Seven Questions for Silicon Valley Superlawyer Gordy Davidson
There aren’t many lawyers who’ve been around Silicon Valley as long, nor advised as many of its notable companies, as Gordy Davidson. He’s the chairman of the law firm Fenwick & West, and his clients read like a history of the Valley: Cisco Systems, Oracle, Intuit, Electronic Arts, Macromedia, Facebook, to name but a few.
He doesn’t ordinarily give interviews, so when I got the chance to sit down with him at Fenwick’s headquarters in Mountain View recently, I jumped at it. Not long after we spoke, Fenwick announced that Davidson would be stepping aside at the end of the year and handing the chairmanship over to Richard Dickson.
My first question was to ask Davidson to sum up what he does, as he sees it.
AllThingsD: Gordy, I think I have a pretty good idea what you do all day, but tell me, from your perspective, what is it that you do?
Davidson: I’m a general Silicon Valley lawyer. One day I may be at a Cisco board meeting, as I will be tomorrow. The other may be meeting with two kids out of Stanford with a business plan. Those literally happened on the same day a few years ago, and I said to myself that I find them both equally exhilirating. It’s part of the cycle of Silicon Valley. I worked at a startup company before I was a lawyer, so I’ve been there. I worked for a company that was started in an industrial garage out by the San Jose airport. Everyone was there in the big room, and it was fun. We’ve had a great run. About a year after I joined Fenwick, Steve Jobs and Steve Wozniak walked in and started Apple Computer. And everything has flowed from there. The work has involved startup companies, venture capital, intellectual property, technology licensing, IPOs, mergers and acquisitions. It runs the gamut, which is what makes it interesting. We’ve seen five complete business cycles since then.
And given that, where do you think the business cycle is now?
Well, the stock market is about as high as it has ever been, so it’s an up cycle. There’s a lot of activity. As a firm, we set revenue records in each of the last three years. I’m not sure why the stock market is up. It’s a little mysterious. But you can see other indicators of economic activity. You can measure it with traffic on Highway 101, and in job creation in Silicon Valley. Real estate prices are up, and foreclosures are down. I don’t think it’s a bubble, but then I’ll knock on wood when I say that. Nor do I see it as particulary robust. It’s not affecting all industries. But certainly technology is strong right now, with notable exceptions. Some companies are having trouble.
And there have certainly been a lot of IPOs in recent memory. Which ones have you been involved in?
We did Workday and ServiceNow. We did Fusion-io from the underwriting side. We did Vocera and Silver Spring Networks. Those are a few.
Many, if not all of those, if memory serves, took advantage of the JOBS Act when they initially filed to go public. Do you think that’s been helpful to companies?
The companies certainly like it. Companies are vulnerable to competitive sniping when they file, if they don’t get out on the fastest possible schedule. Competitors are ruthless. They point out to customers that the balance sheet may be running down, and start asking why the company in question can’t get out sooner, and sowing doubt by asking them if they really want to take a product from a company running out of money. And so the JOBS Act has largely solved that problem. I don’t think it’s as revolutionary as the authors thought it would be. The only useful provision of it has been the confidential submission rules for when a company first files to go public. Not many companies that we’ve worked with have wanted to take advantage of the provision that allows them to file only two years of financial data as opposed to three. If you want to be taken seriously, why not be audited for the third year? And the companies that are coming public now are companies of substance. They’re not just raising $10 million or $20 million. They’re raising $75 million or $100 million. At that rate, you probably ought to audit three years.
I’ve been talking to some startup companies at various stages, and they tell me that, in a lot of cases, the venture capital firms are coming to them and not the other way around. It’s almost like the VCs are shoving checks down founders’ throats a bit. Is there perhaps too much money in the system?
Well, there’s been a big shakeout in firms versus a few years ago, so there’s less money overall. Venture funds have been cut in half, and the amount of funds raised is coming down. But the hot companies are just getting money thrown at them. There are companies like GitHub, which is a client of mine. There’s a startup company that was under the radar, and they had a number of venture capitalists chasing them, until they finally went with Peter Levine at Andreessen Horowitz. Marc Andreessen once said that there are really only 15 VC deals in Silicon Valley every year that really matter, and I think directionally speaking that’s true. And there is a bipolar distribution among the venture funds. There are probably only 15 that are successful, and the rest just aren’t as successful. It isn’t like 1999, when there was too much money chasing too few deals. Now there’s a lot of money chasing a lot of really good deals.
Do you think there is something different with the way that companies are conceived that makes them better now than before?
Well the Internet has changed everything. The infrastructure has changed everything. It doesn’t take much to start a company; with all the open source software and cloud services out there, you don’t really have to do all that much research and development. The tools are there. You can get to the product you are trying to develop quickly. So the time to market is much shorter. So companies can get up and running fast, and build up their scale fast. Think of Twitter, Facebook, Airbnb, Square, and how fast they’re growing.
As an attorney, your job is to advise companies on pitfalls they may avoid. What’s the classic thing that you tell companies to avoid over and over again? There must be a million of them.
There are a million of them. One thing is to try and rein in their exhuberance. For example, when VC money is being thrown at them, it’s not always about the highest bidder that is the best source of capital. There’s a story I like to tell about Intuit. Scott Cook funded Intuit by kiting his credit cards for a long time, and almost went bankrupt twice. Finally, when it started to get traction, they went for venture capital, not to fund the company, but to pay off their debt. So they got five offers from five funds, and Scott asked me which one to take. He wouldn’t tell who made the higher or lower offers, but there was about a 50 percent difference in the valuation between the lower ones and the higher ones. I immediately connected the dots and told him to accept the lower offers. He couldn’t believe it, and he asked why. I said that the lower bidders brought with them John Doerr of Kleiner Perkins and Burt McMurtry of TVI. I said they would make more difference to the ultimate valuation of Intuit. He later remembered that advice, and acknowledged that it was right.