a chief scientific officer. So we will often give advice on the appropriate scope of a non-compete agreement.
My own view on the larger question you asked—particularly if you examine the differences between West Coast and East Coast culture, and ask whether the quote-unquote “absence” of non-competes on the West Coast explains the difference in company creation—is that there are a lot of other reasons for the difference. If there is a greater prevalence of broad non-compete agreements on the East Coast, it’s a minor factor in explaining the differences in company creation. And you should know that it’s not that there’s an absence of non-competes in California; they’re just a lot narrower.
TB: I would argue that the culture here creates the non-competes. It’s not the other way around. Our culture here on the East Coast being perhaps a little bit more careful and reserved, which by definition stifles innovation a little bit.
X: Mintz Levin has a big office in San Diego. Say a company came to you and was trying to decide whether to locate on the East Coast, where they might be closer to the technology talent, or on the West Coast, where they might find more interested and risk-taking investors. How would you advise them?
LG: It’s more complicated than that. You’ve got physical assets, you’ve got people, there are all sorts of considerations to where to locate a company. And West Coast investors don’t necessarily limit themselves to investing on the West Coast. I think where to locate a company is a separate question from picking investors. What’s really important these days, especially if you are going to need serious capital over the long term, maybe $40 or $50 or $80 million, is to decide whether you would rather have a syndicate of three or four investors, with the right mix, who can provide all of that capital, versus finding maybe one West Coast investor and take the risk that with your series B or C round you will have to go out and find new money. Building the right syndicate for the right company is a very detailed art. Deals, right now, don’t get done unless the right syndicate is built.
X: My impression is that East Coast venture firms are more interested in syndicating than West Coast firms. Does that jibe with what you see?
TB: I’ve been involved in four or five deals where the West Coast investors were adamant about taking the whole deal, and the East Coast guys wanted to do a syndicate, and the entrepreneur had to make a decision. It is definitely peculiar. In cleantech, the market is not regional—you might have technology based in Massachusetts, but your market might be in California or Germany. If you have a syndicate that covers both the East Coast and the West Coast, you can draw on the relationships in those areas. West Coast firms tend to have more going on in Asia. You think about who is going to provide you with access to the right kinds of players.