1 THE VALUE OF RELATIONSHIPS BETWEEN BUSINESS INCUBATORS (AND SIMILAR PROGRAMS) AND THE LEGAL COMMUNITY ESTHER BARRON I. INTRODUCTION The proliferation of shared work spaces, incubators and accelerator programs designed to assist new businesses has created unique and valuable opportunities for law schools, law clinics, law students, law firms and lawyers. These constituencies each have a great deal to gain by sharing their knowledge, expertise and time with such entrepreneurial programs. A prevalent criticism of current legal education is that the standard law school curriculum fails to provide meaningful experiential learning opportunities, particularly to students interested in transactional practice. Shared work spaces, incubators and accelerator programs afford law students, with the supervision and guidance through legal clinics, the opportunity to provide legal services to resident start-ups while gaining valuable training. Additionally, as lawyers face new pressures to rethink old business models in order to prosper in a changing legal market driven by client demand for alternative payment structures and heightened competition, innovative lawyers and law firms can unlock increasingly valuable business development opportunities by building relationships with shared work spaces, incubators and accelerators. In this article, I will briefly examine the history of incubators (and other similar organizations) and describe what I see as the current landscape. I will then evaluate opportunities available to the legal community and provide my opinions, shaped by many personal experiences, as to how the legal community can both serve and benefit from this rapidly growing entrepreneurial infrastructure, and in doing so, thrive in a challenging economic environment. The legal community should embrace opportunities presented by shared workspaces, incubators and accelerators, and lawyers, law students and law schools should move forward as partners, mentors, sponsors and counsel to such programs. II. HISTORY AND CURRENT LANDSCAPE Clinical Associate Professor of Law and the Director of the Entrepreneurship Law Center in the Bluhm Legal Clinic, Northwestern University School of Law.
2 2 THE OHIO STATE ENTREPRENEURIAL BUSINESS LAW JOURNAL As a threshold matter, I think it is important to address vocabulary, or at least my working definitions of certain concepts I will use throughout this article. A common goal of shared work spaces, incubators and accelerators is to increase the chance of success for startups. However, these terms are often used interchangeably and many people are not aware of the distinguishing traits of each. A shared work space for new business ventures is a place where entrepreneurs come together to work on their own separate ideas while sharing certain expenses, such as receptionist costs, utility bills and really strong coffee. Some shared work spaces also provide residents added resources such as workshops, office hours with industry experts and access to mentors. While the reduction in overhead costs certainly helps the bottom line, entrepreneurs in shared work spaces often derive greater benefit from the collaborative energy that permeates such environments. This concept is based, at least in part, on the idea that proximity to innovation breeds more innovation. The term incubator conjures up different things for different people, but often implies that there is some equity ownership of the business by the organization running the incubator. Incubators often provide physical space and generally provide even more resources. In some incubators, the management of the organization comes up with new business ideas and finds people to build and execute them. Incubators that come up with their own business ideas and then recruit people to build those businesses internally retain relatively high percentage ownership in those businesses. Others are more similar to an accelerator (which I will discuss next), where the incubator obtains an ownership stake in an existing new venture in exchange for access to experienced and successful entrepreneurs as well as other services and often a cash investment. According to the National Business Incubation Association, a leading incubator special interest group, a business incubator is defined as a support process that accelerates the successful development of start-up and fledgling companies by providing entrepreneurs with an array of targeted resources and services. 1 Incubators also generally do not have a strict limit on the amount of time a business will spend in a program. Accelerators are concentrated and intense programs that offer mentorship, office space and cash in exchange for equity. Accelerator programs are generally ninety days and end in what is referred to as a demo day where the entrepreneurs pitch to potential investors. Entrepreneurs are introduced to a network of alumni, investors and mentors committed to helping facilitate success. 1 What is Business Incubation, NBIA, (last visited Jan. 21, 2013).
3 2013 The Value of Relationships 3 Between Business Incubators (and similar programs) and the Legal Community The first business incubator is said to date back to 1956 in Batavia, New York, where a hardware store manager, Joseph Mancuso, converted an 850,000 square foot manufacturing complex into a new non-profit facility he called the Batavia Industrial Center. 2 The purpose was to provide tenants with cheap office space and access to other entrepreneurs and experts willing to share expertise and advice. 3 Although not broadly adopted at the time, the basic model envisioned by Mr. Mancuso remains essentially intact and has become widely embraced. Y Combinator is generally considered the first startup accelerator and began in 2005 and developed a new model of startup funding. 4 Y Combinator invests $14,000 to $20,000 plus an $80,000 note into a large number of startups each year (most recently fifty-two). 5 Since 2005, Y Combinator has funded over 550 startups, including Loopt and Dropbox. 6 TechStars entered the accelerator space about a year later and is considered by many to be the number one startup accelerator in the United States. 7 TechStars focuses on a smaller number of companies during the course of its program. The TechStars Network launched in 2011 and since that time twenty-three programs have committed to running under the TechStars model, while still being independently owned and operated. 8 TechStars invests $18,000 and there is an option for a $100,000 convertible debt note. 9 TechStars Chicago (formerly Excelerate Labs) is one such accelerator program that has enjoyed tremendous local and national success. It has been rated as one of the best accelerator programs nationally, and its first thirty companies have raised funds in excess of $30 million dollars and created more than 150 jobs. 10 Shared work spaces, incubators and accelerators have become incredibly popular and have grown exponentially. The number of incubators and shared work spaces in the United States today has greatly increased. 11 Many of these programs are specialized and target a particular market segment. For example, 1871, a nationally and internationally recognized shared workspace in Chicago, focuses on technology start-ups History of Business Incubation, NBIA, (last visited Jan. 21, 2013). 3 Id. 4 Y COMBINATOR, (last visited Jan ). 5 Id. 6 Id. 7 Frank Gruber, Top 15 US Startup Accelerators Ranked; Y Combinator and TechStars On Top, TECHCOCKTAIL (Aug. 22, 2012), 8 TECHSTARS, (last visited Jan. 21, 2013). 9 Id. 10 EXCELERATE LABS, (last visited Jan. 21, 2013). 11 Business Incubation FAQ, NBIA, (last visited Jan. 21, 2013). 12 See 1871, (last visited Jan. 21, 2013).
4 4 THE OHIO STATE ENTREPRENEURIAL BUSINESS LAW JOURNAL Panzanzee, another prominent Chicago-based organization, aims for a comprehensive model incorporating a shared work space, an incubator and an accelerator program and targets ventures with a social mission or impact. 13 The overall entrepreneurial scene in the United States and worldwide is exploding, and the legal community should be celebrating and jumping on board. III. THE SYMBIOTIC RELATIONSHIP BETWEEN LEGAL CLINICS AND BUSINESS INCUBATORS (AND SIMILAR PROGRAMS) As noted above, a prevalent criticism of current legal education is that law school curricula lack significant experiential learning opportunities, and that there is also a scarcity of opportunities for transaction focused law students. Law schools that have transactional legal clinics and are located in areas reasonably close to shared work spaces, business incubators or accelerators should take advantage of the abundance of opportunities such programs provide for law students. These organizations generally welcome academic involvement and, in fact, often seek to involve local schools and universities. Steven Collens, one of the founders of 1871 and Senior Vice President at the Pritzker Group, noted that [e]ngaging area universities was a priority as we were setting up 1871, and their participation has proven enormously valuable to our members. Two of the four universities with offices at 1871 have active entrepreneurial law clinics and their faculty and students regularly help entrepreneurs with basic legal questions. 14 Partnerships between law school legal clinics and local organizations abound in environmental law, child advocacy and other traditional, litigation-based clinical areas. The approach benefits clients who are able to receive legal assistance and students who are exposed to the complexities of how the law fits into the big picture of a client s needs. Although traditional social service organizations are not a great fit for transactional legal clinics, the same proven benefits of collaboration can be realized through partnerships with local business programs. The relationships between transactional law clinics and shared work spaces, incubators and accelerator programs provide the resident start-up ventures with much needed legal counsel early in their development while simultaneously providing law students with hands on, real word training a win/win. Many new entrepreneurs avoid meeting with attorneys at initial stages of business development for various reasons, including the cost of 13 PANZANZEE, (last visited Jan. 21, 2013). 14 from Steven Collens, co-founder of 1871 and Senior Vice President at the Pritzker Group, to Esther Barron, Director of the Entrepreneurship Law Center at Northwestern University School of Law and Clinical Professor (Aug. 25, 2013) (on file with author).
5 2013 The Value of Relationships 5 Between Business Incubators (and similar programs) and the Legal Community legal services, a lack of time and resources to engage legal representation, and sometimes just plain old procrastination. As a result, entrepreneurs may make legal errors that prove difficult and costly to resolve. While entrepreneurs realize significant value from legal assistance during a vulnerable phase, law students also benefit tremendously from the opportunity to provide legal services to early-stage companies. At Northwestern University School of Law s Entrepreneurship Law Center, among other projects, law students provide counsel on entity selection, conduct trademark searches, explore intellectual property issues, and draft releases, founders agreements, customer contracts and online policies. A typical project NU students provide for many clients is a trademark search and analysis. Students learn trademark law in the context of working with a real client, and advising the client on the strength of a proposed mark as well as potential conflicts that could result in a trademark infringement suit. The real world implications of their work highlight its significance. Students also gain experience performing some of the more difficult tasks required in real world legal practice. For example, a student may have to inform a client that his or her desired business name could pose a significant risk of litigation. The analytical and communication skills that students develop in this environment are essential to the successful practice of law. Thomas Morsch, founder and Emeritus Director of the Entrepreneurship Law Center (formerly the Small Business Opportunity Center) at Northwestern University School of Law, observed that: [f]rom the point of view of the entrepreneur or inventor, an awareness of what legal issues are likely to arise, and how much time, effort and money will be required to resolve them, is essential to developing the business plan. This kind of information can be acquired in a few hours and without cost if his or her incubator has an established relationship with a law school clinic or other legal service provider. 15 Given the substantial value proposition offered by many shared works spaces, incubators and accelerators, entrepreneurs seeking to gain admission to such programs face a rigorous selection process that weeds out the vast majority of applicants. For example, Y Combinator and TechStars have application acceptance rates between 1% and 3%. 16 The companies 15 from Thomas Morsch, founder and Emeritus Director of the Entrepreneurship Law Center (formerly the Small Business Opportunity Center) at Northwestern University School of Law, to Esther Barron, Director of the Entrepreneurship Law Center at Northwestern University School of Law and Clinical Professor (Aug. 20, 2013) (on file with author). 16 Ryan Lawler, With a 50% Increase in Applications, the Next Y Combinator Class Will Be 80 Strong, TECHCRUNCH (May 22, 2012), 80-strong/. See also TECHSTARS, (last visited Jan. 21, 2013).
6 6 THE OHIO STATE ENTREPRENEURIAL BUSINESS LAW JOURNAL that are ultimately admitted to such programs tend to be committed and serious about moving the business forward. Clinicians running transactional legal clinics are generally stretched and do not always have sufficient time and resources to adequately screen client requests. Partnering with these entrepreneurial organizations helps clinical faculty, who can depend on steady client flow and focus their attention on improving client outcomes. Moreover, the curated application process that ventures must navigate can effectively serve as a pre-screening process for potential clinic clients. Often times, faculty supervisors first meet new clients alongside their students at an initial client meeting. Generally, this process works out fine and transactional clinics work with good clients that provide substantive projects. However, when clients flake out or are not committed to their businesses, law students have a much less rewarding and robust experience than when they work with responsive clients who are eager to complete projects. In my experience at the Northwestern University School of Law Entrepreneurship Law Center, I have found that working with companies from reputable shared work spaces, incubators and accelerator programs dramatically increases the level of sophistication of our client work, significantly reduces the percentage of clients that do not follow through on projects or are not responsive to students, and ultimately enhances student passion for transactional work. I think this occurs not only as a result of the valuable pre-screening process that comes with the organization s own selection criteria, but also because of the array of other resources that shared work spaces, incubators and accelerators provide to entrepreneurs in an effort to increase their chances of success. Our Center has worked with clients from 1871, The Chicago Fashion Incubator, Panzanzee, TechStars Chicago, Impact Engine and various other programs, and each has been a valuable source of excellent clients and projects for our students. In addition to working on transactional matters for clients, law students can ease their transition into legal practice by further developing their soft skills. One such skill is being able to educate clients regarding the substantive areas of the law that are most relevant to their business or industry. The opportunity to conduct workshops for groups of entrepreneurs provides law students with a means to practice and refine this skill. Shared work spaces, incubators and accelerator programs are ripe grounds for finding interested audiences to target for such workshops, which provide entrepreneurs the chance to gain knowledge that may help them reduce risks and liability down the road. I have supervised many law students who have conducted workshops on topics such as trademark protection, entity selection and worker classification. Another important soft skill that all lawyers must master, often with little preparation from law school, is the ever-important ability to develop a
7 2013 The Value of Relationships 7 Between Business Incubators (and similar programs) and the Legal Community client base. Just as entrepreneurs benefit from the synergies created by their proximity to other entrepreneurs, law students can also benefit from the abundance of potential clients concentrated in one location. By having client meetings and conducting workshops at such focal points of entrepreneurial activity, law students are likely to meet and develop relationships with a number of entrepreneurs. This provides a great opportunity for law students to start practicing client development and retention. Increasingly, transactional law clinics are partnering with local business incubators, shared work spaces and accelerator programs. As noted, these relationships create a reliable client stream for the clinic, afford opportunities for law students and provide entrepreneurs with valuable legal services. This arrangement has meaningful implications for the attorneyclient relationship, clinical pedagogy and the business development of local entrepreneurs. IV. THE SYMBIOTIC RELATIONSHIP BETWEEN LAW FIRMS AND LAWYERS AND INCUBATORS The business of running a law firm has also drastically changed in the past several years. Clients often scrutinize bills and billing practices more carefully, creating the need for law firms to rethink their old ways of doing business. Law firms throughout the United States are exploring alternative forms of fee structures in order to retain current clients and attract new ones. 17 Shared work spaces, incubators and accelerators provide many opportunities for forward thinking lawyers and law firms. Law firms that service start-ups can claim success on a few different fronts. The most obvious is that representing start-ups at an early stage is a proven way to build a relationship with a client that may become highly profitable in the future. A law firm that is willing to defer fees or come up with a creative fee structure may be investing in future business. Of course, since the statistics show that most start-ups fail, this alone may not be sufficient to entice a law firm to work with start-up clients at discounted billing rates. Another measure of value provided to firms is the ability to provide valuable training to junior associates. Start-up companies may be more willing to work with junior associates at a significantly discounted rate than more mature clients. Of course, junior associates need to be supervised, but representing a start-up client, may provide an opportunity for an associate 17 Catherine Ho, Is Timing Running Out on the Billable Hour?, WASH. POST (Jan. 15, 2012),
8 8 THE OHIO STATE ENTREPRENEURIAL BUSINESS LAW JOURNAL to practice legal skills in addition to client development and retention skills, all of which are fundamentally important to the continued success of a firm. Assisting start-ups has also benefited several law firms from a branding perspective. Law firms that provide pro bono or discounted rates to startups may be seen as contributing to job creation and economic growth. This can be great for a firm s reputation and its morale. V. CONCLUSION Shared work spaces, incubators and accelerators generate entrepreneurial energy and excitement and they provide resources and space for entrepreneurs to successfully launch and build new ventures. There is an old saying that lawyers get more deals on the golf course than by sitting in an office. The idea behind the humorous adage is, of course, that lawyers find new work by meeting clients and building relationships. Shared work spaces, incubators and accelerators provide a wealth of opportunities for the legal community to build partnerships, develop client relationships, provide important legal services and hone skills. My own involvement in the Chicagoland entrepreneurial community with organizations such as the Chicago Fashion Incubator, Panzanzee, 1871, TechStars Chicago and others has had a great impact on the Northwestern University School of Law Entrepreneurship Law Center where I am the Director. Our clients are launching cutting edge new ventures, which provide exciting work for our students. We have a steady flow of client applications from trusted sources that provide responsive and diligent clients. Our students regularly conduct legal workshops for a variety of entrepreneurs and they have made meaningful contributions to these organizations by delivering excellent legal services at early stages of business development. When our students graduate, they leave law school with important transactional skills developed by working with real clients in an entrepreneurial setting and they also leave with the understanding of the potential important role they can play in the entrepreneurial community as lawyers.