Many venture capital firms have in-house positions now, when did the trend start?
In the mid-2000s, '05, '06, '07, we started to see a change. It used to be that just the huge VC's with well over a billion dollars under management had in-house attorneys.
I came to Sofinnova in February of 2007 and around that time I think DCM, Doll Capital Management, Venrock and Blue Run Ventures all hired GCs or internal counsel that year. We have seen other funds starting to bring on internal counsel as well: Kleiner Perkins just brought somebody on. Founders Fund brought somebody on. It is interesting because we started a quarterly group luncheon of what we call VC-GCs and the list continues to grow.
Why do you think more VC firms are creating a GC role?
Well, because I think venture capital is a legal intensive industry. A lot of what I do is reduce the amount of legal paper work the investment professionals go through. All the documents go through me and I filter it down to one or two questions and I save them a lot of time so they can focus a lot more on the business side rather than the legal side.
But our own experience here has been one of those things where 'we didn't know if we could keep you busy when you were brought on, and now we don't now how we ever got along without you.'
Now that you're settled in, what has your role become?
You know a lot of times venture investors hire counsel initially when they invest in a company and then a year or so later the company is raising money again. Then, a new lead investor comes in with their own counsel, and the existing investors are not necessarily protected by anybody. And so, if there is misalignment of interest, if there's a down round, washout or refinancing, you may not know what is being done to your rights in that deal if you are not a lawyer.
Often the existing VC investors don't go out and hire separate counsel in follow-on rounds; sometimes they do it, but a lot of times they don't. So you could have a situation where the new investor completely changes around the rights the existing investors thought they had without them really knowing. I think in that scenario, internal counsel adds a lot of value because you keep an eye on what is going on in every company and every deal that is being done. I also draft term sheets, review board and stockholder consents, IPO and merger documents and anything else that require legal review.
Having transferred from a law firm and seeing the market from the other side, what do you look for when assembling your outside legal team?
There are a number of different ways. Most VC firms – even prior to bringing in internal counsel – have established relationships with different law firms and they tend to continue to hire them. And a lot of times we are co-investors with other funds on deals. They will invite us into a deal where there is a term sheet with a lawyer already attached. So we don't really have a say in that.
But if I am going to determine who I am working with, it is probably people I had experiences with in the past, unless there is someone that a specific investment partner here that has a really good relationship with a specific lawyer and insists on using that person.
There are a lot of good firms I use here in the Valley. I tend to work a lot of with partners at my old firm (O'Melveny & Myers) because I know that they are competent and I know their work styles. But when it is very specific work, whether it's IP related or regulatory, then you look for individuals that have the experience in those fields.
Some have reported a downturn in biotech investments. What are the most important industry trends that you are seeing right now?
I think we have been finding that there are a lot of deals where we don't see as much competition as we used to. For each opportunity where two or three VCs were looking at it, now it's one or two. Does that give us an advantage? To some extent, yes, we are not fighting for deals as much.
But it is still important for any VC to syndicate a given deal. You want to have other co-investors willing to put money in both because they validate your thesis and they add more deep pockets. Biotech as you know takes a lot of money before it reaches a liquidity point.
We have been fortunate in that our last fund has been successful. So we see some return investors in our latest fund and we are happy that we still have the support to be able to raise the new fund.
What kinds of companies does Sofinnova Ventures currently target?
We are currently on our eighth fund: Sofinnova Venture Partners VIII, LP. This latest fund is our first fund that is only going to be focused solely on life sciences. Our previous funds were split between biotech and information technologies. We focus on drug development and have done some early stage investments. But we are now focusing on –more developed drugs – ones in stage II or III clinical trials – and looking for interesting products, compounds and teams that have developed drugs in the past.
Do you have any advice to another VC firm that wishes to create a GC office?
I recommend they sit down and talk to the person and see if they have an idea of what he or she can do when they get here. Also, talk to other VC buddies and say, 'hey how has your life changed since you brought on your GC and what were they able to do?' You get a little bit of input from those other firms as to what kind of value it is that a GC brings. Because it is not often intuitive or easy to think about how much work a general counsel can take off the desk of an investment professional.
||Hooman Shahlavi, |