Just Because You Can Start a Business Doesn't Mean You Can Run One

Last Updated Dec 8, 2010 2:30 PM EST

By David Bailey, Partner, Kauth, Pomeroy, Peck & Bailey, LLP, Irvine, Calif.
My partners and I started our intellectual property law firm because we wanted to do things differently. We had all grown tired of business-as-usual at the large IP firm where we worked: Too many clients opted to pay settlements on bogus patent infringement cases simply to avoid racking up stratospheric legal fees. We planned to throw out the traditional hourly rate model to try out a project-based fee structure.

Striking out on our own was incredibly nervewracking, especially since we wanted to pioneer what amounted to an entirely new way of practicing law. In fact, we were so concerned with the feasibility of the concept that we never stopped to think about what would happen if it became a booming business. That turned out to be a pretty significant mistake.

The IP litigation loop
Before my partners and I started KPPB, we worked with a lot of technology startups, helping them file patents to protect their ideas and representing them in litigation. In our field they say a company isn't truly successful until it's been sued. We increasingly found ourselves defending tech startups against suits filed by so-called 'patent trolls,' companies that purchase patents specifically so they can accuse other companies of infringement and then extract payment.

In these cases, most large IP firms gear up for the defense like they're going to war. They staff the case with 15 or 20 attorneys -- all of whom work hourly -- and build iron-clad defenses for their clients. The trolls, whose claims are usually wholly without merit, hire contingency-fee attorneys who drag suits out for as long as possible. They're effectively betting that a settlement will eventually look better to the company than ever-compounding legal fees.

It was a lose-lose situation for our clients, often crippling their businesses to the point of failure.

A leap of faith and a little luck
There is no track record for flat fee-based law practices; we were really going out on a limb. All of us felt strongly about changing the way things are done, and while we were all friends beforehand, our convictions really strengthened the bond between us. It's actually very difficult for attorneys to court the clients with whom they had previously worked when they leave a firm, so there was little we could do to pad our landing. We put all of our faith in the concept, ourselves and each other.

When we finally struck out on our own we were lucky enough to have one client, a major tech startup, sign on with us the very first day. I was literally sitting on the floor of our new office filing patent applications on a laptop while my partners wrestled with the Ethernet setup. From there, more and more of the clients that we had worked with at our previous firm took note and followed us. Our idea was a success.

The devil in the details
However, there's a big difference between a great concept that takes off and a successful business. I won't say that my partners and I were totally naïve about striking out on our own -- I consulted an entrepreneur client of mine beforehand, who offered a grave prediction: 'There will be heartache' -- but we were a little wet behind the ears.

We tried to do it all ourselves: maintain the books, administer benefits, handle payroll, manage employees and, of course, practice law. Our model required a lot of work up front. We had to assess each case carefully, assess our fees, and offer it to the client as a proposal (not unlike a carpenter offering a bid on a job) before we could get started and begin billing them.

Things got stressful and we quickly got the sense that signing up clients was different from keeping them. If we were too wrapped up in dealing with day-to-day issues to manage the increasing case load, we were going to start losing clients as fast as we had gained them.

That entrepreneur client of mine had been right: Almost nobody gets a company off the ground without having to face some kind of music. We had the law thing covered, but we needed to get some staff on board who could use their own expertise to handle the rest.

In order to get Joel Kauth, our managing partner, away from the day-to-day details and back to his practice, we brought in a part-time bookkeeper. She streamlined the financial administration of the business in no time at all. We also bailed out our legal assistant, who was bogged down with back-office work, by hiring another legal assistant. With better staffing in place, the prospect of further growth has become an asset, rather than a liability.

Saved by a sturdy foundation
In the end, what made our business work -- even more than our innovative concept and individual abilities -- was our friendship. We had taken it for granted, but that bond of mutual admiration and respect made it possible for us to sit down at a table together and admit that we weren't doing a good job of managing our business.

With a different group of guys, our firm might have imploded. We could have pushed blame around and gotten on each other's cases during those early days when we were fumbling with the finances. Instead, we acknowledged our mutual shortcomings and made the decisions that kept our business going.

When he's not talking strategy with clients, David Bailey likes to fill his car with outdoor gear and light out for the beach or mountains with his wife.
-- As told to Joseph Conway