Exploring the Upcoming Legal Implications of the Dot-Com Boom: Attorneys and Investors See Potential for Profits

Summary

The Dot-com boom of the late 1990s and early 2000s left a lasting impact on the technology sector, and the trend of investing in start-up tech companies is back. Dot-coms have speculators and lawyers alike seeing dollar signs as venture capital firms more frequently invest in start-ups and lawyers are hired to advise on deals.


Investment in these start-ups has shifted from angel investors to major venture capital firms. In the late 1990s, angel investors were the primary source of funding for tech start-ups. This has changed in recent years. Now venture capital firms are investing heavily in start-up companies, providing the capital they need to expand and get their products to the market.

Venture capital firms invest in companies with potential to reap huge returns, including technology start-ups that can provide a large return on a relatively small investment when the technology succeeds. They are also more willing than individual venture capital investors to invest in risky ventures that can potentially provide huge returns if they succeed.

The influx of venture capital funds into the sector has led to increased competition between investors and start-up companies. This competition forces start-ups to be creative in the way they market and distribute their products in order to attract potential investors.

The return of venture capital funds and the associated competition between start-ups has also led to an increase in the number of lawyers hired by venture capital firms and start-ups. Lawyers are hired to provide legal advice to both venture capital firms and start-ups wishing to secure investments. Lawyers are also needed to advise on the legal and financial aspects of the investments, such as due diligence and the negotiation of contracts.

At the same time, the legal and financial advice these lawyers provide to their clients has become increasingly important. It is the lawyer's job to ensure that the legal and financial aspects of the deal are in order, and that the venture capital funds are being invested in a way that maximises the return on investment for their client.

The return of venture capital funds and the associated legal and financial advice has led to increased speculation in the tech sector. Venture capital firms are increasingly investing in start-up companies, driving up the demand for legal and financial advice. And as the stakes become higher and the competition stiffens, lawyers are becoming more important than ever in helping venture capital firms and start-up companies make informed decisions. The result is a renewed interest in the tech sector and lawyers with strong expertise in the legal and financial aspects of venture capital deals are in high demand.
 

Dot-Com Speculation & the Role of Lawyers

The dot-com boom of the late 90s, though short-lived, had a major impact on the legal industry. With the new economy, came a big demand for legal advice and assistance in the dynamic internet world. As the dot-com scene flourished, lawyers got deeply involved in venture capital, startup funding, and complex business transactions.
 

Rise of the Internet & the Legal Industry

In the early days of the internet, much was still unknown and in flux. Speculators were drawn to this new and potentially lucrative frontier while lawyers were tasked with navigating the quickly-shifting legal landscape. The lack of regulatory standards presented new legal challenges that kept attorneys busy as they worked to define and protect the rights of companies and investors in the burgeoning market.
 

Lawyers & the Challenges of the Dot-Com Boom

The dot-com boom saw the rise of a variety of legal needs. Lawyers had to think outside the box and develop creative solutions to help their clients keep pace with the rapid changes technology was bringing to the marketplace. This included everything from initial capital financing, to intellectual property protection, to antitrust law compliance.
 

Technology Companies & the Need for Legal Services

It wasn't just investors who needed legal help during the dot-com boom. Technology companies themselves also had an urgent need for lawyers. To keep up with rapidly changing technology, industries had to adapt their operations quickly, requiring lawyers to help negotiate complex contracts and licensing agreements.
 

Dot-Com's Requirement for Business-Savvy Lawyers

The dot-com boom underscored the importance of lawyers with a business mindset. As businesses rushed to capitalize on the potential of the web, they needed lawyers who could not only interpret the law, but also provide effective strategies to help them achieve their goals. To keep up with the quickly-changing marketplace of the time, lawyers also had to stay on top of the latest trends and developments.
<
''The impact of the recession and the bursting of the dot-com bubble was very strong and is still being felt today,'' said E. Patrick Ellisen, a partner at Foley & Lardner in Silicon Valley. ''Things in general, though, are beginning to turn around in the Valley.''

With many Fortune 100 companies in this location known as one of the premiere high-tech corridors in the country, Silicon Valley stretches roughly from San Jose to just south of San Francisco in an area of California about 50 miles long and 10 miles wide.

''Companies were being created daily. Money was flowing quite freely. Companies were going public very quickly,'' said Patrick A. Pohlen, a partner in Latham & Watkins' Silicon Valley office and a member of the firm's corporate department.

Mr. Pohlen is one of the nation's leading attorneys in representing high-growth technology and life-science companies and the financial institutions—venture capitalists and investment banks—that finance them.

''In terms of servicing tech clients, it is different in that a lot of it is about measuring risk vs. reward,'' said Mr. Pohlen, whose firm's clients include Yahoo and Adobe.

''The bond that is created with a tech company is just so different because you're there, literally, from the beginning as he has an idea and tries to get funding, for example, and that bond is unique, I think.''

It seems like only yesterday that the dot-com bubble burst in Silicon Valley. Stock prices fell; so did investors' faces. But plucky e-commerce portals with ''virtual storefronts'' like Amazon.com eventually posted profits and are now hitting their strides.

''We had friends who lost their jobs during the recession,'' said Gary E. Weiss, a partner-in-charge of Orrick, Herrington & Sutcliffe's Silicon Valley office.

''You can measure the loss in any number of ways. For example, I commute from San Francisco, and it was an hour-and-20-minute commute. Now, it's a 45-minute commute.''

Mr. Weiss has represented clients such as Lucent Technologies and Handspring, Inc., in civil and criminal matters involving trade secrets, inevitable misappropriation, industrial espionage, and employee raiding.

''But we don't merely represent companies; we represent people who worked there too. And it was very difficult to watch, especially people you were close to, while we lost clients entirely,'' Mr. Weiss said.

A deluge of dot-coms with too much capital and ''get-rich-quick'' dreams led to the Gold Rush folly of some, whereas those with ''why-hasn't-someone-thought-of-this-before?'' business ideas are in the black, like NetFlix.com, an online DVD-rental service.

''Good companies make it through tough times, and then they start getting profitable again, regardless of whether you're an Internet company, an airline, or a car manufacturer,'' Mr. Pohlen said.

Since its Aug. 19 initial public offering, Google's stock has traded in the range of $95.96 to $201.60. And according to Department of Commerce figures, e-commerce accounted for 1.7 percent of all U.S. consumer sales in the second quarter of 2004.

After the dot-com boom of the late 1990s and bust of 2000, venture capital funding all but dried up. Now, however, investors are ready to put their toes back in Internet waters.

''Certainly venture-capital investing has been up in the last two years, compared to four years ago, when it seemed like anyone with a coherent business plan—and some even without—was getting funded,'' said Mr. Ellisen.

A member of Foley & Lardner's intellectual property department, Mr. Ellisen focuses his practice on intellectual property and general commercial litigation, as well as intellectual property protection, counseling, and exploitation.

''Something like 20 percent of employees in Santa Clara County were laid off during the recession,'' said Mr. Ellisen, who is experienced in copyright, trademark, and trade secret matters.

''There were businesses built on the overly optimistic premise on how integral the Internet would be in people's lives—that everybody would be shopping on the Internet whether they owned a PC or not.''

Still, according to JupiterResearch, a leading international research advisory organization specializing in business and technology market research, overall online ad spending is expected to nearly double by 2009 to $16.1 billion.

The sales of music, movies, games, and other digital products of e-commerce and new ways to use ''Wi-Fi,'' the popular term for wireless high-speed Internet access over short distances, are expected to drive the growth of the next phase of the Internet.

''Today, we all carry around little cell phones, and we have complete mobility and portability that's now been translated into e-mail. You have laptop computers connecting to networks wirelessly and communicating with people,'' Mr. Pohlen said.

Ten years ago, the consumer version of the web grew out of the academic and military Internet that had been around since 1969. Amazon.com was founded in 1994, eBay and Yahoo in 1995, followed by other companies hoping to jump on the Internet bandwagon.

In 2003, Amazon.com's market capitalization climbed 79 percent to $9.7 billion. Yahoo, over the same time period, has climbed 63 percent to reach a corporate value of $15 billion. And eBay is up 61 percent to reach $28.4 billion.

''Technology has totally changed the way business is done. But the lesson learned from the dot-com bust is that profitability still matters. You still have to show a way at the end of the day to make money,'' Mr. Ellisen said.

Law firms and investment banks are now hiring again, and ''traffic here is getting difficult again—commutes taking longer—and that's usually a sign that the economy is improving,'' Mr. Pohlen said with a chuckle.

''Things are now, I would describe them, 'strong and steady,' but I don't think it's because dot-coms refused to die. I think it's because people are continuing to execute and create great, new ideas.''