Three Ways VCs Can Leverage Technology to Optimize Legal Work
As VC firms continue to raise funds and deploy capital in increasingly competitive markets, the legal support provided by outside counsel is subject to growing pressure. According to an Apperio report on VC legal spending and sentiment, law firms experienced increased scrutiny over the past five years. With firms spending an average of $7.5m annually, well-leveraged technology empowers VCs to prepare for engagements with venture lawyers to do more impactful, value-driven work.
Venture investors hire outside counsel for term sheet drafting, deal negotiations, closing logistics, fund formation, fundraising, side letters, mergers, acquisitions, public offerings, secondary investments, and more. In addition to deal work, basic information requests - such as those from LPs or auditors - can take up substantial time and effort for VC firms and their lawyers. Fees add up quickly and, depending on the firm’s size, the intricacies and pace of legal work can be challenging to orchestrate in a streamlined manner.
Traditionally, many VCs strive to streamline this process manually, often using Excel and document repositories, but these systems are often clunky, error-prone, and difficult to maintain. If VCs have better methods for organizing and summarizing historical investment terms, all parties involved - VC firms, law firms, and other third parties - could avoid these manual and imprecise systems. They can also begin engagements “on the same page” concerning their understanding of and visibility into historical transactions. Automation and AI can be invaluable in this process of confirming and analyzing the historical data, freeing both VCs and their lawyers to do more impactful deal work.
Technology can unearth fresh insight
In our role within the private market ecosystem, Aumni has been fortunate to facilitate the capture and analysis of datasets for venture investors that want to evolve their processes at every level. We can attest to the benefits of a proactive, centralized approach to organizing legal information in a single application and dashboard and the time savings that this approach provides VC firms.
There are three areas where our VC customers have found technology to be particularly helpful in supporting legal counsel and making the most effective use of legal work: (1) firm- and fund-level portfolio trends, (2) private capital market data benchmarking, and (3) recordkeeping configured for ease of use.
Firm- and Fund-level Portfolio Trends — With each pending transaction, VCs and lawyers meet to address a similar set of questions: “What have we done in the past few deals? What’s normal at this stage? What are you seeing in your recent deals that we might need to know?” Effective technology and analytics platforms can provide a shared understanding of positions and investor rights, confirming data that forms the foundation for ideas and exploration.
The best deal lawyers relish working with sophisticated, knowledgeable VCs. It’s not the highest and best use of anyone’s time to spend a large portion of their engagement with clients reviewing previous contracts or getting VCs up to speed on basic legal concepts. Instead, imagine that the lawyer and the VC share a baseline understanding of the most important legal terms in past and present transactions. In that case, they can have more nuanced and thoughtful conversations about what matters most to the deal(s) at hand. Technologies like Aumni allow the VC to come to the table organized and prepared to collaborate and direct their lawyers toward higher-value tasks.
Recordkeeping — Using technology to organize deal documents and automate back-office workflows significantly improves the role of the VC with regard to recordkeeping. While law firms are often tasked with maintaining a client document repository, they may not have all the necessary information or systems to provide a comprehensive, dynamic, report-centric repository that captures the VC firm’s entire portfolio. Using a more sophisticated recordkeeping platform like Aumni can help expedite and improve access to legal data at the venture firm affords the VC’s front- and back-offices and lawyers real-time access to deal summaries and related details. Simplifying recordkeeping at the venture firm brings everyone “up to speed” on a platform of trusted information and custom reporting.
Private Capital Market Data Benchmarking — In a crowded landscape of highly competitive deals, VCs and law firms both work to seek an edge. VCs and law firms may have a general sense of “what’s market” based on their deal experience, but given the quickly-shifting nature of market terms, supplementing this general sense with a comprehensive, market-based dataset can help paint an even clearer picture. In some cases, a VC and its law firm may even want to explore the questions “What creative solutions lie outside the median or ‘market’ behavior, how far ‘off-market’ is the solution, and does this particular circumstance justify taking this ‘off-market’ approach?”
Aumni’s proprietary data analytics engine provides an anonymized, aggregated look at deal terms over the past ten years. What once required a lengthy research process can now be discovered in moments. VCs can instantly understand trends using technology to validate incoming data and aggregate results in a UI that offers custom queries.
After exploring market trends, VCs and lawyers can calibrate deal terms to discover new alpha in areas where they can differentiate terms. Time is saved and deals optimized across potential outcomes. This process allows lawyers to focus on high-level business counsel and risk mitigation, the areas of expertise that make them truly valuable.
In the past two years, venture firms have enjoyed the most active period in the history of the private capital markets. As VCs close deals at a record pace, the complexities of tracking ownership percentages, investor rights, and updates to valuation in each portfolio company and fund grow exponentially, and the growth shows no sign of slowing. VCs can gain efficiency and redirect energy into relationships, due diligence, and fund management by leveraging technology to automate back-office processes and provide a genuinely insightful window into all deals.