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John, thanks for the shoutout, and yes, thanks for the push toward loyalty in this market! We happen to love startups at SpeakerBox, and the entrepreneurial spirit is what inspires us every day. One may not find that at bigger firms. For those startups that are still with us today, we work harder than ever.

The other dynamic we have seen is “we need to hire a Silicon Valley firm now” and that’s just as tough. Hire a firm in a different time zone, that is bigger (read: less mindshare for the client) and that may not understand the dynamics in this VC market? We tend to be gracious and see them on their way, but unless they hire one of the best firms out there, they might just be back. And we’re OK with that. We’re that loyal.

Maybe that means we’re like the first wife who opens her arm to the ex-husband who realizes the younger second-wife just didn’t make a grade!

I agree. Not only am I loyal to those companies who have helped me and many cases are helping me again, but I push people who are looking for xyz to the guys who helped me.

You find out who your friends are when you are down. Once you know those are who you need to stick with, no questions asked.

As an aside maybe it’s time for someone to start a new alex brown, instead of moaning they are gone. There is a market for that level someone needs to fill it.

Amen. 1) When it comes to still growing firms, this “loyalty” often equals “prudence” as well. One rarely has the best talent in large firms working on the account of your growing firms. 2) Seeking the alleged “prestige” of huge vendors inhibits the formation of a local mutually-reinforcing ecosystem of technology and service firms that really drives rapid-fire innovation and growth. And just an aside, but as a Baltimore boy, Alex Brown was a big hero of mine – took Apple public! My brother worked there for years and through DB’s acquisition.

Well said and right on. The reality is that igger and more established often translates to impersonal and more expensive. I appreciate that you excepted out Manatt and Cooley as law firms that understand the value of establishing and maintaining relationships with smaller companies (and smaller investment funds), with the bet that these companies will mature and remember. This approach has served us well here at Manatt, as we truly value our relationships with clients of whatever size. Thanks for getting it.

Some stream of consciousness reactions:

– I’m not so certain this is a change as much as an evolution. In 1981 (dating myself), I joined Flow General, then based in McLean and a NYSE multinational (since then, sold in pieces). The company had an investment banking relationship with LF Rothschild Unterberg Towbin (remember them?) — “relationship” being the critical word. When the CEO was considering any issue, he’d call the company’s partner at the firm, and they’d chat about the issue with no quid pro quo that there would be business arising from the chat, and with no fees of any kind. There was a very deep implicit understanding of what “relationship” meant, and thus our partner at LAFRUT knew without question that when there would be a deal or a transaction of some sort they would get the business. But 1981 or so was also the birth of what was then called the “go-go” years on The Street, and that meant that on an almost daily basis our CFO would get a call from other IB firms offering services at steep discounts. As a public company, at a certain point, driven by a responsibility to attend to shareholder value issues, it became increasingly difficult to pay a higher fee to the firm where we had our loyalty and relationship versus a lower fee to a firm that could do the same job for a materially lower fee but where we had no loyalty nor relationship. In other words, it became virtually STRUCTURALLY IMPOSSIBLE to reward loyalty. Follow the money. The evolution has progressed, and now includes, as per your example, D&O insurance.

– In many ways, I think that issues such as this are really symptomatic of a basic change in our economy, from a manufacturing economy to a knowledge economy. There are emerging some very fundamental changes, and more will emerge and they will emerge with even greater impact. For example, the concept “time is money” is a sacrosanct law of business. But that law only emerged when business moved indoors, with the growth of the manufacturing economy, the associated ebbing of the agrarian economy, and (coincidentally) the invention of reliable clocks. “Time is money” wasn’t a sacrosanct law of the agrarian economy — it wasn’t even relevant. In fact, time itself was perceived in a totally different way. Is it sensible to now think that the laws and approaches and models of the manufacturing economy will be relevant or inane in the Knowledge Economy? I vote for these laws becoming inane — and I also believe many other concepts we now consider absolute a priori truths of business will also prove to be outdated and inane. But the transition will not be easy (it hasn’t been easy to date), and as old standards are clung to, and new standards and “laws” emerge, there will be confusion and disruption and mistakes in judgment.

– Of course, we won’t be able to live with a new normal relevant to the Knowledge Economy until the Knowledge Economy actually becomes an “economy” and that can’t happen until the most important asset of that economy — knowledge itself — can be monetized by those who possess it: individual human beings with expertise. Got some gold in your pocket? You can monetize it. Own a set of coffee cups, want to monetize it? Go to eBay or a flea market or run a classified ad and monetize it. Own some knowledge, expertise, built over years and years and want to monetize it? Go become an employee of a business or create a business because you can only monetize knowledge in the context of an institution. Same with loyalty. Same with relationships. Non-fixed “soft” assets that are owned on an individual basis have little value within the context of an institutional world when the institutions have been built with outdated manufacturing economy standards (well, if not “outdated” yet, “becoming outdated”).

– The problem can be addressed in large part by a change in the balance sheet — of course, that would require the involvement and innovative thinking of accountants and the AICPA, who are about as far from innovative thinking as you can get. But just consider the balance sheet of today. An enterprise’s most important assets as far as the balance sheet is concerned are fixed assets (property plant and equipment). But consider tech companies, or service companies, which may be great businesses: they can have zero fixed assets but tons of human assets and legacy and institutional IP — where do those assets show up on the balance sheet? Consider the insurance company that has a great book of business based, at least in part, on the relationships they have built over the years: where does that loyalty show up as an asset? Certainly not on the balance sheet, unless the company bought another company, paid a premium over “hard book” and ended up with “goodwill” — Goodwill??? Oh no, not goodwill — goodwill is a negative, isn’t it? After all, goodwill is penalized as an asset with less than favorable amortization schedules. But if we do not recognize loyalty and relationships as an asset in the most important tool that measures the company’s assets (the balance sheet) it becomes pretty easy to dismiss it when a customer switches D&O carriers without looking back at the relationship they had with the firm they are leaving. The same way banks lend money on hard assets and dismiss human assets. Why should they do otherwise? Loyalty isn’t an asset. If it was an asset, wouldn’t it be recognized as an asset? If the balance sheet doesn’t recognize loyalty as an important asset, and if banks dismiss it and even dislike it, then why should the customer?

– The great irony is that the slow shift from “laws of business” relevant to the manufacturing economy and irrelevant to the knowledge economy are due largely to knowledge economy businesses themselves. I have first hand knowledge of this from my experience with Qorvis, the communications firm I co-founded (I sold my interests in Qorvis and am now dedicated to building a new business). We created a new model. We said: all our competitors are billing their clients on the basis of time, but time is a commodity and not relevant to what the client really wants. The client doesn’t care about how busy their PR firm is …. they care about the value the firm produces for them. So we killed time at Qorvis. We eliminated time sheets entirely — we didn’t modify them. We obliterated them. Prospective clients that wanted to be billed on an hourly basis were told we weren’t the firm for them. We billed exclusively on the basis of the value we provided. What was the result of this new model? We became consistently, year after year, one of the fastest growing firms of our kind in the nation, with one of the industry’s lowest employee and client turnover rates, and with (by far) the highest margin in the industry. I’ve explained the Qorvis model at all sorts of blogs that serve the communications industry, and the Qorvis approach has been featured in lots of articles. How many firms emulated our model? Basically none. Why not? Because they are clinging to the outdated “laws” of an old economy. The same is true of law firms and other firms that provide expertise and knowledge. The irony again: those with the most vested interest in adopting new laws for a new economy are clinging to the old laws for the old economy. Kind of strange if you ask me.

– We see the same thing in other venues, including VCs (ahum — let me clear my throat here for a moment). How do VC firms decide when a company is “ready” for them? By looking at all those attributes that characterize growth in the traditional terms of a manufacturing economy, or by those attributes that make sense for a knowledge economy?

– In the final analysis, this dilemma — together with the disruptive global economy and shifting political currents in which we now live — has resulted in what, in my opinion, must be the greatest opportunity for Creative Destruction in modern history. People in business are deceiving themselves as to how innovative they are. PR and other communications firms boast of how “advanced” they are by using new tools, such as Twitter — but Twitter et al are nothing more than new tools. Use Twitter and you are using a new tool, not operating with a new business model. We need to identify what is truly part of emerging new models — the fundamental changes — the entirely new models — the scary ideas — the new ways of doing things that even when shown to be amazingly successful are shunned. But those new models WILL be created and WILL succeed. Bravo!!! And the old models and old ways of doing things will be destroyed. Oh no!!!

– And, as these fundamental changes occur, old attributes, including loyalty and relationships and even more fundamental things such as the way we see time and space, will also change, and new attributes will exist in a new context.

In the meantime … have fun.

John,

Not only do you have a good point, but I think it’s part of a broader set of pressures on the start up ecosystem. Including Sarbox we have seen years of increasing the regulatory and tax burdens in ways that favor bigger businesses and reduce the incentives to investors and entrepreneurs and employees. This has resulted in a self-reinforcing downward trend counter to the self-reinforcing upward trends we had in the 80s and 90s.

My main hope is that society cycles through this trend much faster now.

PS: excellent illustrations btw…

I think that as companies grow, a defensive “CYA” mentality sometimes begins to take hold. The old adage that no one ever got fired for hiring IBM is something I’ve all too often observed. A thriving ecosystem of agile and hard-working small service-providers is a necessity to economic growth, especially in the start-up realm. Depriving these companies of well-deserved rewards for taking risk will eventaully backfire.