TL;DR: No. Most top startup lawyers have clients in many different cities, and lawyers specializing in emerging tech/startup work usually exist only in denser tech ecosystems.
- Bad Advisors: The Problem with Localism
- Navigating Referrals in a Connected Startup Ecosystem
- How to avoid “Captive” company counsel
- Gatekeepers v. Ecosystems
If you live in a small town/city and need specialized (not general practice) medical care, you most likely need to look to a larger city to find that specialist. Any kind of service provider needs some minimal user base to build a viable practice. Larger cities have a higher concentration of patients, and therefore a higher number of patients needing a particular specialty, which is what enables the development of specialist doctors.
This is why cardiologists generally don’t live in farm towns, at least not during their working-week. They live in larger cities. And neonatal cardiologists (even more narrowly specialized) generally only live in the very largest cities.
For localized work, specialization requires density.
It’s also why true startup lawyers – corporate lawyers with a focused practice in emerging tech and venture-backed companies – generally exist only in cities with dense startup ecosystems. Even with modern technology that enables casting a wider net for your market reach, most professionals rely significantly on a local client base. If that local base doesn’t exist, they move to where one does, or they change their practice to mirror the local market. Houston has among the world’s top energy lawyers, but slim pickings for technology/vc lawyers. Boston has among the world’s top healthcare lawyers, but slim pickings for entertainment lawyers (many of which are in Los Angeles). No surprises there.
So to the extent work has a heavily local component (like healthcare, and to a lesser extent law), if you need a particular kind of specialized service, you are smart to look for it in places that have a real density of users for that service. Otherwise you will end up with sub-par local providers, which can be fine if the stakes are low, but disastrous when they aren’t.
Startup Law really isn’t that localized.
It may come as a surprise to people that, for a significant portion of my client base, I have never met the principals in person; and likely never will. Videoconferencing and teleconferencing serve just fine (in addition to other tech tools). That is actually the case for a lot of lawyers with specialized practices. Most serious startup/VC lawyers that I know have clients in multiple cities. In my case, about half of my clients are in Austin (reflecting the need for a dense local base to usually build a specialized practice), and the other half are not (confirming that being local isn’t required at all).
Unlike a cardiologist, I don’t need to physically examine anyone to do my job, which makes geography largely irrelevant. Because most startups generally incorporate in Delaware for reasons discussed throughout the startup blogosphere, local state law only plays a small role in most of the legal issues that startups deal with (usually local employment law); and for those issues, most startup lawyers collaborate with local employment lawyers. The corporate issues generally require very little understanding of local state law. I have quite a few clients with lawyers in half a dozen different cities, none of which are the city where the company is headquartered. And it works just fine.
Local v. foreign specialized lawyers is about tradeoffs.
Silicon valley startups generally use silicon valley startup lawyers. Austin startups generally use Austin startup lawyers. And in both cases, that works very well, because there isn’t a cost to ‘going local.’ Being able to meet up once in a while in person with your service providers is obviously nice from a relationship standpoint. There is some benefit also to your investors being familiar with company counsel, although that issue is usually exaggerated for reasons that I’ll discuss more below.
So if you can get the nice benefits of having someone local, without many costs, going local is usually a good idea as long as you can find someone local who isn’t captive to local investor interests. And sometimes you can’t. See: “How to avoid ‘captive’ company counsel.” There is no set of advisors for whom a founder/management team should care more about their independence than company counsel.
For startups with less dense ecosystems than Silicon Valley or Austin, however, the cost to going local can be much higher. The reason VC or Angel-backed startups in Houston, San Antonio, Dallas, Atlanta, Miami, New Orleans, Phoenix, Salt Lake City, and similar cities often hire startup lawyers who aren’t local is that they (correctly) recognize that their local ecosystems (generally) lack the density to support truly specialized, scalable startup/vc law practices. Each of those cities has fantastic, very smart corporate lawyers who likely have some tech clients, but startup/vc law as a specialization is more difficult to find; although there are exceptions.
My non-Austin clients have concluded that it’s much better, and more efficient, to collaborate with lawyers in another city who’ve seen the exact issues they’re dealing with dozens of times, and have the resources to address them quickly, relative to someone who may be easier to grab beers with, but hasn’t. CEOs need to exercise their own judgment for their own circumstances.
Be careful with localism, and localist incentives.
“Localism” is a term I’ve started using to refer to the underlying, subtle incentives among ecosystem players that push them to promote local people onto a set of founders, sometimes at a very high cost to the company; discussed in the links at the beginning of this post. Ask any experienced founder, and they’ll tell you about so-called “advisors” or “mentors” in their local ecosystem who, while fun to hang around as cheerleaders, unfortunately don’t actually deliver much real advice or mentorship. There are some great advisors/mentors out there, but also a lot of duds.
There are, broadly speaking, 2 ways (not mutually exclusive) in which service providers (venture capitalists, lawyers, accelerators, accountants, advisors, etc.) build their portfolios: (A) being actually good (objectively) at their service, and (B) building relationships and generating referrals from those relationships. Most A-level people rely on both (because the first leads to the second). But there are a whole lot of people in every business community who are quite mediocre at the actual service they provide, but are exceptional at marketing themselves and building referrals.
If my social capital is the primary way that I get business, then I’m heavily incentivized to refer to people within my personal, local social circle, even if I know that objectively, someone better may be in another city. That “someone better in the other city” has his own social circles she/he belongs to that aren’t as inter-connected (or dependent) on my own. Sending business to them makes it less likely that it’ll come back to me, unless there’s some objective reason for the referral.
I don’t mean to sound cynical about all of this. It is how a lot of good people build their practices and reputations in the business world, and it’s just fine. But it’s important for every team to to be aware of these dynamics in their raw form, and correct for them as needed. And believe me I get the “farmers market” “go local” “support the LOCAL ecosystem” aspects of promoting local people as well, even if I believe the more self-interested dynamics underly a lot of that; at least as it relates to service providers.
There’s something noble in that, but not when it comes at the expense of founders – who are putting their entire livelihoods on the line – getting shit service. As I’ve written before, nothing builds an ecosystem more than great companies, and great companies aren’t built with mediocre people.
Watch out for ‘captive’ local counsel.
Circling back quickly to the issue of captive company counsel is a good place to close this out. For many people in startup ecosystems, localism is driven either by self-interested referral circles, or ecosystem cheerleading. But for the most influential players in a particular ecosystem, it can also be driven by control. Thankfully the transparency of the web is weakening this dynamic, but institutional investors with heavy local influence often like to see local VC lawyers in the company counsel seat because they’ve strategically built leverage over those lawyers by (i) being their clients, and/or (ii) pushing portfolio companies to use them as company counsel. In other words, they’re company counsel, but… not really.
Obviously you’ll never hear anything like this stated flat out in a board meeting. What you’ll more often hear is discussion about credentials, or familiarity, or experience, etc. etc. “I’m not sure those lawyers have the right experience” or “We’re more comfortable with these guys.” As I’ve written before, sometimes those concerns have merit. Take them seriously, and if you need to upgrade, go through the process yourself to find independent counsel. But also understand how these comments are usually veiled attempts at pushing companies to engage lawyers who are captive to the investors’ interests, and unable to fully represent the company. If your lead investors seem peculiarly interested in your using a particular set of lawyers, that’s often a good indication of whom you should avoid.
Yes, there’s some reduction of “friction” when company counsel is familiar with the norms/expectations of investors across the table. But its value shouldn’t be overstated. Sometimes what investors call “friction” is just your lawyers doing their damn job. In this regard, we have seen companies from smaller ecosystems choose to engage foreign company counsel not because local VC specialists weren’t available, but because the founder team viewed them all as captive. Sometimes (but not always) they are right.
There’s no right answer for all companies on this issue. Specialization is important. Local can be helpful at times, but also costly in specific circumstances. But you’ll arrive at a much better decision by weighing all the variables, instead of just assuming that “going local” is a requirement. It most certainly is not.