Musings of a Legal Tech Founder: On Investment + Law Firm Adoption

Musings of a Legal Tech Founder

By Alex Nordholm, co-founder of due diligence collaboration platform, dealWIP

(The following musings are from a collection of Tweets on the subject of legal tech adoption by law firms and how investors view legal tech startups. Enjoy.)

1/ So, I’m gonna try this threading thing. Working Title: musings of a #legaltech founder after 12 months (aka how I’m feeling about lawyers, legaltech adoption and legaltech financings right now). Probably no new insights for observers, but perhaps a new gloss. Disagree freely.

2/ The view that lawyers are Luddites is total and complete nonsense. What I get in sales meetings with lawyers and innovation folks: ‘We are thirsting for sane and thoughtful solutions to our problems.’ Clients want it, firms want it & all acknowledge that future is efficient.

3/ Importantly, too: contrary to popular belief, lawyers aren’t mutated Homo Sapiens satisfied with a life experienced under fluorescent lights, glued to monitors. They hate wasting time; they hate missing holidays w/ kids; they want to go home, like everyone else (weird!).

‘Lawyers aren’t mutated Homo Sapiens satisfied with a life experienced under fluorescent lights, glued to monitors.’

4/ But there are realities that can’t be denied. First, and most importantly, is that lawyers have professional obligations to clients – that’s taken really seriously. It means doing work carefully, reading twice, and dotting i’s and crossing t’s. Also leads to:

5/ some other issues, like: 1) they pay close attention to security standards, which are generally quite high in the industry which causes; 2) existing IT/software systems to be in place for security/infrastructure and workflow purposes. 1 & 2 are straight startup repellant

6/ Building software applications that meet security requirements and integrate with (or, at least, don’t undermine) existing systems is a serious undertaking. It means that having a great product is not enough; being thoughtful about implementation, onboarding/training is key

7/ What does it take to create a great product that solves important problems and also be sophisticated in security, implementation, onboarding and training? Well, it takes a significant amount of resources and time (i.e. money/runway!). This is common across enterprise apps.

8/ What isn’t common across enterprise apps is that most VCs hate the market. Of course there are exceptions and/or examples of VC investment in legaltech, but the pool of potential VCs is significantly slimmed down by the perception that legal is a bad market.

L to R: the author, Alex Nordholm, Head of Product, plus: Tunji Williams, CEO and Operations Head, James Clarkin-Breslin, all co-founders of US-based dealWIP.

9/ For VCs, there are generally 2 (at least) non-negotiable filters: 1) they must love the founders; and 2) they can’t hate the market. Legal (selling to firms, specifically) violates that second filter for many VCs, it seems. So that puts legaltech companies in a bind.

10/ This isn’t a thread in which I’ll fully confront professional investors for failing to buy-into my self-serving (perhaps, delusional) view that legaltech (specifically, targeting firms/ALSPs) is one of the best markets for investment today. But, if you ascribe to the (true)

11/ view that the only way to make outsized returns is to be both contrarian and ‘right’, I’d be interested in knowing where other contrarian bets in multi-billion dollar, generally winner-take-all markets even exist. I get that telling LPs that you invested in scooters

12/ while premier VCs were also investing in scooters, and you just backed the wrong horse, is defensible. But flocking to the same markets and deals strikes me as the definition of competing away profits in the investment biz. Industry-wide data verifies this, I believe.

13/ Anyways, back to legaltech, the above status quo demonstrates a 2-pronged, self-reinforcing cycle that, when broken, will bring better, more commercially viable tech to legal providers (and ending legaltech’s (particularly, the kind that sells to firms) sad malaise)

14/ The first prong of this cycle is the slow sales cycle caused by 1) the perception by lawyers that most legaltech products are low quality and/or not sufficient for the end user (‘Skepticism’), and 2) the disaggregated decision-making process at firms (‘Slow Decisions’)

15/ Skepticism is informed, certainly, by real challenges in change management. Getting folks to change well-worn behaviors using tech is really hard, and it takes a disciplined program to make change happen. That’s true with any solution. These observations aren’t new.

16/ It is also undoubtedly true that some legaltech products are indeed bad, warranting Skepticism. But it seems to me that in the legaltech context lawyers tend to be particularly Skeptical of whether a product might work for THEM – maybe for others, but not for them.

17/ My evidence on this point is admittedly anecdotal, but it seems to be a very real trend – and I’ve seen the criticism levied by others. In my experience, other professionals (we also talk to bankers, advisors, etc.) seem more open to new solutions and ways of working.

18/ Slow Decisions are a feature of law firm structure – in the DNA of the partnership model, essentially – but are exacerbated by the fact that most firms have not taken steps to centralise decision-making or empower innovation departments to impose change management programs

19/ The second prong of the self-reinforcing cycle is the perception by investors that law firms constitute a bad market, dampening financing. This is caused by the slow sales cycles brought on by Skepticism and Slow Decisions. As a result of the perception legal = “bad” market

20/ investors disqualify legaltech companies that sell into law firms. That makes it hard as a legaltech company to find requisite investment. I’m sure you can see that those two prongs are reinforcing… low investment -> low quality -> Skepticism -> slow adoption -> bad market

21/ Without significant investment, legaltech companies cannot build products that from the outset satisfy law firms (i.e., that solve important problems, are provably secure and integrate with firms’ existing IT/infrastructure and applications) – causing slow/no sales

How to convince the VCs…?

22/ Without faster uptake by law firms, legaltech companies cannot convince VCs that selling to law firms is a “good” market, suitable for VC investment by generating excess returns in 5-7 years (exceptions exist, of course, but they often don’t sell to firms/have other markets)

22/ The ways to break the cycle are obvious – attack/circumvent either of the prongs – either the slow sales cycle prong or the investment prong. Both are being incrementally eroded, but there are no doubt things that can be done to expedite their destruction. Law firms can take

23/ steps to shorten sales cycles. That includes, primarily, change management programs internally that undermine Skepticism and/or centralized decision-making processes. Further, transparent/industry standard security and integration requirements would be great (Reynencourt?)

24/ Or, investors could step up: VCs could get interested; law firms could invest at greater scale. With funding, quality startups can knock out barriers (security, integration) and better work with firms on change mgmt. Once this happens evolution will be faster than many think

Important note: these are my industry-wide observations over the entirety of my experience so far; not at all suggestive that my company is feeling these problems acutely or any more than others…to the contrary, I make these observations b/c I’m invested in this for the long-run.

What do you think? Please feel free to comment below to agree, disagree, or add to Alex’s points. 

4 Comments

  1. Some excellent points in this, and I particularly agree that lawyers are at the same time crying out for change in how they work, but find themselves hamstrung in terms of how much change their employers are willing (or able) to facilitate at any given time. I also think point 6 is especially relevant, and sometimes overlooked. No matter how nifty a product might be, if it doesn’t seamlessly talk to the firm’s Document Management System then it’s a non-starter for me (including respecting document access and security settings). If it doesn’t support Active Directory, then I’m going to get frustrated users forgetting their passwords and that just creates admin for our IT helpdesk. No matter how functionally great a product might be, adoption depends just as much on whether it fits into the lawyers existing working patterns, or if it takes them out of it. Many of my colleagues spend their whole working day in either Word or Outlook. If they can’t access the new product from one of those ‘launch pads’, then realistically most wont access it at all.

    • Thanks, Sam – I love the concept of lawyers’ key apps as “launch pads”. Access from those high-usage apps is absolutely critical if you want to integrate well into an attorney’s workflow. It’s such a key observation.

  2. Thanks Alex for sharing your observation on the legal market, It’s very interesting. I agree on a lot of points.

    It’ s true that lawyers are very open to innovation to help them save time and money but they are reluctant to IT in general in terms of integration and training. The solution offered has to be easy to use and user friendly to pass this barrier.It’s also true that the security is very important for them as they have to protect their clients.

    Regarding the VC’s I did not see so far an aversion to the market. In Brazil, where Juridoc is born, the VC’s are quite exciting about the market not only for Legaltech selling to Law firms but also to legal department.

    If you have a solution easy to adopt, which does not require a big integration, and affordable, I am pretty sure you can develop a business quite fast. If the change in a law firm can be complex but your solution can be used by some lawyers in the firm, they will be your best ambassadors to sell you product to their fellow colleagues.

  3. Here’s my experience as the founder and CEO of Gavelytics, a state court litigation analytics service based in Los Angeles. First, it’s not easy selling things to law firms. As the author correctly points out, there is both slow decision making and institutional resistance to change, coupled with quite understandable resistance to adding costs to the firm that don’t result in plainly obvious benefits. New legal tech businesses trying to sell things to law firms are in for a rude awakening unless they have put in a considerable amount of time towards honing their go to market strategy and value proposition.

    Second, we’ve not yet encountered lots of investor skepticism mostly because we don’t have lots of institutional financing. I have no doubt that historically legal has been viewed by institutional investors as a bad bet, but I think recent events (acquisitions and large institutional rounds) mark the beginning of a trend in a more positive direction for the legal tech sector. Legal tech businesses that can sell to both law firms and corporate legal departments have a leg up over those that sell only to firms because the market is so much bigger once you include that second vertical.

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