Atrium: A Post-mortem

On Tuesday (3 March 2020) Tech Crunch broke the news that Atrium, the Californian based hybrid legal software and law firm, was shutting down.

Tech Crunch said this was “after failing to figure out how to deliver better efficiency than a traditional law firm”.

Atrium has now laid off all its employees, which totaled just over 100. It will return some of its $75.5 million in funding to investors. The separate Atrium law firm will continue to operate (more on that later in this post).

The Pivot

I blogged in January about the Atrium pivot. My view then was that we were witnessing shades of what happened to Clearspire. A similar startup that failed I reckon due to trying to reinvent the Legal Tech wheel and investing too much money in doing so. Atrium had an even bigger pot of money to burn, yet did the very same thing.

Anyway, the January pivot saw Atrium paring back its law firm operation by laying off an unspecified number of lawyers (although it appeared to be most of them) and pivoting to their next phase of growth. They would apparently:-

continue expanding outside of legal services as trusted startup advisors by building a professional services network dedicated to founders.

Some clients weren’t impressed by the pivot. Adam Nathan tweeted:-

We liked our lawyers at @atrium, but I’ve never seen a more dysfunctional pivot than what was attempted in January. It felt like they didn’t think about *us* (the customer) at all in their plans, and it sapped our confidence. A good reminder about what should come first.☝️

It looked like they were keeping the software arm of the business going but it wasn’t clear to me how that would work without the lawyers who were supposed to benefit from and use that software.

Some commentators assumed that the software side of the business must be more profitable than the legal services side. Joanna Goodman writing in The Law Society Gazette said:-

Atrium raised $75m in VC funding. The fact that a successful serial entrepreneur finds it necessary to pivot a well-funded business in order to challenge the legal services status quo and expand sufficiently to maintain profitability (clearly the tech side of the business is more profitable than the legal services side) is testament to the challenging nature of tech-driven legal innovation.

How could that software side have (prior to pivot) been more profitable than the legal services side? It was after all software developed specifically for the exclusive use of Atrium legal services. It wasn’t being marketed or sold to third parties. It couldn’t have been making any money on its own.

Likewise, following the pivot, Mark Cohen (who was a funder of Clearspire) wrote in Forbes that:-

Jason Kan apparently did not learn from Clearspire’s experience when Atrium Law was launched as the Siamese twin of the tech company. Its strains credulity that any institutional investors would commit $75M to a small, unproven law firm. That’s why Atrium’s course correction was likely made well in advance of its announcement to wind-down the firm. This supports the conclusion that Atrium Law was never intended to be more than a beta tester for its tech arm. Kan now recognizes that Atrium’s value to start-ups did not derive principally from legal acumen but from its technology stack, fundraising expertise, and business prowess. His blog post announcing the law firm wind-down confirms this: “founders (Atrium’s target market) are seeking holistic business services and advice for the key issues they face.”

I’m not sure that it can really be said “that Atrium Law was never intended to be more than a beta tester for its tech arm”. It was always sold as being an integrated venture. What was that tech in any event? (I will return to try and answer that question later in this post).

The Shutdown

Well within just seven weeks it became clear that the software side of the business wasn’t making any money either and there was presumably little actual value in  its “technology stack” after all with the closure of that side of the business too. The “business prowess” that Mark Cohen referenced must by now also be somewhat questionable.

The founder of Atrium, Justin Kan (who previously founded Justin.tv, which became Twitch and later sold to Amazon for $970 million) told TechCrunch:-

If you look at our original business model with the verticalized law firm, a lot of these companies that have this kind of full stack model are not going to survive. A lot of these companies, Atrium included, did not figure out how to make a dent in operational efficiency.

So Justin thinks that the issue in reinventing the practice of law is to “figure out how to make a dent in operational efficiency”.

He tried to do that, as Clearspire had done before him, by creating his own bespoke software.

The Software

So what was so special about this bespoke software that was going to give the Atrium law firm “a dent in operational efficiency” that its competitors lacked?

Atrium claimed that they had “an unmatched technology platform that redefines legal services“.

Benefits apparently included:-

• Simplified legal workflows. Streamline your most common legal work with oversight by your legal team.
• Centralized collaboration. Request, track, and collaborate on all legal projects with your legal team from within a centralized location.
• Simplified communication. Communicate contextually with your legal team on all of your legal needs to reduce time spent emailing.
• Robust document management. Access and manage up-to-date corporate legal documents, reviewed by your Atrium legal team.

Alex G. Smith tweeted back in October 2019:-

Anyone else got the sneaking feeling that these folk have built HighQ from scratch?

Exactly. Atrium were just reinventing the wheel and spending a fortune doing so.

Following the shutdown an article in an Indian online tech magazine had the headline: The failure of Atrium, a promising Law Tech Firm proves that AI Software is not a panacea.

I don’t think there was any AI anywhere near the Atrium software. But we know that the technology press like to throw in AI for good measure whenever they can. Also known as AI washing:-

A marketing effort designed to imply that a company’s brands and products involve artificial intelligence technologies, even though the connection may be tenuous or non-existent.

Usually this is at the hands of the vendors themselves but it is not uncommon for the legal technology press to create rather than just perpetuate the myth.

Another website referred to Atrium rather grandly as a Legal workflow automation firm. I don’t think they were that either.

Sol Irvine suggested, in a tweet, that the technology was perhaps nothing special if even in existence:-

When they pitched me (in my role as GC), the tech was painfully absent. It wasn’t a bad pitch, but the benefits of their tech platform had absolutely nothing to do with it. I had a pretty clear idea of what I wanted from the platform, but they weren’t even close.

Above the Law were perhaps kinder when, only a few weeks ago, they wrote:-

Its tech by some reports is still maturing.

After the pivot and before the shutdown, Mitch Kowalski asked:-

What if Atrium had spent the time to properly research already available technology, then built something that simply leveraged off that existing technology?

What if Atrium’s founders had spoken to the founders of Clearspire, listened to its story (and demise), then bought or licenced Clearspire’s technology?

I said about Clearspire’s demise:-

With legal IT providers having invested huge sums in perfecting proven legal IT systems over the years is there really any need for a NewLaw firm to reinvent the wheel?

Such systems (especially the cloud based ones) can now be purchased on an affordable per user basis allowing the IT to grow as the law firm grows rather than the IT having to pay for itself once the law firm reaches a critical mass, which seems to have been the Clearspire model. What law firms need to spend time and money on is making sure these off the shelf systems are working to their full potential within their own four walls (even if that is virtual walls).

So in my view Clearspire may have got it wrong with the huge investment in its own legal IT system. It is not the start of the end of NewLaw but perhaps a lesson for would be NewLaw firms. Law Firms survive on providing legal services to customers (aka clients). Law firms, new or old, need to concentrate on that. Technology is a tool to assist that process. When setting up a law firm I wouldn’t try to create a PC or phone from scratch. Pier Giorgio Perotto and Alexander Graham Bell beat me to it. The same is true of legal IT systems. There are plenty out there that work very well indeed. Usually it is the law firms or individual lawyers within those law firms that are simply not using the systems anywhere near to their full potential.

[N.B. Back then (2014) we were commonly referring to Legal IT. Today that seems to have shifted to Legal Tech.]

The same can be said about Atrium.

As Mitch Kowalski suggested, I doubt that Justin Kan researched the legal technology already available. Did he just assume it wasn’t there or wasn’t good enough?

He thus focussed on creating a law firm that was “a full stack vertical startup”.

The Full Stack Vertical Startup

I had no idea what this was. I googled it and found this article: The Full-stack platform and full-stack startup, a state of play.

I learned from this article that:-

a Full-stack startup is a company which develops a technology that can provide the end customer with a complete product or service which handles the entire value chain of its activity. Apple, Uber, Netflix and Tesla are cited amongst the full-stack company references.

Being a Full-stack startup appears to be idyllic for all companies: controlling the entire value chain, not being dependent on any technology or third party services, innovating with unlimited velocity and creating a product with absolute luxury.

BeBe Chueh (a co-founder of Atrium) described this to the Legal Tech Blog with reference to Atrium like this:-

The challenges encountered by startups in legal can be illustrated by way of an albeit imperfect analogy to those encountered in auto tech: Imagine you’d like to improve sustainable transportation by building an electric car. But you’re cash-strapped and lack community support so you start with a compromise: you make a vehicle part that converts gasoline cars into hybrids. You convince gasoline car manufacturers that they should buy your part and that people want hybrid cars. Then you custom your part to fit each manufacturer’s specs. In the end you’re a parts maker, gasoline is still king, and you still don’t have an electric car.

Enter Tesla, a company that set out to accelerate non-gasoline transportation by building its own electric car, the parts that go into it and scalable process improvements. Atrium takes a Tesla approach to improving legal services. We assemble the full vertical stack of legal software tools spanning incorporation, equity management, deal management and client service. While legal software companies struggle to sell individual tools to law firms, at Atrium we have an integrated structure that allows law firm and tech company to work together in a coordinated fashion. Our law firm uses tools where good tools exist, and we co-founded a tech company – Atrium LTS – to build tools where no good options exist. In this unique system, we design and provide the legal service offering, from top to bottom.

Like the road to fully electric cars, the road to better legal services is paved with failed efforts. And in an industry based on trust, reputation and strong personal relationships, we can’t just adopt a “technology solves all” attitude. By designing an integrated stack from tools to advice, we believe Atrium can make legal services and legal practice better for everyone involved.

But why would a law firm really want to do this?

Maybe if it had a very specific technological need that had never been developed before. Unlikely. But even then that could be outsourced rather than creating a company and employing coders to do it just for you.

In recent years we have seen a shift in the legal industry to outsourcing functions rather than keeping them in house. This is usually based on the economic advantages of doing so. A full stack vertical approach is certainly not in keeping with that.

I used to work in a bakery when I was still at school. The owner of the bakery tinkered with some of the existing machinery and made them more efficient and better for the operation of the bakery. He didn’t build the machinery from scratch.

Imagine setting up a full stack vertical bakery from scratch and forming a company and employing engineers to design and build provers, mixers, rollers, cutting machines, ovens etc just for you. Think how many loaves of bread you would then have to sell to recoup your costs. Crazy. Yes, crazy. And crazy to do that in legal practice too.

Today is it not all about being more lean and agile? Being “full stack” is surely the opposite of that.

The Finances

Tech Crunch tells us:-

Keeping a large squad of lawyers on staff proved costly. Atrium priced packages of its software and legal assistance under subscriptions, with momentous deals like acquisitions incurring add-on fees. The model relied less on milking clients with steep hourly rates measured down to six-minute increments like most law firms.

Lyman Thai, who worked at Atrium over the last 2.5 years, said on LinkedIn:-

In under 3 years, we grew a law firm and a tech company to nearly 200 people, over 450 clients and $XXM in annual revenue.

He doesn’t disclose the annual revenue. But 200 people to 450 clients?! That is 2.25 clients per employee! No law firm would be able to function on that ratio. You would need to bill $167,778 per client just to recoup the $75.5 million investment in the company never mind your day to day operating costs. That would be milking. The maths (math to my American friends) just does not add up.

But there again you wouldn’t have that $75.5 million investment to recoup if you hadn’t unnecessarily sought to reinvent the legal tech wheel.

Could others succeed where Clearspire and Atrium failed?

Zach Abramowitz tweeted:-

Lots of schadenfreude over Atrium’s shutdown.

Here’s my unemotional take: Atrium’s shutdown — and some of this could be applied to Clearspire — was not a structural flaw, it was a mistake in execution. Even the #legaltech schadenfreuders will agree.

The fact is the two company model makes a ton of sense, which is why you’re seeing large firms spin out subs like @gravitystacklaw & @sixfiftyhq and small firms spin out tech cos like @hellodivorce @LegalMation not to mention @cognition_ip the less known YC funded startup firm

Clearspire was before it’s time and would probably do very well if it was started today with a $75M mega funding round. The disappointing thing with Atrium is that timing seemed to be right this time.

Put differently, If Andreessen gave @jaesunum @jborstein @bryon_z and @christianllang $75M to reinvent law, does anyone think they’re shutting down today?

Me either.

Hmm? “Clearspire was before it’s time and would probably do very well if it was started today with a $75M mega funding round.” Why did it not work for Atrium then when “that timing seemed to be right this time”?!

Yes it was a mistake in execution but it is also a major structural flaw: You don’t need, in addition to a law firm, a company to reinvent the legal technology wheel at vast cost for that one law firm.

The timing will never be right for anyone who thinks a full stack vertical law firm is a good idea. It’s not and it never will be.

Please learn from the mistakes of Clearspire and Atrium and never repeat them.

Meanwhile, José Ancer tweeted:-

Serious startup law firms *know* there’s a segment of the market that totally de-values legal & will never be happy until it’s some AI-driven, automated SV engineer’s wet dream.

So we’re grateful for firms who absorb those clients, while we work with fully formed adults.

Atrium co-founder, Augie Rakow, was quoted as saying at Inspire Legal in NYC that he:-

Did not appreciate the difficulty of putting together a law firm and a legal tech company, and aligning that with investor interests.

He said:-

Most companies have one priest class; we had two

It was very hard to align those interests.

Pivot Again? – This time to a Law Firm!

Whilst the Atrium pivot in January saw it moving away from being a law firm and towards being a technology company it may come as a surprise to some that, on shutting down the tech company, the law firm has actually survived.

Law.com revealed that:-

Atrium Legal Technology Services Inc., the legal software company backed by $75.5 million in venture capital, may be kaput. But the two lawyers that came on board in January to run Atrium LLP, the law firm side of the hybrid project, in its short-lived pivot to a new business model believe there’s still an opportunity for them to provide legal services to startups in a novel way.

Those two lawyers are Matthew Melville and Michel Narganes.

In this article it is revealed by Matthew Melville that after they started in January:-

We were trying to right the ship. Atrium had negative margins. In a post-WeWork world, that was not acceptable any more. We had to figure out a way to make money on every legal service that we sold.

Have negative margins, even in a pre-WeWork world, ever been acceptable in law firms?!

Melville goes on:-

We felt mildly confident that we could show the new numbers and convince the board that we could move forward. We presented everything. But at the end of the day, the board believed that this wasn’t a venture-backable model.

Law.com comments:-

In short, even if the firm could be profitable, it was never going to achieve the scale and deliver the big growth necessary to make it appealing for another round of funding.

But Melville and Narganes still believe the business can be successful as a law firm. Since the announcement of Atrium’s dissolution, they say they’ve had former Atrium lawyers commit to remaining on the platform and clients likewise commit to staying in the fold.

One key step will be putting in capital. Although the pair held the title of managing partners in Atrium LLP, they treated the partnership as a corporation upon their arrival and did not have to put any of their own resources in.

“Now we’re going to switch that up,” Melville added. ”We have all the systems in place to have revenue coming in each month.”

There are also plans to create a stand-alone version of Atrium’s technology to serve the law firm. But Melville said that Atrium never reached its end goal of building an “all-in-one” technology platform aiding lawyers in serving startup clients. In the absence of a holistic solution, there’s plenty of stand-alone options in the marketplace.

“I want to use as much of the technology as possible, but at least initially, we’ll leverage all the good stuff that’s already out there,” he said.

So there you have it. What is now left of Atrium is a fairly traditional law firm using the partnership model. The partners are going to have to introduce capital to keep it going.

And it has been revealed that Atrium never built an “all-in-one” technology platform. Instead the ‘new’ Atrium law firm will be going out to look at the “plenty of stand-alone options in the marketplace” to “leverage all the good stuff that’s already out there.”

It’s a pity that Justin Kan hadn’t met Melville and Narganes three years ago to hear about all this good existing legal tech that lawyers can leverage!

The Purge

When I considered the Atrium ‘pivot’ in January I finished my post with predictions made in 2018 by Aron Solomon that included:-

2020-2021: The Purge. Most investors leave, many startups fold.

I said then that “we’ve barely entered 2020 and it looks like The Purge has begun.”

In a recent post on LinkedIn, Bram Vandromme tells us:-

Moreover, it is not only Atrium that goes down. Legal Complex recently reported that investments in legal tech companies fell by 530 percent in January 2020 compared to last year and the website points out a lot of broken dreams:

“If we took an honest look at where venture capital for the past decade was allocated, we may come to a harsh conclusion. Most of the money evaporated in broken dreams or products with no fit or it’s being used to prop up legacy systems. Yet the funding metric may not be the only ‘alarm we kept hitting snooze on.”

Raymond Blijd of Legal Complex recommends many of these companies for a pivot. You can’t blame him. Until now, only technology that was able to feed the business model of the billable hours was a success among lawyers.

Three things in relation to Atrium

I’ll leave you this time with some more words of wisdom from Aron Solomon taken from a short vlog he first posted on Twitter in January:-

Three things I want to talk about in relation to Atrium:-

1. It’s not a pivot, it’s an implosion. I don’t think I need to add anything to that.

2. Risk capital is by its nature risky. Atrium burned in the past 15 months through around $65 million. That’s life.

3. The cult of personality… We in the legal innovation space get so taken when someone who has been successful in another vertical decides to come and change the world of legal innovation. But it doesn’t work… It’s going to mean a chilling effect on others that want to invest into LegalTech. Is that a bad thing? No not necessarily, but I’ll tell you who is going to be last in line to get any money: Access to Justice projects.