An Unusual Opportunity

The Counsel Connect Network provides a very unusual opportunity for extraordinary wealth creation with essentially no risk. For comparison, let’s look at other startups, and for the sake of simplicity focus on startups that will be funded by organized angel groups, VC firms, and other sources of serious money. What is particularly interesting is that most of these startups have no revenue model. We’re not talking about the fact that there is no clear plan to become a profitable company, we’re talking about something even more basic: they have no plan for revenues. For most of them, their strategy seems to be, “Here’s a really cool idea, a lot of people might like it, let’s get ten million people hooked, and then several years later, we might stumble our way into figuring out how to charge someone for something. And if not, maybe some wealthy fool will buy us anyway at a ridiculous price.” Talk about a crap shoot! Yes, it has worked for Facebook, which is now profitable. But that’s not a risk we want to take.

Our startup offers a very unusual set of favorable characteristics financially:

  • Huge Market / High Number of Cases – The U.S. is by far the most litigious country in the history of the world, and even if the Republicans take control of the federal government and every state government, this will change only slightly. The only area where tort reformers have made a dent, for example, is in medical malpractice cases. Do not ever underestimate the resourcefulness of plaintiffs lawyers.
  • Very High Price Point – Individual cases can be very valuable. Wrongful death cases are typically worth between $1.5 million and $6 million. In cases where a youngster needs lifetime medical care, judgments can be $20 million or more. While we will obviously help people find lawyers for these complex individual life-and-death cases, the really serious money is not in individual cases, but in mass torts: These are cases where a lawyer aggregates 1000 or 2500 or more (sometimes many more) plaintiffs, all with the same claim, against one wealthy defendant. The aggregate value of those cases can be in the hundreds of millions (or even billions) of dollars.
  • Very High Commissions – The law firm handling the case receives one-third of the case value, and we receive one-third of that (i.e., 1/3 of 1/3 = 1/9). To keep the math simple, assume we receive, on average, 10 percent of case value. Plaintiffs lawyers have been paying referrals for cases for decades, and there is no indication they are not willing to continue doing so for the foreseeable future.
  • High Profit Margins — North of 50 percent
  • No Forward Integration — We can make a lot of money in part because few law firms are sophisticated about the Internet. As our CEO likes to say, “It is very unlikely these plaintiffs lawyers will wake up one day and say, ‘CCN is making so much money selling us cases. Let’s take four years off from practicing law and enroll in Course 6 at MIT.’ ”

In addition, we enjoy one very powerful barrier to entry: the extraordinary intellectual complexity of our integrated system and business system. While the business is simple in concept (matchmaking system for plaintiffs and lawyers), in execution there are dozens of very complex legal, business, legal ethics, and technical issues to be navigated. Every person who has attempted to understand all of the necessary pieces has said, “This is really, really complicated. I don’t know how to explain the whole thing in 5 minutes.” That’s precisely the point. You can get your head around it (at the 50,000 foot level) in 5 days, but to understand all of the complexity takes several years. And to build a business that can actually accommodate all of these moving pieces – so far, no one else has been able to do it. Without this intellectual difficulty, several companies would be doing this already. So far, our group is the only group to have figured out the entire puzzle. And frankly, the opportunity only works this well if one solves the entire puzzle. Solve 19 out of 20 steps and the value capture drops in half. Solve 15 out of 20 and the value creation drops by a few orders of magnitude or more.

As Paul Graham said in How to Make Wealth:

Use difficulty as a guide not just in selecting the overall aim of your company, but also at decision points along the way. At Viaweb one of our rules of thumb was run upstairs. Suppose you are a little, nimble guy being chased by a big, fat, bully. You open a door and find yourself in a staircase. Do you go up or down? I say up. The bully can probably run downstairs as fast as you can. Going upstairs his bulk will be more of a disadvantage. Running upstairs is hard for you but even harder for him.

What this meant in practice was that we deliberately sought hard problems. If there were two features we could add to our software, both equally valuable in proportion to their difficulty, we’d always take the harder one. Not just because it was more valuable, but because it was harder. We delighted in forcing bigger, slower competitors to follow us over difficult ground. Like guerillas, startups prefer the difficult terrain of the mountains, where the troops of the central government can’t follow. I can remember times when we were just exhausted after wrestling all day with some horrible technical problem. And I’d be delighted, because something that was hard for us would be impossible for our competitors.

This is why when someone dwells on “What’s your 30-second elevator pitch?” our response is, “We’re working on it, don’t call us, we’ll call you.” (We’ve never been able to figure out why there is so much emphasis on superficial analysis in the startup industry.)

But there is one more, very interesting characteristic. Consider the startup that was launched in 2004 in a Harvard dorm that has turned out to be worth $50 billion. That venture was risky! Yes, they executed very well, but they also kept rolling the dice and, dozens of time in a row, they rolled double sixes. Great for them, but we do not want to count on being lucky.

What is unusual about CCN is that – at least now, as opposed to when we started CCN — there is essentially no risk. The risk is not zero: the CEO could get hit by a bus, global warming could cause massive hurricanes to sweep across the major continents, comets could hit the Earth. But the risk is so close to zero that (in our humble opinion) you would need a subatomic microscope to measure the distance between our current risk level and zero. Our CEO has been working 90 hours a week since January 2007 figuring out how to eliminate all of the risk. By risk, we mean the odds of not achieving, say, $25 million a year in free cash flow. Yes, it is quite possible we will never be a billion dollar company, there is some small risk we will never have $100 million in annual cash flow. But it’s close to impossible that we not be able to achieve $25 million a year in annual cash flow.

We have no technology risk. We are not dependent on cutting-edge technology for our business to work. Instead, our quite-good information systems are more than good enough to make the business work, and they will only get better. Our CTO is so overqualified for this job that our CEO compares his situation to asking Einstein for help with a 10th grade physics exam.

As for business risk:

  • The number of lawsuits is not going to diminish much, if at all. Plaintiffs lawyers (the most entrepreneurial segment of the legal profession) are constantly finding new things to sue about. The complexity of modern society, modern medicine, modern products, and modern relationships guarantees an endless source of litigation.
  • The Internet is not going to go away.
  • Our target demographic – in most cases, the less educated members of society, who are the most likely to retain an attorney on a contingent fee case – is becoming more comfortable with the Internet every day.
  • The willingness of plaintiffs’ attorneys to pay a referral fee has increased every year, and has been an accepted way of doing business for decades. There is no indication this will change in the foreseeable future.
  • The percentage paid for a referral fee has not changed in the last 50 years. The entire current generation of plaintiffs lawyers has been trained into accepting these rates and this way of doing business.

So this is what makes CCN so exciting — extraordinary upside with very little downside. If you know of another company with similar characteristics, let us know. In the meantime, we’re looking for a few exceptionally talented individuals who are smart and motivated enough to come work with us to take advantage of this extraordinary opportunity and to make a lot of money.