The Entrepreneurial Dilemma
I attended the Fifth Annual Law and Entrepreneurship Retreat this week, and it was an interesting, inter-disciplinary discussion of all things entrepreneurial. The papers and debate focused not only on how the law shapes entrepreneurial conduct, but also how entrepreneurial conduct and innovation might reshape the law. (As I noted in a previous post, whether lawyers have the entrepreneurial spirit that often facilitates innovation is a separate question that some debate.)
As part of the retreat, I had the pleasure of reading and discussing a paper entitled Entrepreneurial Litigation and Venture Capital Finance, by Doug Cumming, Bruce Haslem and April Knill. The paper focuses on a dilemma that I suspect many entrepreneurs face in the startup stage: whether to devote limited resources to litigation that might be necessary to protect and preserve key rights for the company (see, e.g., here). These rights might concern intellectual property, contracts, employees or other aspects of the entrepreneur’s nascent business. Initiating litigation may consume all of the company’s resources and make it less attractive to a venture capitalist; but losing the subject rights may force the company out of business. Entrepreneurial Litigation presents empirical data to guide entrepreneurs and venture capitalists in this decision-making process. (For an interesting study of the other side of this equation and how litigation impacts venture capitalist reputation, see here.)
Although not the focus of Entrepreneurial Litigation, the paper also highlights the significant risk and uncertainty inherent in any entrepreneurial venture. Having a big idea is not enough; a lot can happen as an entrepreneur tries to get that idea to market. Litigation is just one of these risks. But certainly instituting litigation to protect a patent or challenge the application of an existing law to the entrepreneur’s product or business model is not cheap. Litigation can easily consume a large portion of an entrepreneur’s working capital. (For some perspectives on entrepreneurs and litigation, see here and here.) And if the firm folds, a competitor may get the benefit of its innovation and proactive legal strategy—adding insult to injury.
I am not sure that most people appreciate this inherent risk. Certainly entrepreneurs and venture capitalists living this risk cycle do, but I suspect others associate entrepreneurship with Bill Gates, Mark Zuckerberg, Biz Stone and other success stories. It looks so easy in the movies. Given the importance of entrepreneurs and startups to our economy, I am excited that academics and industry organizations are devoting resources to the role that law plays in entrepreneurial ventures.