Go Mobile | RSS | SLS Website Spring  2014, Issue #90
Stanford Lawyer
Image from the article  Law and Policy Lab Image from the article  Paul Brest Image from the article  Student Entrepreneurs Image from the article  Criminal Defense Clinic Image from the article  A River Runs Through It: Buzz Thompson’s Stint as a Special Master Image from the article  The Future of Print and Digital News Image from the article  Jonathan Greenberger: Behind This Week Image from the article  Lawyers in the Military
Feature

JDs As VCs

Lawyers at the Forefront of Innovation

Photography by TrujilloPaumier

Jackson Browne, Bonnie Raitt, the Doobie Brothers, and Crosby, Stills & Nash headlined at Shoreline Amphitheater on a gorgeous summer day last August—a benefit for Musicians United for Safe Energy and humanitarian aid for Japan. It was a redux of a 1979 Madison Square Garden concert where the same musicians rocked and railed against nuclear power.

Photo of Alan Salzman and Graham Nash.

Alan Salzman, JD '78, speaking on stage at Shoreline Amphitheater with Graham Nash. (Photo by Araya Diaz)

But when it was time for the event’s main sponsor to say a few words, the greybeard troubadours and anti-nuke activists stepped aside and made room for Silicon Valley venture capitalist Alan E. Salzman, JD ’78, co-founder and CEO of VantagePoint Capital Partners. Salzman reminded the cheering crowd that a whole passel of clean technology companies was ready to take up the mantle of cleaner, more efficient, and just plain better energy in the form of new products and technology such as LED lighting innovations from companies GLO and Switch and job-producing solar farms in the Mojave Desert built by BrightSource Energy, Inc. It’s a message he spreads tirelessly from Davos to Washington to private investor meetings, as one of clean tech’s most committed and heavily 
invested venture backers, with 30-plus energy innovation start-ups in his portfolio and well over $4 billion of capital.

The concert stage wasn’t exactly a typical site for a venture capital moment. “Backstage there was a guy talking about ‘sticking it to the man,’ ” says Salzman with a grin. “I said, ‘Hey wait a minute, I think I’m the man.’ ” But what is typical for
 Salzman, and other Stanford JDs who have made their names and fortunes in venture capital, is that they often find themselves in situations they never could have imagined in law school and that involve ideas aimed at nothing short of changing the world. “There are moments, like the first time I saw a prototype of a Tesla, when you go, ‘There it is. Something completely new,’ ” says Salzman.

It turns out legal training in logic, problem solving, and the power of 
articulate persuasion helps in working with entrepreneurs trying to bring those ideas to life. Location, too, matters, with Silicon Valley the epicenter of this field. That so many Stanford Law graduates are attracted to VC work doesn’t surprise 
Larry Kramer, Richard E. Lang 
Professor of Law and Dean.

“Early-stage investment work offers an opportunity to be creative and change the world, while using the technical and analytic skills picked up in law school,” says Kramer. “And being in Silicon Valley exposes our students to this world up close and personal while they are here, developing their career aspirations.”

But it’s an area best-suited for those “with an above-average appetite for risk,” says Peter Thiel, JD ’92 (BA ’89, BS ’89), who heads both the hedge fund Clarium Capital and venture capital’s Founders Fund. Lately, VCs also need patience.

The last decade has been rough for the venture capital industry. Venture enjoyed eye-popping returns for much of the 1990s, culminating in stratospheric success during the dot-com IPO frenzy in 1999. But when the dot-coms fell to earth, venture came with it. Since then, the climate for IPOs has been chillier, with intermittent rays of sun.

In 2011 there was a mini-Renaissance as the consumer Internet category—including Pandora, Zillow, HomeAway, LinkedIn, and others—sparked a number of IPOs. However, as this article goes to press, Facebook—where Thiel was the first private investor, which won him his own atypical moment seeing himself portrayed by an actor in The Social Network—and Zynga are waiting in the wings.

But returns across the VC industry have been depressed, and recent volatility in financial markets has not brightened that picture. That has led some funds to invest at later stages than was once typical in the venture business, while others, such as Kewco LLC, launched by John Quigley, JD/MBA ’79, actively consider deals across a broad spectrum of asset classes and stages. Nevertheless, both veteran VCs and those relatively new to the game remain optimistic—certain that venture is integral to America’s future, as well as a rewarding and exciting career.

“For the better part of 30 years there was a bull market for financial leverage. I think that’s over and not coming back quickly,” says Thiel. “So you have to ask, what are the 
unlevered ways to do things? Technology is very much the opposite of leveraged buyouts and flipping condos. This time the paradigm is very different. It feels like Silicon Valley is where the future will be determined and it’s a very exciting time to be in this area. It’s going to be like the ’90s except it will not be a blip; it will be a decade-long expansion, more central to what’s really going on. There’s a tremendous need for new innovation and 
innovation will become more important in the next decade. It’s a good time to be an entrepreneur and a venture 
capitalist.”

Optimism and embracing risk seem to be universal traits among venture capitalists. But based on the journeys of several Stanford JDs, there is no tried-and-true career path. Salzman originally trained and worked as an international lawyer, also studying law in Toronto, London, and Brussels. Thiel’s path included a federal clerkship, seven months at New York’s Sullivan & Cromwell LLP, a stint as a derivatives trader, and an entrepreneurial grand slam as the founder of PayPal, which he sold to eBay in 2002 for $1.5 billion. Redpoint Ventures’ founder and managing director Brad Jones, JD/MBA ’81, who picked up a bachelor’s degree in chemistry and a master’s in physics at Harvard before he completed his JD/MBA, took a less common path of going directly into 
venture capital at Brentwood Venture Capital after graduating from Stanford Law. Dr. Linda Grais, JD ’93, added a law degree to her MD from Yale, worked for Wilson Sonsini Goodrich & Rosati, and then actually founded a life science company that later went public before she became a venture capitalist in 2005.

Bradford Jeffries, JD ’55 (BA ’53), played a pivotal role in the early days of venture capital itself. To fulfill an ROTC obligation, Jeffries served a three-year stint in the Judge Advocate General’s Corps after law school but says he quickly realized he wasn’t destined for courtroom drama: “I tried cases and realized I didn’t like making excuses for people and I also didn’t like prosecuting them either.” After his 
discharge in 1958, he became attorney number thirteen at what is now Cooley LLP in Palo Alto. The firm would be instrumental in taking public such venture-backed icons as Raychem, National Semiconductor, Genentech, and Amgen. After a long career as an attorney to VCs, Jeffries retired from Cooley in 1984 and began a new career as a VC when he and a partner launched Sigma Partners.

Photo of James Gaither

James Gaither, JD '64, at the law school

James C. Gaither, JD ’64, managing director of Sutter Hill Ventures, is another prominent example of a path to venture capital some Stanford JDs have taken, gaining considerable experience, first as an attorney to venture firms, then later sliding to the other side of the table. Gaither began a more traditional public service legal career in impressive style, clerking for U.S. Supreme Court Chief Justice Earl Warren. He then served a stint working in health and education policy in the Johnson White House. Gaither, who was a great friend of Warren Christopher, JD ’49, explains, “When Nixon came in, we left. Chris joined O’Melveny & Myers and worked for big companies, and I joined Cooley and worked for emerging companies.” Gaither stayed at Cooley until 2000, when he moved over to Sutter Hill.

“I was never a specialist,” he says. “I help people solve problems and analyze complex situations. I think the analytical training is better in law school than that in any other discipline.” Sutter Hill includes among its portfolio such well-known companies as nVidia and Shutterfly. Adds Jeffries who, like Gaither, says he enjoyed both sides of the table, “Working as a venture capital lawyer there is a vicarious satisfaction of working with new companies that grow and prosper.” As a VC, Jeffries says he relies on the experience he has developed working with and coaching CEOs. “There is no product or service so great that bad management can’t screw it up.”

Photo of Miriam Rivera

Miriam Rivera, JD/MBA '95 (BA '86, MA '89)

Former Google Deputy General Counsel Miriam 
Rivera, JD/MBA ’95 (BA ’86, MA ’89), is newer to the VC game, but her journey was no less intriguing. She was in a doctoral program in Latin American studies at Stanford and obtained her master’s, but the prospect of spending eight years to get a PhD for an uncertain job market did not jibe with her need to financially support her mother. So, she applied to law school and quickly decided to do the joint MBA program. “There was such an entrepreneurial vibe in the air and a sense that we could change the world through 
entrepreneurship.”

Rivera worked at the law firm of 
Brobeck, Phleger & Harrison and then held several positions in Silicon Valley, including co-founding a start-up with her husband, before going to Ariba as its in-house counsel. She then joined Google in 2001 when the company had just $85 million in revenues. “I felt like it had been pre-destined. My parents only had an eighth-grade education. I was the kid who used to hang around the library and pester the reference librarians to help me figure out everything—not just homework but schools I might want to go to and getting fee waivers and public transportation routes. At Google I felt like I was helping the whole world to access information.”

In 2006, Rivera left Google and in 2008 launched Ulu Ventures with her husband, Clint Korver (MS ’90, PhD ’94), a software entrepreneur. The company is 
investing in Internet-enabled consumer and business services including digital media, mobile, and online advertising companies. And she’s also helping blaze what has been a fairly narrow trail. “Venture is not exactly the most diverse place I’ve ever been. Only five to ten percent of VCs are 
women, and only about two percent are minorities. I’m still kind of flabbergasted that an industry that is so involved with technology companies is not more 
reflective of a lot of those entrepreneurs. They are so global and diverse and speak so many languages. The profession does not reflect that at all—it still looks like the cast of Apollo 13.” Rivera predicts, however, that that balance is going to change. “I think there is going to be a big outflow of people in the next decade.” She is part of the Palo Alto-based Kauffman Fellows Program that seeks to nurture entrepreneurs and venture capitalists.

Grais, who recently left InterWest Partners for a new project, observes that women are more highly represented in the life science sector of venture capital than in information technology, but she says that the field can be a difficult one to enter for both sexes. “One issue is that when venture capital firms recruit, what they are looking for is ad hoc and idiosyncratic. It’s practically the opposite of a firm like McKinsey, where they recruit dozens a year and have a clear-cut and standardized process.”

Quigley has 
taught classes in venture capital to law and finance students at Stanford, Princeton, Columbia, and NYU. He notes that venture capital was a term once reserved for early-stage start-ups, but today there is more overlap across a broader spectrum of investments including leveraged buyouts, recapitalizations, industry consolidations, and mezzanine (later-stage) financings. Quigley joined the pioneering LBO firm Adler & Shaykin in the early 1980s, and in the mid-1990s he founded Nassau Capital to manage the Princeton University endowment’s alternative investments. Over the course of his career he has done deals as diverse as a billion-dollar “going private” buyout of an underground coal mining equipment company in the 1980s and a recent $750,000 seed investment in an Israeli cloud computing start-up.

To succeed in venture and private equity, Quigley tells his students they must become well versed in both finance and the law. He urges students to also broaden their repertoires to include an important set of tools whose names all begin with the letter “p”: pricing, “plumbing,” power, and psychology. “Psychology is incredibly important. With entrepreneurs and CEOs you are going to be dealing with complex, talented, driven, sometimes deeply twisted individuals with egos and blind spots. Develop awareness in this realm. Over time, as experience grows, strive to develop another ‘p’—a philosophy that ties it all together.”

Thiel says his legal training made him particularly sensitive to the importance of company structure, which can be “like a constitutional law metaphor” as it can’t easily change even though the focus and business of the company might. He says his Founders Fund team is very focused on keeping entrepreneur founders integral. “Too many investors think that the founders are dispensable, but in an awful lot of cases when you lose the founder, you lose the ability to make big decisions. An outside guy can’t come in and say, ‘We’re going to do everything differently.’ Somehow the founders do have the ability to make that happen. We assume that they can’t be replaced, and so you have to think hard about how that will structurally work. If they’ll be here for the next decade, we have to figure out how to align them with investors.

“At Facebook, we set this up so it was hard for subsequent investors to transition out the founder. The default view in 2004 was that obviously we should bring someone in to replace [founder Mark] Zuckerberg. Our view was that the company needed to innovate and it would be very hard to do that without him. If we had replaced Zuckerberg, brought some professional CEO in to replace him, the most likely thing he would have done was sell the company for a billion dollars in ’06. It would have made a lot of financial sense, but it would have been a very bad idea.”

Redpoint Ventures was one of the big VC winners of 2011, with significant IPO exits for HomeAway, Qihoo, and Responsys, as well as having several companies acquired. Jones says that changing conditions are part of the game, but he does have a caution for those considering VC as a career: “One of the hardest psychological things about venture capital is that your feedback loop is very long. You won’t have a report card every quarter. After three years in the business I had no idea if I was any good at it. For people who are very impatient for that kind of feedback, this is probably not the right place. Making these companies work takes time.” Nonetheless, “I’d absolutely recommend the career. You meet the most incredible, smart and innovative people, which is fun whether or not you make an investment.”

Despite the divergent backgrounds and the wide array of technologies and innovations these JDs running VCs have shepherded to market—all say that not only their legal training but Stanford’s proximity to Silicon Valley were enormous assets.

“Stanford just has an entrepreneurial culture and that gave me the confidence to start a company. That was not something I could have imagined ten years earlier,” says Grais.

That sentiment pleases Kramer. “We think of ourselves as training people for all the careers that can benefit from legal training. These [venture capitalists] are interesting, creative people and we encourage that. Problem spotting is an important skill, but classic legal training did too much of it and created risk aversion.” Today, says Kramer, “We don’t teach them law, so much as teach them not to be afraid of the law.” SL

Categories: , , ,

Comments RSS 2.0

Leave a response / post your comment

Leave a Reply