Travels through the Blawgosphere #3 : Legal Tech Start-ups

By | February 10, 2019

Legal Technology Start-upsOver the past week or so I’ve seen some interesting tweets, articles, press releases, blog posts and a YouTube video about Legal Technology Start-ups. This is what caught my eye on this topic in the Blawgosphere:-

Legal Tech Start-ups on the decline

Raymond Blijd explained ‘Why I left my job?‘. It was apparently “to power world peace” through working full time on his start-up Legal Pioneer which allows you to benchmark your concept against a dataset of over 7,000 startups. You can find similar ventures based on market, location, and technology. By matching existing companies, to your own startup, you can calculate costs and estimate the investment needed and much more besides. However the interesting point made in this post was that:-

Our numbers show that legal startups have been declining for a second year in a row. Moreover, funding of legal ventures is skewed towards mature later stage companies that only tend to serve traditional models.

Maybe not the best time to give up the day job then?

9 in 10 Legal Tech Start-ups will fail

This is perhaps not surprising if the prediction, reported by Legal Futures, is true that ‘Nine in ten legal tech start-ups will fail‘. This prediction was made by David Holme, chief executive and founder of Exigent, who said that:-

lots of start-ups, flattered by the attention of law firms, had announced the next big thing, but serious tech start-ups needed long-term funding partners, investment strategy and expertise.

The focus for meaningful change and impact should be on combining corporate finance and technology expertise, not on small-scale law firm investment.

That’s why not a single legal start-up or accelerator backed by a law firm will come to market in 2019.

David Holme reckons that instead private equity will target alternative legal services providers.

Building a Legal Tech Company is Hard

But it shouldn’t be forgotten that building a Legal Technology company is hard work and that will be a factor as to why so many fail. This was brought out in a thread on Twitter by Pieter Gunst, Co-Founder of Legal.io.

Peter first addresses why is it hard to build a legal tech company (assuming that the product is useful / tech does not suck). He gives ten reasons:-

  1. The current predominant business model (the hourly rate) does not encourage efficiency on the supply-side of the market.
  2. Lawyers are busy people. It is hard to step back and think “what improvements could I make to make what I am doing more efficient”
  3. Lots of marketing hype. Hard to see the forest through the trees. Chatbots, AI, blockchain. Valid and exciting use cases but we’re all tired of the bs and the misleading numbers being shared. What to buy?
  4. Many people building legal tech are lawyers. Law school does not prepare you to run a business.
  5. Heavily regulated: memo’s for days. Makes it hard to get velocity.
  6. Lawyers are often not tech-savvy. Customer support gets unhappy after the tenth email of the day asking how to reset a password. It’s rough.
  7. Legal is a very fragmented market. Solutions are often jurisdiction specific. Hard to scale.
  8. Sales cycle is usually long. This benefits incumbents and deep pockets.
  9. No organizations enforcing efficiency, e.g. like insurance providers in the medical industry that are organized, have leverage, and an incentive to decrease cost.
  10. It is not trivial to raise capital for a legal tech startup, because – amongst other things – the above.

Peter then looks at, specifically, why it is hard to build a legal marketplace. He defines this as connecting clients to legal solutions (attorneys or otherwise):-

  • High customer acquisition cost (CAC). If you are doing paid acquisition, cost per click on Google is very high. Requires deep pockets.
  • Clients do not have a legal need all the time, so it is hard to build brand loyalty. See Reason One (for legal marketplaces) above.
  • Hard to monetize because of regulation (fee splitting rules). Paired with high CAC, this is killer.
  • Siloed data. We’re lacking the standards that would drive transparency, and hence a more efficient marketplace, for legal services.
  • Business structure limitations: can’t provide legal advice if not a law firm, and law firms are not well positioned to attract and reward the talent to build the solutions of tomorrow.

I can’t argue with Peter’s views which should be essential reading for any novice start-up thinking about doing it in Legal Tech.

The Legal Tech Bubble

In an article in Canadian Lawyer various statistics were given about the extent of global investment in Legal Tech with a view expressed that Canada looks well-placed to lead a legal technology industry being transformed by automation, cybersecurity, talent and APIs.

However, LawGeex vice president of marketing Shmuli Goldberg says that despite the industry’s apparently “explosive” growth, it remains “very early days” for the legal tech industry due to lawyers’ low adoption levels.

Mitch Kowalski, a professor of legal service innovation at the University of Calgary Law School and author of the book Avoiding Extinction: Reimagining Legal Services for the 21st Century, says legal tech remains stuck in “hype mode” in a “bubble that will burst and taint the entire sector.”

Mitch continued:

Just like the fog of war, there seems to be a lot going on out there with legal tech, but it’s becoming more and more difficult to keep up with all the players. Like the dot.com boom, it has become nearly impossible to sort out what’s real and what’s just good marketing.

Mitch added that while the market is seeing increased acquisitions, and while there have been a handful of big funding rounds, this is “very normal for nascent sectors.”

Furthermore, most rounds have been small.

Mitch concluded:

This suggests that while there’s healthy interest in legal tech, venture capitalists are not willing to go ‘all in’ unless there is a proven, compelling business case.

Legal Tech and Wile E Coyote

Aron Solomon gave his wry views in a series of tweets:-

Marketing Tutorial for Legal Tech Start-ups

But for those Legal Tech Start-ups who want to survive, Daniel Hoadley shows them “how to market your Law Tech product like a pro so that even cynics like Alex G Smith buy-in” with his not to be missed ‘How to Make an Awesome #LegalTech Ad tutorial’:-

Law Society Endorsement

An alternative to Daniel’s #LegalTech Ad tutorial is to get your local Law Society to endorse you. Here in Scotland it was announced recently by the Law Society of Scotland that they had entered into a ‘strategic partnership‘ with Legal Tech Start-up Amiqus Resolution “to provide insight, support, guidance and accessible solutions for Scottish solicitors as they undertake new ways of working”. Simultaneously the Law Society of Scotland shattered any remaining or redeemable credibility in their Lawscot Tech initiative by breaking most of the aims and values of that initiative.

The Legal Tech Rocket

At the end of January it was Legal Week in New York City. On the whole the tweets I saw were about/by vendors, related to available swag or the weather (it was snowing). But at the end of the week Inspire Legal took place (a new unconference) from which Joe Borstein was quoted as saying:-

Legal tech is a rocket ship without a guidance system.

Legal Tech for the Legal Elite

Writing about both Legal Week and Inspire Legal Robert Ambrogi asked:-

Whose voices were missing from these conferences?

He answered:-

For one, it was the roughly 90 percent of lawyers who practice outside the large firm/large corporation ecosystem. Neither of these conferences was designed or structured with them in mind.

Who else was missing? How about those the legal system is failing?

Legal Tech and Money

Carolyn Elefant commenting on the previous article thinks ‘The Reason Why Legal Tech Remains the Domain of the Legal Elite: It’s All About The Money‘. She says:-

As I’ve written before,  legal tech — even the tech that purports to focus on serving consumers — is all about the money. Always has been, always will be.  And the truth is that if you want to find the big money, you find it at big law.

Carolyn also points out:-

For a time, many lawyers-turned-entrepreneurs believed that there was money to be made from technology that expands A2J.  Now, many are discovering that’s not the case. Consumer markets depend on volume, and even if wills and divorces and DUI defenses only cost $99, most folks still won’t have need to purchase those services more than a handful of times over the course of their lives. By contrast, think of how many times you took an Uber or made a purchase off Amazon in the past month.  Compared to the consumer space, biglaw has money to burn and once one or two firms begin to embrace technology, it’s only a matter of minutes before the others fall in line lock step.  For legal tech entrepreneurs consulting or building products or founding companies, big law is an attractive market – far more so than A2J.

So for the many Legal Tech Start-ups that go down a route that is not for Big Law their days just might be numbered. And Big Law will only ever need a certain amount of legal technology. Reinventing what they already have might not be a good idea either.

The $100 million Legal Tech Start-up

These comments came just before the announcement that a further $10 million had been invested by existing investors in Legal AI start-up Luminance (who launched in September 2016) apparently now valuing the company at $100 million.

One of the investors is Invoke Capital an investment firm founded by former Autonomy Chief Executive Officer Mike Lynch. U.S. prosecutors charged him with fraud in connection with Hewlett-Packard Co.’s 2011 acquisition of Autonomy. Lynch has denied the charges. He is on the board of Luminance “because he brings a rare mix of deep technology understanding and commercial acumen”.

Luminance software is certainly aimed at Big Law but I wonder what the Dragons (or Sharks) would say about that valuation if pitched to in the Dragons’ Den (or Shark Tank)?

Dragons Den - I'm OutImage Credit: Dragons’ Den © BBC

Reactions on Social Media

In addition to the responses in the comments section below there have been reactions to this post on LinkedIn and on Twitter.

On LinkedIn the following comments have been made:-

Anusia Gillespie (Global Co-Head of Innovation at Eversheds Sutherland):

According to Brian Inkster’s roundup…for 2019: legal tech startups are out, and law companies are in.

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Aron Solomon, JD (I build things):

IMO, Brian Inkster has one of the best perspectives in the world on the
#legal and #legaltech verticals. Thanks for including my ramblings.

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Aron Solomon, JD (I build things):

Thanks for including me. To me, the most impactful comment was David Holme’s:

“That’s why not a single legal start-up or accelerator backed by a law firm will come to market in 2019.”

If true, this is quite awful but also laughable (1, 2,3).

endnotes:

(1) Holy shit.

(2) Recent LegalTech funds, as well as those seeking a cash infusion (several are running on near empty) will reel from this and some will (mercifully) vanish.

(3) So many of these accelerators were started by sheep looking at other sheep in the field. Baker McKenzie Frankfurt is a perfect example. Nextlaw Labs gets full credit for being early, loses every one of those points on execution. I can go on…

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And on Twitter:-

John Craske @John_Craske:

As usual @BrianInkster gives us a sharp and succinct summary of where legal tech is. “It’s all about the money”. A bit sad but true!

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King Solomon‏ @aronsolomon:

THIS (and not just because I’m in it)

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1 Comment

KING SOLOMON on 10/02/2019 at 10:52 am.

Thanks for including me.

The Luminance issue is really interesting to me. I won’t even dignify their self-valuation number. But, honestly, what do you think the value of the company is today?

Aside from a complex acqui-hire or some nasty Elevate-esque “acquisition,” my opinion is that the company is worth around $10mm.

That’s all. Carry on.

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