VC and PE Firms Both Troubled by their Law Firms’ Lack of Billing Accuracy, Timeliness and Predictability as Need for Legal Spend Scrutiny Increases

Venture Capital and Private Equity firms may differ in many ways, but they share a similar predicament – increased pressure to cut legal costs as business revenue from M&A and fundraising declines, according to a new Apperio study entitled “Private Equity and Venture Capital:  Two Industries United by Lackluster Legal Spend Management.”  This PE/VC study found that VC firms in the U.S. and UK are likely to be under even more perceived pressure to cut costs, and both PE and VC firms are concerned about lack of billing accuracy, timeliness and predictability from their law firms.

Apperio’s PE/VC Study showed that in 2019, PE companies spent an average of $9.5 million on legal fees while VC firms spent an average of $7.5 million.  The primary spending for both VC and PE firms was on M&A and fundraising.  VCs typically spent less than PEs for a variety of legal services, specifically 21% less on external legal counsel, 22% less on M&A legal costs, and 16% less on fundraising.  However, though VCs are paying less than PEs for most legal services, 55% of them still said they do not trust that their law firms are billing them accurately.       

Both PE and VC cohorts responded that scrutiny of legal costs for fundraising skyrocketed by 33% in the past five years.  These rapid rises have not gone unnoticed – scrutiny on general external legal spend has risen by 27% for PEs and 32% for VCs in the past five years, and is poised to climb further to 29% and 35% respectively by 2022.  Respondents believe their budgets will shrink this year– 69% of VC legal stakeholders and 85% of PE counterparts expect to reduce external legal spend in 2020, with 60% of VCs reducing by over 6%.

Both VCs and PEs have significant concerns about their legal bills, many admitting that they are ‘surprised’ by them.  Only 54% of both VC and PE cohorts trust their external legal counsel to bill them promptly; 50% of VC legal leaders do not think their legal spend is transparent and sometimes find bills surprising.

VCs have less faith than PEs in the predictability of legal spend: 76% of VC senior counsel report that their legal spend is predictable, compared to 92% in PE.  However, despite this predictability in overall costs, these results suggest that there is significant dissatisfaction around the day-to-day management of such costs.  There is also a need for after-the-fact negotiation after work is completed and bills are submitted to retroactively create more consistency.  This process is time-consuming for senior legal stakeholders and disappointing for external counsel who experience write-downs and delays in payment for services rendered in good faith.

Interestingly, 75% of VC leaders indicated the introduction of procurement skills had catalyzed increased pressure on legal spend, compared to 65% of PE counterparts.  Also, 51% of VCs had introduced procurement leads/teams (PEs were slightly less at 48%) showing that VC firms have made increased investment in procurement, which hopefully will shield them from the impact of deal volume downturns because expenses have already been reduced by procurement experts.

Nicholas d’Adhemar, CEO and founder of Apperio and former lawyer and PE investor, noted the imperative for VC and PE leaders to gain in-depth visibility of their legal spend, and to leverage all available modern resources to address problems.  The study showed that 91% of PE firms and 76% of VC firms still use Excel spreadsheets and manually collect data to track legal spend. They are long overdue for an upgrade.

d’Adhemar said, “Many senior VC and PE legal stakeholders are not adequately prepared to proactively manage the legal spend cost reductions that they are anticipating. They’re held back by reliance on Excel and its inherent limitations.  Billing is antiquated, manual and asynchronous, creating  unnecessary friction and wasting valuable time. Ultimately this creates barriers for in-house teams against meeting organizational objectives to manage and reduce external legal spend.  Senior legal stakeholders working in the investment community and the external advisors that support them have, until now, not had the technology or tools to improve this situation. PE and VC firms are fully justified in demanding greater efficiency and accountability from their legal services providers, and the proper mix of human and technology resources will help.  Law firms must meet the request and make themselves indispensable to their clients to ensure their competitive standing.”