Many Texas attorneys have been approached by a brand new startup that its management is convinced will be wildly successful and make all of its employees and investors fabulously rich. They are convinced — and hope to convince counsel — that their company will be “The Next Big Thing.”

Some of these ventures may pique counsel’s curiosity. However, the unfortunate reality is that the vast majority of these companies are either unfunded or insufficiently focused.

Savvy counsel — the type that the startup should want — may be concerned that she may end up with nothing more than a large, most likely uncollectible, account receivable even after having provided excellent representation. 

Counsel in this situation will undoubtedly consider whether this potential “Facebook” can attract the type and amount of money necessary to realize the founder’s grand vision.

Relying upon Willie Horton’s investment thesis to rob banks because that is “where the money is,” counsel in this situation will undoubtedly consider whether this potential “Facebook” can attract the type and amount of money necessary to realize the founder’s grand vision. Certainly, this analysis can help counsel assess how she can best represent this new company if she accepts the representation.

Even more importantly, counsel will probably consider the items outlined below in determining whether the potential engagement represents a wise investment of time and expertise.The start-up may be able to raise enough cash from “friends and family” to enable it to make some progress towards its goals, but a startup’s ability to access enough cash to fully execute on its vision via this funding approach is highly doubtful.

More frequently, these companies must seek capital from angel investors and/or venture capitalists. Recognizing this reality, most experienced lawyers understand –- and will factor prominently into their decision on whether to accept this new client –- the following same six key points on which both of these types of investors will focus in determining whether to invest their capital, time, and expertise in this new venture.

Identifiable market

• Is there a clearly defined market for the company’s product or service?
• Does the company’s product or service meet an identifiable need in that market?
• Does the company have a reasonable plan to meet the identified need in an efficient, revenue generating manner?
• What percentage of this market must the company get over what period of time in order to break even, gain traction, and/or become “successful”?

A focus on the customer

• What problems does this product or service solve?
• Does this product or service adequately address this need without introducing new problems to the process of adoption?
• How and why is it better than the alternatives?
• What other reasons compel the customers to buy this product or service?
• Why is it worth the price the company wants and/or needs to charge for it?
• How will the company market and sell its product or service?
• Has the product or service been well received to date?

Strong management

• Does the company’s leadership have the vision, expertise, and the ability to profitably develop, market, sell, and administer this product or service in order to exploit the market opportunity in a profitable way?
• Do they seem to have the ability to attract a first class team? Drive, passion, tenacity, flexibility, commitment, teamwork, coachability, and knowledgeability are the terms most frequently used in discussions about the type of management team that entices investment.

Business model

• Can management build a viable business model around this product or service?
• Is the company’s business model profitable, repeatable, and scalable with reasonably predictable results?
• Upon what assumptions are the business model and management’s projections based and are those assumptions defensible?
• Can the company be built in a capital efficient way?
• Can the product or service be produced and sold efficiently in order to generate revenue in an amount necessary to meet or exceed the investors’ required rate of return for investments with this risk profile?
• One basic rule of thumb is to not offer up “hockey stick” projections that have a fairly short and static wrap-up period before skyrocketing — generally inexplicably -– to the upper right corner of the revenue chart.

Sustainable competitive advantage

• Assuming that the company’s service or product is received well when initially offered, how will management compete with respect to price, features, and performance in the future?
• Are there significant barriers to entry that will inhibit others from encroaching upon its market? Has the company properly protected its key intellectual property?
• Who are the company’s potential competitors, and how do the company’s strengths and weaknesses match up against the strengths and weaknesses of those competitors?
• Can the company defeat any potential major competitors whose size, distribution, customer base, and credibility would give them an immediate competitive advantage if that company decided to compete, even with an inferior product or at unexpectedly attractive financial terms?

Assess the relevant risks

• What are the other principal risks to the business — such as regulatory or product liability risks — that management has identified?
• What steps can, have, and will management take to eliminate or at least minimize each risk?

Following this approach, a management team seeking counsel and funding should be able to address many of these shares issues in a thorough and thoughtful manner, and — hopefully — enlist the necessary talent and resources from both.

Carl Soderstrom is a founding partner of Green Park & Golf Ventures, an early stage venture capital investment company. He is a member of the board of directors of Caddis Partners, a Dallas-based healthcare real estate investment firm. Additionally, he serves on the Board of Dallas-based PerioSciences. Finally, and most recently, Soderstrom co-founded Dallas-based Health Wildcatters, a healthcare-focused accelerator. He served as chairman of the board and chief executive officer of PhyServe Physician Services, Inc. for 14 years before joining THPG, and has 23 years of experience in physician practice management.

Richard A. Blunk is managing director and general counsel of Thermopylae Ventures, LLC, a Dallas-based alternative investment firm with interests in alternative litigation finance, cyber security, database management, fire retardants, inbound foreign investment, intellectual property licensing, Internet addresses, mezzanine financing, sports medicine, and Texas real estate.

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